UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
fiscal year ended September 30, 2014.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for
the transition period from ___________ to _____________.
Commission File Number 000-23357
BIOANALYTICAL SYSTEMS, INC.
(Exact name of the registrant as specified in its charter)
INDIANA
(State or other jurisdiction of incorporation or organization)
35-1345024
(I.R.S. Employer Identification No.)
2701 KENT AVENUE
WEST LAFAYETTE, INDIANA
(Address of principal executive offices)
47906
(Zip code)
(765) 463-4527
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Shares
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. YES NO
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO
Based on the closing price on the NASDAQ Capital Market on March 31, 2014, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was $16,737,000. As of December 22, 2014, 8,075,847 of registrant's common
shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders have
been incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
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PART I
This Report may contain "forward-looking statements," within the meaning of Section 27A of the Securities Act
of 1933, as amended, and/or Section 21E of the Securities Exchange Act of 1934, as amended. Those statements may
include, but are not limited to, discussions regarding our intent, belief or current expectations with respect to (i) our
strategic plans; (ii) our future profitability, liquidity and capital resources; (iii) our capital requirements; (iv) industry
trends affecting our financial condition or results of operations; (v) our sales or marketing plans; or (vi) our growth
strategy. Investors in our common shares are cautioned that reliance on any forward-looking statement involves risks
and uncertainties, including the risk factors beginning on page 13 of the Report. Although we believe that the
assumptions on which the forward-looking statements contained herein are based are reasonable, any of those
assumptions could prove inaccurate and, as a result, the forward-looking statements based upon those assumptions
could be significantly different from actual results. In light of the uncertainties inherent in any forward-looking
statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by us
that our plans and objectives will be achieved. We do not undertake any obligation to update any forward-looking
statement.
(Dollar amounts in thousands, except per share data, unless noted otherwise.)
ITEM 1 - BUSINESS
General
Bioanalytical Systems, Inc. (“We” the “Company”, or “BASi”) is an international contract research
organization providing drug discovery and development services and analytical instruments. Our strategy is to provide
services that will generate high-quality and timely data in support of new drug approval or use expansion. Our clients
and partners include pharmaceutical, biotechnology, 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 therapeutics and maximize the returns on their research and development investments. We offer an
efficient, variable-cost alternative to our clients' internal product development programs. Outsourcing development work
to reduce overhead and speed drug approvals through the Food and Drug Administration ("FDA") is an established
alternative to in-house development among pharmaceutical companies. We derive our revenues from sales of our
research services and drug development instruments, both of which are focused on determining drug safety and efficacy.
The Company has been involved in the research of drugs to treat numerous therapeutic areas for over 40 years since its
formation as a corporation organized in Indiana in 1974.
We support the preclinical and clinical development needs of researchers and clinicians for small molecule and
large biomolecule drug candidates. We believe our scientists have the skills in analytical instrumentation development,
chemistry, computer software development, physiology, medicine, analytical chemistry and toxicology to make the
services and products we provide increasingly valuable to our current and potential clients. Our principal clients are
scientists engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies,
pharmacokinetics and basic research from small start-up biotechnology companies to many of the largest global
pharmaceutical companies. We are committed to bringing scientific expertise, quality and speed to every drug discovery
and development program to help our clients develop safe and effective life-changing medicines.
Developments within the industries we serve have a direct, and sometimes material, impact on our operations.
Currently, many large pharmaceutical companies have major "block-buster" drugs that are nearing the end of their patent
protections. This puts significant pressure on these companies both to develop new drugs with large market appeal, and
to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations ("CRO's")
have benefited from these developments, as the pharmaceutical industry has turned to out-sourcing to both reduce fixed
costs and to increase the speed of research and data development necessary for new drug applications. The number of
significant drugs that have reached or are nearing the end of their patent protection has also benefited the generic drug
industry. Generic drug companies provide a significant source of new business for CROs as they develop, test and
manufacture their generic compounds.
A significant portion of innovation in the pharmaceutical industry is now being driven by biotech and small,
venture capital funded drug development companies. Many of these companies are "single-molecule" entities, whose
success depends on one innovative compound. While several of the biotech companies have reached the status of major
pharmaceuticals, the industry is still characterized by smaller entities. These developmental companies generally do not
have the resources to perform much of the research within their organizations, and are therefore dependent on the CRO
industry for both their research and for guidance in preparing their FDA submissions. These companies have provided
significant new opportunities for the CRO industry, including us. They do, however, provide challenges in selling, as
they frequently have only one product in development, which causes CROs to be unable to develop a flow of projects
from a single company. These companies may expend all of their available funds and cease operations prior to fully
developing a product. Additionally, the funding of these companies is subject to investment market fluctuations, which
changes as the risk profiles and appetite of investors change.
Industry Overview
Drug discovery and development is the process of creating drugs for the treatment of human disease. The drug
discovery process aims to identify potential drug candidates, while the drug development process involves the testing of
these drug candidates in animals and humans to meet regulatory requirements. Discovering and developing new drugs is
an extremely expensive, complex, high-risk and time-consuming process. Multiple industry sources estimate the fully
capitalized cost of developing and commercializing a new pharmaceutical product ranges from $800 million to over $1
billion. In addition, it generally takes between 10 and 15 years to develop a new prescription drug and obtain approval to
market it in the United States.
The drug development services industry provides independent product development services to pharmaceutical
companies, biotechnology companies, and government organizations. This industry has evolved from providing limited
clinical trial services in the 1970s to a full-service industry today characterized by broader relationships with clients and
by service offerings that encompass the entire drug development process, including preclinical evaluations, study design,
clinical trial management, data collection, biostatistical analyses, regulatory consulting, clinical laboratory and diagnostic
services, pre- and post-approval safety analysis, product registration and post-approval support.
Over the past 25 years, technological advances, as well as the emergence of the biotechnology industry, have
dramatically changed the drug discovery process. New and improved technologies have evolved such as ultra-high-
throughput screening, new in vitro and in vivo preclinical profiling techniques and the gene-based drug research
commonly referred to as genomics. The objective of these innovations is to find more drug targets and to screen
chemical compounds against targets much more quickly, with literally millions of compounds possible. This process is
expected to produce many more molecules having the ability to affect biological activity. These molecules then need to
be tested quickly and economically to determine their viability as potentially safe and effective drug candidates.
Trends Affecting the Drug Discovery and Development Industry
Our services and products are marketed globally to pharmaceutical, medical research and biotechnology
companies and institutions engaged in drug research and development. The research services industry is highly
fragmented among many niche vendors led by a small number of larger companies; the latter offer an ever-growing
portfolio of start-to-finish pharmaceutical development services. Our products are also marketed to academic and
governmental institutions. Our services and products may have distinctly different clients (often separate divisions in a
single large pharmaceutical company) and requirements. We believe that all clients are facing increased pressure to
outsource facets of their research and development activities and that the following factors will increase client
outsourcing:
Accelerated Drug Development
Clients continue to demand faster, more efficient, more selective development of an increasing pool of drug
candidates. Consequently, our clients require fast, high-quality service in order to make well-informed decisions to
quickly exclude poor candidates and speed development of successful ones. The need for additional development
capacity to exploit more opportunities, accelerate development, extend market exclusivity and increase profitability
drives the demand for outsourced services.
Increase in Potential New Drug Candidates
While research and development spending and the number of drug candidates are increasing, the time and cost
required to develop a new drug candidate also have increased. Many pharmaceutical and biotechnology companies do
not have sufficient internal resources to pursue development of all of these new drug candidates on their own.
Consequently, these companies are looking to the drug discovery and development services industry for cost-effective,
innovative and rapid means of developing new drugs.
Cost Pressures of Introducing New Drugs
Market forces, healthcare reform and other governmental initiatives place significant pressures on
pharmaceutical and biotechnology companies to reduce drug prices. In addition, increased competition as a result of
patent expiration, market acceptance of generic drugs, and governmental and privately managed care organization efforts
to reduce healthcare costs have added to drug pricing pressures. The industry is responding by consolidating,
streamlining operations, decentralizing internal discovery and development processes, and minimizing fixed costs. In
addition, increased pressures to differentiate products and justify drug pricing are resulting in an increased focus on
healthcare economics, safety monitoring and commercialization services. Moreover, pharmaceutical and biotechnology
companies are attempting to increase the speed and efficiency of internal new drug discovery and development
processes.
Patent Expiration
As exclusivity ends with patent expiry, drug companies defend their proprietary positions against generic
competition with various patent extension strategies. Both the drug company creating these extensions and the generic
competitors should provide additional opportunities for us.
Alliances
Strategic alliances allow pharmaceutical companies to share research know-how and to develop and market new
drugs faster in more diverse, global markets. We believe that such alliances will lead to a greater number of potential
drugs in testing, many under study by small companies lacking broad technical resources. Those small companies can
add shareholder value by further developing new products through outsourcing, reducing risk for potential allies. Clients
seek realistic business partnerships with their service provider in an effort to ensure that costs are controlled as their
development programs progress. We have long-standing business relationships with many pharmaceutical companies
and continue to offer flexible services and adapt to our client’s requirements.
Mergers and Acquisitions
Consolidation in the pharmaceutical industry is commonplace. As firms blend personnel, resources and business
activities, we believe they will continue to streamline operations and minimize staffing, which may lead to more
outsourcing. Consolidation may result in a disruption in the progress of drug development programs as merging
companies rationalize their respective drug development pipelines.
Biotechnology Industry and Virtual Drug Company Growth
The U.S. biotechnology industry has grown rapidly over the last decade and has emerged as a key client
segment for the drug discovery and development services industry. In recent years, this industry has generated significant
numbers of new drug candidates that will require development and regulatory approval. Many biotechnology drug
developers do not have in-house resources to conduct development. Many new companies choose only to carry a product
to a developed stage sufficient to attract a partner who will manufacture and market the drug. Because of the time and
cost involved, these companies rely heavily on CROs to conduct research for their drug candidates.
Unique Technical Expertise
The increasing complexity of new drugs requires highly specialized, innovative, solution-driven research not
available in all client labs. We believe that this need for unique technical expertise will increasingly lead to outsourcing
of research activity.
Data Management and Quality Expertise
Our clients and the FDA require more data, greater access to that data, consistent and auditable management of
that data, and greater security and control of that data. We have made significant investments in software throughout our
contract services groups to optimize efficiency and ensure compliance with FDA regulations and market expectations.
Changes in the Regulatory Environment
The drug discovery and development process is heavily regulated by the FDA and its Center for Drug
Evaluation and Research. Recent product safety concerns, increases in drug and general healthcare costs and the
emergence of importation issues have placed the FDA and other regulatory agencies under increased scrutiny. The war
on terror, the risk of global vaccine shortages and the threat of new potential pandemics have elevated the FDA’s focus
on research in the areas of bioterrorism and vaccine development. As a result of these and other events, drug safety, cost
and availability are under intense monitoring and review by Congress, the FDA and other government agencies. In 2007,
primarily in response to the FDA’s handling of post market data and recent drug safety concerns, the FDA Act was
signed into law. In addition to reauthorizing and amending various provisions that were scheduled to expire, this Act
provided the FDA with new regulatory authority to require drug sponsors to run post-approval studies and clinical trials
and develop and implement risk evaluation and mitigation strategies. It is also likely that additional legislation will be
passed that will impact the FDA and drug development and approval process in the United States. The FDA Act,
continued drug safety issues and future legislation could have a lasting and pronounced impact on the drug discovery and
development industry.
Globalization of the Marketplace
Foreign firms rely on independent development companies with experience in the U.S. to provide integrated
services through all phases of product development and to assist in preparing complex regulatory submissions. Domestic
drug firms are broadening product availability globally, demanding local regulatory approval. We believe that domestic
service providers with global reach, established regulatory expertise, and a broad range of integrated development
services and products will benefit from this trend.
Our Solution
We address the needs of the pharmaceutical and biotechnology industries, as well as academic, non-profit and
government organizations, for drug discovery and development by providing integrated services to help our clients
maximize the return on their research and development investments. Our application of innovative technologies and
products and our commitment to quality throughout the drug discovery and development process offer our clients a way
to identify and develop successful drugs and devices more quickly and cost-effectively. We have obtained significant
drug development expertise from more than 40 years of operation.
The Company's Role in the Drug Development Process
After a new drug candidate is identified and carried through preliminary screening, the development process for
new drugs has three distinct phases.
The preclinical phase includes safety testing to prepare an Investigational New Drug ("IND") application for
1)
submission to the FDA. The IND must be accepted by the FDA before the drug can be tested in humans. Once a
pharmacologically active molecule is fully analyzed to confirm its integrity, the initial dosage form for clinical trials is
created. An analytical chemistry method is developed to enable reliable quantification. Stability and purity of the
formulation are also determined.
Clients work with our preclinical services group to establish pharmacokinetics (PK), pharmacodynamics (PD)
and safety testing of the new drug. These safety studies range from dose ranging studies, that involve acute safety
monitoring of drugs and medical devices to chronic, multi-year oncogenicity and reproductive toxicity studies. Dose
formulation analysis is provided by our pharmaceutical analysis group. Bioanalyses of blood sampled under these
protocols by our bioanalytical services group provide pharmacokinetic and metabolism data that is used with the safety
and toxicity information to determine the exposure required to demonstrate toxicity. A no effect level is then established
for the drug and sets the basis for future dose levels in further safety testing and clinical phase I studies. Upon successful
completion of preclinical safety studies, an IND submission is prepared and provided to the FDA for review prior to
human clinical trials.
Many of our products are designed for use in discovery and preclinical development. The Culex® family of
robotic automated dose delivery, blood and other biofluids sampling and physiological parameters measurement systems
enable researchers to quickly and cost effectively determine PK/PD profiles of drugs in large and small animal models.
The Culex® system allows experiments on freely moving conscious animals from early research for therapeutic target
validation to lead optimization of compounds. Using the Culex® system, researchers are able to automatically dose and
sample in-vivo to develop pharmacokinetic and pharmacodynamic profiles of drugs during early screening in rodents
and other animals quickly and cost effectively. Our bioanalytical services group utilizes our depth of expertise in liquid
chromatography with detection by mass spectrometry to support research, preclinical and clinical programs. We also
offer bioanalytical services that utilize electrochemistry, spectrophotometric (UV/Vis or fluorescence) and Corona
Discharge detection as options. We have invested heavily in robotics and mass spectrometry systems. Application of
this technology allows us to rapidly develop and validate methods for new compounds and obtain information suitable
for regulatory submission.
2)
The clinical phase further explores the safety and efficacy of the drug candidate in humans. The sponsor
conducts Phase I human clinical trials in a limited number of healthy individuals to determine safety and tolerability.
Bioanalytical assays determine the availability and metabolism of the active ingredient following administration.
Expertise in method development and validation is critical, particularly for new chemical entities.
Exhaustive safety, tolerability and dosing regimens are established in sick patients in Phase II trials. Phase III
clinical trials verify efficacy and safety. After successful completion of Phase III trials, the sponsor of the new drug
submits a New Drug Application ("NDA") or Product License Application ("PLA") to the FDA requesting that the
product be approved for marketing. Early manufacturing demonstrates production of the substance in accordance with
FDA Good Manufacturing Practices ("GMP") guidelines. Data are compiled in an NDA, or for biotechnology products a
PLA, for submission to the FDA requesting approval to market the drug or product. The bioanalytical sample count per
study grows rapidly from Phase I through Phase III. Phase II and III studies may take several years to complete,
supported by well-proven, consistently applied analytical methods.
Our services include evaluation of bioequivalence and bioavailability to monitor the rate and extent to which a
drug is available in the body and to demonstrate that the availability is consistent between formulations. We also offer
in-vitro bioequivalence testing for non-absorbed oral drugs. We offer support and testing services in clinical sample
development, release and stability.
The Post-approval phase follows FDA approval of the NDA or PLA. This includes production and continued
3)
analytical and clinical monitoring of the drug. The post-approval phase also includes development and regulatory
approval of product modifications and line extensions, including improved dosage forms. The drug manufacturer must
comply with quality assurance and quality control requirements throughout production and must continue analytical and
stability studies of the drug during commercial production to continue to validate production processes and confirm
product shelf life. Samples from each manufactured batch must be tested prior to release of the batch for distribution to
the public.
We also provide services in all areas during the post-approval phase, including bioequivalence studies of new
formulations, line extensions, new disease indications and drug interaction studies. Our ability to offer GMP
electrochemical detection services has provided increased business opportunities for release testing.
The increases in our services offerings have resulted in our ability to provide a broader range of services to our
clients, often using combined services of several disciplines to address client needs. Our ability to solve client problems
by combining our knowledge base, services and products has been a factor in our selection by major pharmaceutical
companies to assist in several preclinical through the post-approval phases.
Company Services and Products
Overview
We focus on developing innovative services and products that increase efficiency and reduce costs associated
with taking new drugs to market. We operate in two business segments – contract research services and research
products, both of which address the bioanalytical, preclinical, and clinical research needs of drug developers. Both
segments arose out of our expertise in a number of core technologies designed to quantify trace chemicals in complex
matrices.
Contract Research Services
The contract research services segment provides screening and pharmacological testing, preclinical safety
testing, formulation development, regulatory compliance and quality control testing. Revenues from the contract research
services segment were $19.1 million for fiscal 2014. The following is a description of the services provided by our
contract research services segment:
• Product Characterization, Method Development and Validation: Analytical methods, primarily performed in
West Lafayette, Indiana, determine potency, purity, chemical composition, structure and physical properties of a
compound. Methods are validated to ensure that data generated are accurate, precise, reproducible and reliable
and are used consistently throughout the drug development process and in later product support.
• Bioanalytical Testing: We analyze specimens from preclinical and clinical trials to measure drug and
metabolite concentrations in complex biological matrices. Bioanalysis is performed at our facilities in West
Lafayette, Indiana.
• Stability Testing: We test stability of drug substances and formulated drug products and maintain secure storage
facilities in West Lafayette, Indiana to establish and confirm product purity, potency and shelf life. We have
multiple International Conference on Harmonization validated controlled-climate GMP (Good Manufacturing
Practices) systems in place, and the testing capability to complete most stability programs.
In Vivo Pharmacology: We provide preclinical in vivo sampling services for the continuous monitoring of
chemical changes in life, in particular, how a drug enters, travels through, and is metabolized in living systems.
Those services are performed in customized facilities in West Lafayette and Evansville, Indiana using our
robotic Culex® APS (Automated Pharmacology System).
•
• Preclinical and Pathology Services: We provide pharmacokinetic and safety testing in studies ranging from
acute safety monitoring of drugs and medical devices to chronic, multi-year oncogenicity studies in our
Evansville, Indiana site.
Research Products
We focus our products business on expediting preclinical screening of developmental drugs. We compete in
small niches of the multibillion dollar analytical instrument industry. The products business targets unique niches in life
science research. We design, develop, manufacture and market state-of-the-art:
In vivo sampling systems and accessories (including disposables, training and systems qualification)
•
• Physiology monitoring tools
• Liquid chromatography and electrochemistry instruments platforms
Revenues for our products segment were $5.5 million for fiscal 2014. We offer three (3) principal product
lines: Analytical Products, In vivo Sampling Products and Vetronics’ Products. The following is a brief description of
the products offered:
•
• Analytical Products: The analytical products consist of our liquid chromatographic and electrochemical
instruments with associated accessories. The critical component of these products is the Epsilon®
electrochemical platform. This incorporates all the hardware capabilities needed for most electrochemical
experiments but can be modified through software development. The market is principally academic
institutions and industrial research companies.
In vivo Sampling Products: The in vivo sampling products consist of the Culex® family of automated in vivo
sampling and dosing instruments. These are used by pharmaceutical researchers to dose animals and collect
biological samples (blood, bile, urine, microdialysate, feces or any bio-fluid) from the animals. Since dosing
and sample collections are automated, animals are not manually handled, reducing stress on the animals and
producing more representative pharmacological data. Behavior and other physiological parameters can also be
monitored simultaneously. Compared to manual methods, the Culex® products offer significant reduction in
test model use and comparable reduction in labor. The line also includes in vivo sampling devices sold to drug
developers and medical research centers to assist in the study of a number of medical conditions including
stroke, depression, Alzheimer’s and Parkinson’s diseases, diabetes and osteoporosis.
• Vetronics’ Products: The Vetronics’ products consist of instruments and related software to monitor and
diagnose cardiac function (electro-cardiogram) and measure other vital physiological parameters primarily in
cats and dogs in veterinary clinics.
Clients
Over the past five years, we have regularly provided our services and/or products to most of the top 25
pharmaceutical companies in the world, as ranked by the number of research and development projects. Approximately
10% of our revenues are generated from customers outside of North America.
We balance our business development effort between large pharmaceutical developers and smaller drug
development companies.
In fiscal 2014, our Preclinical services group significantly expanded its presence at two important existing
customers. In fiscal 2014, Arrowhead Research Corporation accounted for approximately 12.1% of total sales and
18.5% of total trade accounts receivable at September 30, 2014. In fiscal 2013, Arrowhead accounted for approximately
0.4% of total sales and 4.6% of total trade accounts receivable at September 30, 2013. In fiscal 2014, Principia
Biopharma accounted for approximately 8.7% of total sales and 8.4% of total trade accounts receivable at September 30,
2014. In fiscal 2013, Principia Biopharma accounted for approximately 0.4% of total sales and 7.1% of total trade
accounts receivable at September 30, 2013.
In fiscal 2014, Boehringer Ingelheim remained an important customer accounting for approximately 5.9% of
total sales and 2.5% of total trade accounts receivable at September 30, 2014. In fiscal 2013, Boehringer Ingelheim
accounted for approximately 6.0% of total sales and 2.6% of total trade accounts receivable at September 30, 2013. The
clients discussed are included in our contract research services segment. There can be no assurance that our business
will move away from dependence upon a limited number of customer relationships.
Sales and Marketing
With both large and small pharmaceutical and biotechnology companies, as well as research institutions, we
promote our services through concentrated business development efforts, scientist-to-scientist communications and
centralized corporate marketing programs. We recognize that our growth and customer satisfaction depend upon our
ability to continually improve and create new client relationships.
Our sales and global marketing initiatives include integrated campaigns designed to help differentiate and
promote our products and services. Through trade events, online and print advertising in trade publications, direct
communication, newsletters, and our website, we provide our perspective on current industry challenges or
developments to create an ongoing dialogue with our clients and to promote our industry expertise, quality, technology
and innovation. We reinforce key messages and selling points through client presentations, corporate material and at
trade events and industry conferences.
We encourage and sponsor the participation of our scientific and technical personnel in a variety of professional
endeavors, including via speaking engagements, the presentation of papers at national and international professional
trade meetings and the publication of scientific articles in medical and pharmaceutical journals. Through these endeavors
we seek to further our reputation for professional excellence.
As of September 30, 2014 we have 10 employees on our global sales and marketing staff. We have a network of
19 established distributors covering Japan, the Pacific Basin, South America, the Middle East, India, South Africa and
Eastern Europe. All of our distributor relationships are managed from the corporate headquarters in West Lafayette,
Indiana.
Contractual Arrangements
Our service contracts typically establish an estimated fee to be paid for identified services. In most cases, some
percentage of the contract costs is paid in advance. While we are performing a contract, clients often adjust the scope of
services to be provided based on interim project results. Fees are adjusted accordingly. Generally, our fee-for-service
contracts are terminable by the client upon written notice of 30 days or less for a variety of reasons, including the client's
decision to forego a particular study, the failure of product prototypes to satisfy safety requirements, and unexpected or
undesired results of product testing. Cancellation or delay of ongoing contracts may result in fluctuations in our quarterly
and annual results. We are generally able to recover, at minimum, our invested costs when contracts are terminated.
Our products business offers both annual and multi-year service and maintenance agreements as well as capital
lease arrangements on many of our product lines.
Competition
Services
We compete with in-house research, development, quality control and other support service departments of
pharmaceutical and biotechnology companies. There are also full-service Contract Research Organizations ("CROs")
that compete in this industry. Several of our competitors have significantly greater financial resources than we do. The
largest CRO competitors offering similar research services include:
• Covance, Inc.;
• Pharmaceutical Product Development, Inc.;
• Charles River Laboratories, Inc.; and
• Quintiles Transnational Holdings, Inc.
CROs generally compete on:
•
•
•
regulatory compliance record;
reputation for on-time quality performance;
quality system;
previous experience;
•
• medical and scientific expertise in specific therapeutic areas;
•
•
•
•
•
•
•
•
•
•
scientist-to-scientist relationships;
quality of contract research;
financial viability;
database management;
statistical and regulatory services;
ability to recruit investigators;
ability to integrate information technology with systems to optimize research efficiency;
quality of facilities;
an international presence with strategically located facilities; and
price.
Products
Though many global analytical instruments competitors exist, we have an extensive, long standing network of
customers who are repeat buyers and recommend our products. In contrast, there are few competitors for our in vivo
sampling products. The primary market is large pharmaceutical research departments and academic research institutions.
Our differentiators are high quality, flexibility to meet customers’ specific needs and superior technical support and
service. We provide equipment that enables our customers to attain premium scientific laboratory information on a
reasonable operating investment. As customers’ needs constantly change, we continually refine our products and
develop new products which meet our operating objectives.
Government Regulation
We are subject to various regulatory requirements designed to ensure the quality and integrity of our data and
products. These regulations are promulgated primarily under the Federal Food, Drug and Cosmetic Act, and include
Good Laboratory Practice ("GLP"), Good Manufacturing Practice ("GMP"), and Good Clinical Practice ("GCP")
guidelines administered by the FDA. The standards of GLP, GMP, and GCP are required by the FDA and by similar
regulatory authorities around the world. These guidelines demand rigorous attention to employee training; detailed
documentation; equipment validation; careful tracking of changes and routine auditing of compliance. Noncompliance
with these standards could result in disqualification of project data collected by the Company. Material violation of GLP,
GMP, or GCP guidelines could result in regulatory sanctions and, in severe cases, could also result in a discontinuance
of selected operations. Since April 2005, we have been audited, on a routine basis, by the FDA fifteen times. The FDA
has visited eleven times in West Lafayette and four times at the Evansville location. Of the fifteen FDA audits, ten were
without findings. Where the FDA had findings, which have not been significant to our operations, we have taken actions
to address the findings. Our West Lafayette location was also audited by the Environmental Protection Agency during
fiscal 2013 with no findings.
We have not experienced any significant problems to date in complying with the regulations of such agencies
and do not believe that any existing or proposed regulations will require material capital expenditures or changes in our
method of operation.
Analytical Services
Laboratories that provide information included in INDs, NDAs and PLAs must conform to regulatory
requirements that are designed to ensure the quality and integrity of the testing process. Most of our contract research
services are subject to government standards for laboratory practices that are embodied in guidelines for GLP. The FDA
and other regulatory authorities require that test results submitted to such authorities be based on studies conducted in
accordance with GLP. These guidelines are set out to help the researcher perform work in compliance with a pre-
established plan and standardized procedures. These guidelines include but are not restricted to:
• Resources – organization, personnel, facilities and equipment
• Rules – protocols and written procedures
• Characterization – test items and test systems
• Documentation – raw data, final report and archives
• Quality assurance unit – formalized internal audit function
We must also maintain reports for each study for specified periods for auditing by the study sponsor and by the
FDA or similar regulatory authorities in other parts of the world. Noncompliance with GLP can result in the
disqualification of data collected during the preclinical trial.
Preclinical Services
Our animal research facilities are subject to a variety of federal and state laws and regulations, including The
Animal Welfare Act and the rules and regulations enforced by the United States Department of Agriculture ("USDA")
and the National Institutes of Health ("NIH"). These regulations establish the standards for the humane treatment, care
and handling of animals by dealers and research facilities. Our animal research facilities maintain detailed standard
operating procedures and other documentation necessary to comply with applicable regulations for the humane treatment
of the animals in our custody. In addition to being licensed by the USDA as a research facility, we are also accredited by
the Association for Assessment and Accreditation of Laboratory Animal Care International ("AAALAC") and have
registered assurance with the NIH.
Quality Assurance and Information Technology
To assure compliance with applicable regulations, we have established quality assurance programs at our
facilities that audit test data, train personnel and review procedures and regularly inspect facilities. In addition, FDA
regulations and guidelines serve as a basis for our Standard Operating Procedures (“SOPs”) where applicable. On an
ongoing basis, we endeavor to standardize SOPs across all relevant operations. We have both developed and purchased
software to ensure compliant documentation, handling and reporting of laboratory-generated study data. We use 21 CFR
Part 11 (FDA guidelines on electronic records and electronic signatures that define the criteria under which electronic
records and electronic signatures are considered to be trustworthy, reliable and equivalent to paper records) compliant
software for our preclinical research group. At the end of fiscal 2014, our contract research operations were compliant
with applicable US FDA regulations (including 21 CFR Part 11) in our analytical, bioanalytical, toxicology, lab
information management, and document management systems. Systems compliant with 21 CFR Part 11 were formally
validated and released for use in regulated studies.
We manage our business systems through the use of an Enterprise Resource Planning ("ERP") system. We are
continually refining and adjusting our ERP system to improve efficiency, provide better management tools and address
changes in our business. These changes are appropriately documented and tested before implementation. We also test
these systems in connection with management’s annual review of our internal control systems. Management’s
assessment and report on internal controls over financial reporting is included in Item 9A.
Controlled, Hazardous, and Environmentally Threatening Substances
Some of our development and testing activities are subject to the Controlled Substances Act administered by the
Drug Enforcement Agency ("DEA"), which strictly regulates all narcotic and habit-forming substances. We maintain
restricted-access facilities and heightened control procedures for projects involving such substances due to the level of
security and other controls required by the DEA. In addition, we are subject to other federal and state regulations
concerning such matters as occupational safety and health and protection of the environment.
Our laboratories are subject to licensing and regulation under federal, state and local laws relating to hazard
communication and employee right-to-know regulations, the handling and disposal of medical specimens and hazardous
waste, as well as the safety and health of laboratory employees. All of our laboratories are subject to applicable federal
and state laws and regulations relating to the storage and disposal of laboratory specimens, including regulations of the
Environmental Protection Agency, the Department of Transportation, the National Fire Protection Agency and the
Resource Conservation and Recovery Act. Although we believe that we are currently in compliance in all material
respects with such federal, state and local laws, failure to comply could subject us to denial of the right to conduct
business, fines, criminal penalties and other enforcement actions.
The regulations of the U.S. Department of Transportation, the U.S. Public Health Service and the U.S. Postal
Service apply to the surface and air transportation of laboratory specimens. Our laboratories also comply with the
International Air Transport Association regulations which govern international shipments of laboratory specimens.
Furthermore, when materials are sent to a foreign country, the transportation of such materials becomes subject to the
laws, rules and regulations of such foreign country.
Safety
In addition to comprehensive regulation of safety in the workplace, the Occupational Safety and Health
Administration has established extensive requirements relating to workplace safety for health care employers whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among
other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations
and other measures designed to minimize exposure to chemicals, and transmission of blood-borne and airborne
pathogens. Furthermore, relevant employees receive initial and periodic training focusing on compliance with applicable
hazardous materials regulations and health and safety guidelines.
HIPAA
The U.S. Department of Health and Human Services has promulgated final regulations under the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") that govern the disclosure of confidential medical
information in the United States. We have had a global privacy policy in place since January 2001 and believe that we
are in compliance with HIPAA and current European Union requirements regarding confidential medical information.
We continue to monitor our compliance with these regulations, and we intend to take appropriate steps to ensure
compliance as these and other privacy regulations are revised or additional regulations come into effect.
Product Liability and Insurance
We maintain product liability and professional errors and omissions liability
insurance, providing
approximately $6.0 million in coverage on a claims-made basis. Additionally, in certain circumstances, we seek to
manage our liability risk through contractual provisions to be indemnified by the client or covered by the client’s liability
insurance policies. Also, in certain types of engagements, we seek to limit our contractual liability to clients to the
amount of fees received. The contractual arrangements are subject to negotiation with clients, and the terms and scope of
such indemnification, liability limitation and insurance coverage vary by client and project.
Research and Development
In fiscal 2014 and 2013, we spent $658 and $454, respectively, on research and development. Separate from our
contract research services business, we maintain applications research and development to enhance our products
business. Expenditures cover hardware and software engineering costs, laboratory supplies, labor, prototype
development and laboratory demonstrations of new products and applications for those products.
Intellectual Property
We believe that our patents, trademarks, copyrights and other proprietary rights are important to our business.
Accordingly, we actively seek protection for those rights both in the United States and abroad. Where we deem it to be
an appropriate course of action, we will vigorously prosecute patent infringements. The loss of any one or more of our
patents, trademarks, copyrights or other proprietary rights could be material to our consolidated revenues or earnings.
We currently hold three U.S. federally registered trademarks. We also have one issued U.S. patent on the Dried
Blood Spot (DBS) sampling card for the Culex® Automated Blood Sampling Instrumentation and a pending U.S. patent
application for another element of the DBS technology. There are also three pending international patent applications for
this technology in Japan, Canada, and Europe. Additionally, we have two issued U.S. patents and one pending U.S.
patent application for the No Blood Waste technology for the Culex® instrument. There are two pending international
patent applications for this technology in Europe and Canada. There are two additional issued U.S. patents and 15 issued
international patents in Germany, Denmark, Europe, Spain, France, Great Britain, Japan, Sweden, and Switzerland
relating to the Raturn® technology which can be used with the Culex® system; one issued U.S. patent relating to pinch
valve technology; and one pending U.S. patent application and three pending international patent applications in Japan,
Canada, and Europe relating to a tube assembly system that could potentially be used in the Culex® system.
Our issued patents are protected for durations ranging from April of 2017 to October of 2031. In addition to
these formal intellectual property rights, we rely on trade secrets, unpatented know-how and continuing applications
research which we seek to protect through means of reasonable business procedures, such as confidentiality agreements.
Raw Materials
There are no specialized raw materials that are particularly essential to our business. We have a variety of
alternative suppliers for the essential components in our products.
Employees
At September 30, 2014, we had 150 full-time employees and 9 part-time employees. All employees enter into
confidentiality agreements intended to protect our proprietary information. We believe that our relations with our
employees are good. None of our employees are represented by a labor union. Our performance depends on our ability to
attract and retain qualified professional, scientific and technical staff. The level of competition among employers for
skilled personnel is high. We believe that our employee benefit plans enhance employee morale, professional
commitment and work productivity and provide an incentive for employees to remain with the Company.
Executive Officers of the Registrant
The following table illustrates information concerning the persons who served as our executive officers as of
September 30, 2014. Officers are elected annually at the annual meeting of the board of directors.
Name
Jacqueline M. Lemke
Age
Position
52 President and Chief Executive Officer,
Jeffrey Potrzebowski 61 Chief Financial Officer, Vice President-Finance
John P. Devine, Jr.*
53 Vice President, Preclinical Services
Dr. James S. Bourdage 62 Vice President Bioanalytical Operations
Connie Dougherty 52 Vice President of Business Development
*As stated below, Mr. Devine’s Employment Agreement was not renewed beyond its current term. His official
termination date is December 30, 2014
Jacqueline M. Lemke, joined the Company as Vice President, Finance and Chief Financial Officer on April 9,
2012. She was named Interim President and Chief Executive Officer on July 5, 2012. On February 12, 2013, she was
named President and Chief Executive Officer. Prior to joining the Company, Ms. Lemke, was Vice President of Finance
and Global CFO of Remy, Inc., a billion dollar division of Remy International, from 2007 – 2010 where she built a
global finance team and created a financial system to support rapid decision making and clear lines of management
accountability. From 2004 - 2005, she served as Vice President of Finance and Global CFO Connected Home Solutions
at Motorola, Inc., and, prior to that, was Global Strategic Planning Director of the multi-billion dollar revenue Invista
division at the DuPont Company. Ms. Lemke’s experience includes managing cyclical, global businesses, negotiating
and implementing mergers, acquisitions and joint ventures as well as building an infrastructure to execute a restructured
refinancing. She began her career as a tax consultant at Deloitte & Touche and is a Certified Public Accountant (CPA).
Ms. Lemke earned her bachelor’s degree in finance and accounting from Drexel University and her master’s degree in
management from Northwestern University.
Jeffrey Potrzebowski joined the Company as Vice President-Finance and Chief Financial Officer on June 9,
2014. Prior to joining the Company, from 2006 to 2013, Mr. Potrzebowski was CFO of Oerilkon Drive Systems, a
manufacturer of gear and drive solutions. Prior to that, Mr. Potrzebowski was Senior Vice President and CFO of Remy
International before which, Mr. Potrzebowski had spent twelve years in financial positions of increasing responsibility
with Great Lakes Chemical Corporation. Mr. Potrzebowski is a Certified Public Accountant (CPA), with a bachelor’s
degree in Business Administration in Accounting from Toledo University.
John P. Devine, Jr., joined the Company in 1989 and has been Vice President, Preclinical Services , since
fiscal 2011. Mr. Devine was responsible for BASi’s in vivo discovery services and preclinical services. On September
18, 2014, Mr. Devine was given notice that, pursuant to his Employment Agreement, it is the Company’s intention not to
extend the term of his Employment Agreement beyond its current term. Mr. Devine earned his bachelor’s degree in
biology from the University of Southern Indiana, is a Board Certified Toxicologist and is a regional and national member
of the Society of Toxicology.
Dr. James S. Bourdage, joined the Company as Vice President of Bioanalytical Operations on June 2, 2014.
Prior to joining the Company, Dr. Bourdage was Executive Director Biopharmaceutical CMC Solutions at Covance Inc.,
Greenfield, Indiana, since 2011, where he was responsible for the US Biotechnology CMC operation of this $2.4 billion
drug development services organization. From 2009 to 2011, Dr. Bourdage was Senior Director, Bioanalytical Sciences,
at Pharmathene, Inc., Annapolis, Maryland, a biodefense company with more than $300 million in government contracts.
From 2003 to 2009, Dr. Bourdage was Global Research Advisor and Team Leader, Laboratory for Experimental
Medicine at Eli Lilly Co., Indianapolis, where his responsibilities included oversight of biotherapeutic immunogenicity
and biomarker assay development to support global clinical trials. Previously, he was Senior Research Scientist, Drug
Absorption and Transport at Pharmacia (Upjohn), Kalamazoo, Michigan, where he received the Upjohn Corporate
Special Recognition Award in 1992 and the Quality Control Achievement Award in 1993. Dr. Bourdage received a
Ph.D. in Immunochemistry from the University of Illinois in 1979. He is a member of the American Society of Clinical
Pathologists and the American Association of Pharmaceutical Scientists.
Connie Dougherty, joined the Company as Vice President of Business Development on September 15, 2014.
Prior to joining the Company, from 2008 to 2014, Ms. Dougherty served as Area Marketing Manager - Northern New
Jersey, Manhattan, and Queens for Sunoco, a Division of Energy Transfer Partners. In that role Ms. Dougherty was
responsible for commercializing new business opportunities and developing strategic relationships. Previously, she was
Territory Manager Downstream Business for, Exxon Company, USA/Exxon Mobil –Marketing. Ms. Dougherty also
held a variety of sales leadership positions at Lehigh Gas Inc. and Sun Refining and Marketing Company. Ms.
Dougherty received a Bachelor of Science degree in business from Rowan University in Glassboro, New Jersey in 1985.
Investor Information
We file various reports with, or furnish them to, the Securities and Exchange Commission (the “SEC”),
including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to such reports. These reports are available free of charge upon written request or by visiting
www.BASinc.com/invest. Inquiries from shareholders, security analysts, portfolio managers, registered representatives
and other interested parties including media inquiries should be directed to:
BASi Investor Relations,
Attn: Jeffrey Potrzebowski
2701 Kent Avenue, West Lafayette, IN 47906 USA
Phone 765-463-4527, Fax 765-497-1102, basi@BASinc.com
ITEM 1A - RISK FACTORS
Risks Related to Our Business
Our business is subject to many risks and uncertainties, which may affect our future financial performance. If
any of the events or circumstances described below occur, our business and financial performance could be adversely
affected, our actual results could differ materially from our expectations and the market value of our stock could decline.
The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and
uncertainties not currently known to us or that we currently do not believe are material that may adversely affect our
business and financial performance.
A reduction in research and development budgets at pharmaceutical and biotechnology companies may adversely
affect our business.
Our customers include researchers at pharmaceutical and biotechnology companies. Our ability to continue to
grow and win new business is dependent in large part upon the ability and willingness of the pharmaceutical and
biotechnology industries to continue to spend on research and development and to outsource the products and services
we provide. Fluctuations in the research and development budgets of these researchers and their organizations could
have a significant effect on the demand for our products and services. Research and development budgets fluctuate due
to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities and
institutional budgetary policies. Our business could be adversely affected by any significant decrease in life sciences
research and development expenditures by pharmaceutical and biotechnology companies. Similarly, economic factors
and industry trends that affect our clients in these industries also affect our business.
We rely on a limited number of key customers, the importance of which may vary dramatically from year to year,
and a loss of one or more of these key customers may adversely affect our operating results.
Two customers accounted for approximately 20.8% of our total revenue in fiscal 2014 and three customers
accounted for approximately 15.3% of our total revenues in fiscal 2013. The loss of a significant amount of business
from one of our major customers would materially and adversely affect our results of operations until such time, if ever,
as we are able to replace the lost business. Significant clients or projects in any one period may not continue to be
significant clients or projects in other periods. In any given year, there is a possibility that a single pharmaceutical
company may account for 5% or more of our total revenue or that our business may be dependent on one or more large
projects. Since we do not have long-term contracts with most of our clients, the importance of a single client may vary
dramatically from year to year. To the extent that we are dependent on any single customer, we are subject to the risks
faced by that customer to the extent that such risks impede the customer's ability to stay in business and make timely
payments to us.
The majority of our customers’ contracts can be terminated upon short notice.
Most of our contracts for CRO services are terminable by the client upon 30 days’ notice. Clients terminate or
delay their contracts for a variety of reasons, including but not limited to:
• products being tested fail to satisfy safety requirements;
• products have undesired clinical results;
• the client decides to forego a particular study;
• inability to enroll enough patients in the study;
• inability to recruit enough investigators;
• production problems causing shortages of the drug; and
• actions by regulatory authorities.
The loss, reduction in scope or delay of a large contract or the loss or delay of multiple contracts could
materially adversely affect our business, although our contracts frequently entitle us to receive the costs of winding down
the terminated projects, as well as all fees earned by us up to the time of termination. Some contracts also entitle us to a
termination fee.
Changes in government regulation or in practices relating to the pharmaceutical industry could change the need
for the services we provide.
Governmental agencies throughout the world, but particularly in the United States, strictly regulate the drug
development process. Our business involves helping pharmaceutical and biotechnology companies comply with the
regulatory drug approval process. Changes in regulation, such as a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, or an increase in regulatory requirements that we may have
difficulty satisfying, or that make our services less competitive, could substantially change the demand for our services.
Also, if the government increases efforts to contain drug costs and pharmaceutical and biotechnology company profits
from new drugs, our customers may spend less, or reduce their growth in spending on research and development.
We may bear financial risk if we underprice our contracts or overrun cost estimates.
Since some of our contracts are structured as fixed price or fee-for-service, we bear the financial risk if we
initially underprice our contracts or otherwise overrun our cost estimates. Such underpricing or significant cost overruns
could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Any failure by us to comply with existing regulations could harm our reputation and operating results.
Any failure on our part to comply with existing regulations could result in the termination of ongoing research
or the disqualification of data for submission to regulatory authorities. For example, if we were to fail to properly
monitor compliance with study protocols, the data collected could be disqualified. If this were to happen, we may be
contractually required to repeat a study at no further cost to the customer, but at substantial cost to us. This would harm
our reputation, our prospects for future work and our operating results. Furthermore, the issuance of a notice from the
FDA based on a finding of a material violation by us of good clinical practice, good laboratory practice or good
manufacturing practice requirements could materially and adversely affect our business and financial performance.
Our future success depends on our ability to keep pace with rapid technological changes that could make our
services and products less competitive or obsolete.
The biotechnology, pharmaceutical and medical device industries generally, and contract research services more
specifically, are subject to increasingly rapid technological changes. Our competitors or others might develop
technologies, services or products that are more effective or commercially attractive than our current or future
technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If
competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain
competitive, our competitive position, and in turn our business, revenues and financial condition, would be materially
and adversely affected.
We have experienced periods of losses on our operating activities.
Our overall strategy includes increasing revenue on a consistent basis and controlling our operating expenses in
support of the revenue growth. We have concentrated our efforts on enhancing our business development program as
well as ongoing Company-wide efficiency activities intended to increase productivity and streamline our operations. We
cannot assure that our efforts will result in profitability, or if our efforts result in profits, such profits will continue for
any meaningful period of time.
Our failure to comply with the covenants contained in our credit facility, including as a result of events beyond
our control, could result in an event of default, which could materially and adversely affect our operating results
and our financial condition.
On May 14, 2014, we entered into a Credit Agreement with Huntington Bank. The agreement includes both a
term loan and a revolving loan and is secured by mortgages on our facilities and in West Lafayette and Evansville,
Indiana and liens on our personal property. This credit facility requires us to maintain certain financial ratios. The credit
facility also requires us to comply with various operational and other covenants. If there were an event of default under
our credit facility that was not cured or waived, the lenders of the defaulted debt could cause all amounts outstanding
with respect to that debt to be due and payable immediately. We cannot assure that our assets or cash flow would be
sufficient to fully repay borrowings under the credit facility, either upon maturity or if accelerated, upon an event of
default, or that we would be able to refinance or restructure the payments becoming due on the credit facility.. Please see
Note 7 to the Consolidated Financial Statements for additional detail regarding our credit facility.
If we are unable to maintain effective internal control over financial reporting or disclosure controls and
procedures, the accuracy and timeliness of our financial reporting may be adversely affected.
Maintaining effective internal controls over financial reporting is necessary for us to produce reliable financial
statements. Moreover, we must maintain effective disclosure controls and procedures in order to provide reasonable
assurance that the information required to be reported in our periodic reports filed with the SEC is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. If we are unable to maintain effective internal
controls over financial reporting or disclosure controls and procedures or remediate any material weakness, it could
result in a material misstatement of our consolidated financial statements that would require a restatement, investor
confidence in the accuracy and timeliness of our financial reports may be adversely impacted, and the market price of
our common shares could be negatively impacted.
We operate in a highly competitive industry.
The CRO services industry is highly competitive. We often compete for business not only with other, often
larger and better capitalized, CRO companies, but also with internal discovery and development departments within our
clients, some of which are large pharmaceutical and biotechnology companies with greater resources than we have. If we
do not compete successfully, our business will suffer. The industry is highly fragmented, with numerous smaller
specialized companies and a handful of full-service companies with global capabilities much larger than ours. Increased
competition might lead to price and other forms of competition that might adversely affect our operating results. As a
result of competitive pressures, our industry experienced consolidation in recent years. This trend is likely to produce
more competition among the larger companies for both clients and acquisition candidates.
The loss of our key personnel could adversely affect our business.
Our success depends to a significant extent upon the efforts of our senior management team and other key
personnel. The loss of the services of such personnel could adversely affect our business. Also, because of the nature of
our business, our success is dependent upon our ability to attract, train, manage and retain technologically qualified
personnel. There is substantial competition for qualified personnel, and an inability to recruit or retain qualified
personnel may impact our ability to grow our business and compete effectively in our industry.
We might incur expense to develop products that are never successfully commercialized.
We have incurred and expect to continue to incur research and development and other expenses in connection
with our products business. The potential products to which we devote resources might never be successfully developed
or commercialized by us for numerous reasons, including:
•
inability to develop products that address our customers’ needs;
competitive products with superior performance;
•
• patent conflicts or unenforceable intellectual property rights;
• demand for the particular product; and
• other factors that could make the product uneconomical.
Incurring expenses for a potential product that is not successfully developed and/or commercialized could have
a material adverse effect on our business, financial condition, prospects and stock price.
Providing CRO services creates a risk of liability.
In certain circumstances, we seek to manage our liability risk through contractual provisions with clients
requiring us to be indemnified by the clients or covered by the clients’ product liability insurance policies. Although
most of our clients are large, well-capitalized companies, the financial performance of these indemnities is not secured.
Therefore, we bear the risk that the indemnifying party may not have the financial ability to fulfill its indemnification
obligations or the liability would exceed the amount of applicable insurance. Furthermore, we could be held liable for
errors and omissions in connection with the services we perform. There can be no assurance that our insurance coverage
will be adequate, or that insurance coverage will continue to be available on acceptable terms, or that we can obtain
indemnification arrangements or otherwise be able to limit our liability risk.
We rely on third parties for important services.
We depend on third parties to provide us with services critical to our business. The failure of any of these third
parties to adequately provide the needed services including, without limitation, transportation services, could have a
material adverse effect on our business.
Our business uses biological and hazardous materials, which could injure people or violate laws, resulting in
liability that could adversely impact our financial condition and business.
Our activities involve the controlled use of potentially harmful biological materials, as well as hazardous
materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental
contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or
injury, we could be held liable for damages that result, and any liability could exceed our insurance coverage and ability
to pay. Any contamination or injury could also damage our reputation, which is critical to getting new business. In
addition, we are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal
of these materials and specified waste products. The cost of compliance with these laws and regulations is significant and
if changes are made to impose additional requirements, these costs could increase and have an adverse impact on our
financial condition and results of operations.
Hardware or software failures, delays in the operations of our computer and communications systems or the
failure to implement system enhancements could harm our business.
Our success depends on the efficient and uninterrupted operation of our computer and communications systems.
A failure of our network or data gathering procedures could impede the processing of data, delivery of databases and
services, client orders and day-to-day management of our business and could result in the corruption or loss of data.
While all of our operations have disaster recovery plans in place, they might not adequately protect us. Despite any
precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses,
break-ins and similar events at our computer facilities could result in interruptions in the flow of data to our servers and
from our servers to our clients. In addition, any failure by our computer environment to provide our required data
communications capacity could result in interruptions in our service. In the event of a delay in the delivery of data, we
could be required to transfer our data collection operations to an alternative provider of server hosting services. Such a
transfer could result in delays in our ability to deliver our products and services to our clients. Additionally, significant
delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once
they are completed could damage our reputation and harm our business. Finally, long-term disruptions in the
infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities and acts of
terrorism, particularly involving cities in which we have offices, could adversely affect our businesses. Although we
carry property and business interruption insurance, our coverage might not be adequate to compensate us for all losses
that may occur.
Our animal populations may suffer diseases that can damage our inventory, harm our reputation, result in
decreased sales of research products or result in other liability to us.
It is important that our research products be free of diseases, including infectious diseases. The presence of
diseases can distort or compromise the quality of research results, can cause loss of animals in our inventory, can result
in harm to humans or outside animal populations if the disease is not contained to animals in inventory, or can result in
other losses. Such results could harm our reputation or have a material adverse effect on our financial condition, results
of operations, and cash flows.
Our products business depends on our intellectual property.
Our products business is dependent, in part, on our ability to obtain patents in various jurisdictions on our
current and future technologies and products, to defend our patents and protect our trade secrets and to operate without
infringing on the proprietary rights of others. There can be no assurance that our patents will not be challenged by third
parties or that, if challenged, those patents will be held valid. In addition, there can be no assurance that any technologies
or products developed by us will not be challenged by third parties owning patent rights and, if challenged, will be held
not to infringe on those patent rights. The expense involved in any patent litigation can be significant. We also rely on
unpatented proprietary technology, and there can be no assurance that others will not independently develop or obtain
similar products or technologies.
We may expand our business through acquisitions.
We occasionally review acquisition candidates. Factors which may affect our ability to grow successfully
through acquisitions include:
•
•
•
•
•
•
•
inability to obtain financing;
difficulties and expenses in connection with integrating the acquired companies and achieving the
expected benefits;
diversion of management’s attention from current operations;
the possibility that we may be adversely affected by risk factors facing the acquired companies;
acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of
our common stock to the shareholders of the acquired company, dilutive to the percentage of
ownership of our existing stockholders;
potential losses resulting from undiscovered liabilities of acquired companies not covered by the
indemnification we may obtain from the seller; and
loss of key employees of the acquired companies.
We depend on the pharmaceutical and biotechnology industries.
Over the past several years, some areas of our businesses have grown significantly as a result of the increase in
pharmaceutical and biotechnology companies outsourcing their preclinical and clinical research support activities. We
believe that due to the significant investment in facilities and personnel required to support drug development,
pharmaceutical and biotechnology companies look to outsource some or all of those services. By doing so, they can
focus their resources on their core competency of drug discovery, while obtaining the outsourced services from a full-
service provider like us. Our revenues depend greatly on the expenditures made by these pharmaceutical and
biotechnology companies in research and development. In some instances, companies in these industries are reliant on
their ability to raise capital in order to fund their research and development projects. Accordingly, economic factors and
industry trends that affect our clients in these industries also affect our business. If companies in these industries were to
reduce the number of research and development projects they conduct or outsource, our business could be materially
adversely affected.
Unfavorable general economic conditions may materially adversely affect our business.
While it is difficult for us to predict the impact of general economic conditions on our business, these conditions
could reduce customer demand for some of our services, which could cause our revenue to decline. Also, our customers,
particularly smaller biotechnology companies which are especially reliant on the credit and capital markets, may not be
able to obtain adequate access to credit or equity funding, which could affect their ability to make timely payments to us.
Moreover, we rely on credit facilities to provide working capital to support our operations. We regularly evaluate
alternative financing sources. Further changes in the commercial credit market or in the financial stability of our
creditors may impact the ability of our creditors to provide additional financing. In addition, the financial condition of
our credit facility providers, which is beyond our control, may adversely change. Any decrease in our access to
borrowings under our credit facility, tightening of lending standards and other changes to our sources of liquidity could
adversely impact our ability to obtain the financing we need to continue operating the business in our current manner.
For these reasons, among others, if the economic conditions stagnate or decline, our operating results and financial
condition could be adversely affected.
We rely on air transportation to serve our customers.
Our laboratories and certain of our other businesses are heavily reliant on air travel for transport of samples and
other material, products and people. A significant disruption to the air travel system, or our access to it, could have a
material adverse effect on our business.
Privacy regulations could increase our costs or limit our services.
The U.S. Department of Health and Human Services has issued regulations under the Health Insurance
Portability and Accountability Act of 1996 These regulations demand greater patient privacy and confidentiality. Some
state governments are considering more stringent regulations. These regulations might require us to increase our
investment in security or limit the services we offer. We could be found liable if we fail to meet existing or proposed
regulations on privacy and security of health information.
We may be affected by health care reform.
In March 2010, the United States Congress enacted the Patient Protection and Affordable Care Act (“PPACA”)
intended over time to expand health insurance coverage and impose health industry cost containment measures. PPACA
legislation and the accompanying regulations may significantly impact the pharmaceutical and biotechnology industries
as it is implemented over the next several years. In addition, the U.S. Congress, various state legislatures and European
and Asian governments may consider various types of health care reform in order to control growing health care costs.
We are unable to predict what legislative proposals will be adopted in the future, if any.
Implementation of health care reform legislation may have certain benefits but also may contain costs that
could limit the profits that can be made from the development of new drugs. This could adversely affect research and
development expenditures by pharmaceutical and biotechnology companies, which could in turn decrease the business
opportunities available to us both in the United States and abroad. In addition, new laws or regulations may create a risk
of liability, increase our costs or limit our service offerings.
Risks Related to Share Ownership
Our share price could be volatile and our trading volume may fluctuate substantially.
The market price of our common shares has historically experienced and might continue to experience
volatility.
Many factors could have a significant impact on the future price of our common shares, including:
our failure to successfully implement our business objectives;
compliance with ongoing regulatory requirements;
•
•
• market acceptance of our products;
•
technological innovations, new commercial products or drug discovery efforts and preclinical and clinical
activities by us or our competitors;
changes in government regulations;
general economic conditions and other external factors;
actual or anticipated fluctuations in our quarterly financial and operating results;
the degree of trading liquidity in our common shares; and
our ability to meet the minimum standards required for remaining listed on the NASDAQ Capital Market.
•
•
•
•
•
These factors also include ones beyond our control, such as market conditions within our industry and changes
in pharmaceutical and biotechnology industries. In addition, in recent years, the stock market has experienced significant
price and volume fluctuations. The stock market, and in particular the market for pharmaceutical and biotechnology
company stocks, has also experienced significant decreases in value in the past. This volatility and valuation decline
have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating
performance, and might adversely affect the price of our common stock.
If we are unable to maintain listing of our securities on the NASDAQ Capital Market or any stock exchange, it
may be more difficult for the Company's shareholders to sell their securities.
NASDAQ requires listing issuers to comply with certain standards in order to remain listed on its exchange. If,
for any reason, NASDAQ should delist the Company's securities from trading on its exchange and the Company is
unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur,
each of which could have a material adverse effect on our shareholders:
•
the liquidity of our common stock;
•
the market price of our common stock;
•
our ability to obtain financing for the continuation of our operations;
•
the number of institutional and general investors that will consider investing in our common stock;
•
the number of investors in general that will consider investing in our common stock;
•
the number of market makers in our common stock;
•
the availability of information concerning the trading prices and volume of our common stock; and
•
the number of broker-dealers willing to execute trades in shares of our common stock.
There is no public market for the Series A preferred shares or warrants to purchase common shares.
There is no established public trading market for the Series A preferred shares and the warrants that were sold
May 11, 2011, and we do not expect a market to develop. In addition, we do not intend to apply to list the Series A
preferred shares or the warrants on any securities exchange. Without an active market, the liquidity of these securities is
limited.
We have never paid cash dividends and currently do not intend to do so.
We have never declared or paid cash dividends on our common shares. We currently plan to retain any
earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the
future will depend on our financial condition, results of operations and capital requirements, as well as other factors
deemed relevant by our board of directors.
ITEM 1B- UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2-PROPERTIES
We operate in the following locations, all of which we own, except as otherwise indicated:
•
Our principal executive offices are located at 2701 Kent Avenue, West Lafayette, Indiana 47906, with
approximately 121,000 square feet of operations, manufacturing, and administrative space. Both the contract research
services segment and the products segment conduct operations at this facility. The building has been financed by
mortgages.
•
BAS Evansville Inc. is in Evansville, Indiana. We occupy 10 buildings with roughly 92,000 square feet of
operating and administrative space on 52 acres. Most of this site is engaged in preclinical toxicology testing of
developmental drugs in animal models. The contract research services segment conducts operations at this facility.
We believe that our facilities are adequate for our operations and that suitable additional space will be available
if and when needed. The terms of any mortgages and leases for the above properties are detailed in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes 6 and 7 to the
Notes to Consolidated Financial Statements.
ITEM 3-LEGAL PROCEEDINGS
We currently do not have any material pending legal proceedings.
ITEM 4- MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5-MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of September 30, 2014, our common stock was traded on the NASDAQ Capital Market under the symbol
“BASi”. The following table sets forth the quarterly high and low sales price per share of our common stock from
October 1, 2012 through September 30, 2014.
Fiscal Year Ended September 30, 2013
First Quarter ………………………...
Second Quarter ……………………..
Third Quarter ……………………….
Fourth Quarter ……………………...
High
Low
$ 1.36
1.80
1.64
1.58
$ 1.10
1.23
1.25
1.26
Fiscal Year Ended September 30, 2014
First Quarter ………………………..
Second Quarter …………………….
Third Quarter ………………………
Fourth Quarter ……………………...
$ 3.06
3.30
2.95
2.60
$ 1.29
2.49
2.51
2.12
Holders
There were approximately 2,700 holders of record of our common stock as of December 19, 2014.
Dividends
We did not pay any cash dividends on our common shares in fiscal years 2014 or 2013 and do not anticipate
paying cash dividends in the foreseeable future. Dividends paid on our Series A preferred shares are discussed in Note 3
to the Notes to Consolidated Financial Statements.
ITEM 6 – SELECTED FINANCIAL DATA
Not applicable.
[Remainder of page intentionally left blank.]
ITEM 7-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the 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. Our actual results could differ
materially from those discussed in the forward-looking statements. Please refer to page 1 of this Report for a cautionary
statement regarding forward-looking information.
References to years or portions of years in this Item refer to our fiscal year ended September 30, unless
otherwise indicated. The following amounts are in thousands unless otherwise indicated.
Business Overview
We are an international contract research organization providing drug discovery and development services. Our
clients and partners include pharmaceutical, biotechnology, academic and governmental organizations. We apply
innovative technologies and products and a commitment to quality to help clients and partners accelerate the
development of safe and effective therapeutics and maximize the returns on their research and development investments.
We offer an efficient, variable-cost alternative to our clients' internal product development programs. Outsourcing
development work to reduce overhead and speed drug approvals through the Food and Drug Administration ("FDA") is
an established alternative to in-house development among pharmaceutical companies. We derive our revenues from sales
of our research services and drug development tools, both of which are focused on determining drug safety and efficacy.
The Company has been involved in the research of drugs to treat numerous therapeutic areas for over 40 years.
We support the preclinical and clinical development needs of researchers and clinicians for small molecule and
large biomolecule drug candidates. Our scientists have the skills in analytical instrumentation development, chemistry,
computer software development, physiology, medicine, analytical chemistry and toxicology to make the services and
products we provide increasingly valuable to our current and potential clients. Our principal clients are scientists
engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and
basic research at many of the small start-up biotechnology companies and the largest global pharmaceutical companies.
Our business is largely dependent on the level of pharmaceutical and biotechnology companies' efforts in new
drug discovery and approval. Our contract research services segment is a direct beneficiary of these efforts, through
outsourcing by these companies of research work. Our products segment is an indirect beneficiary of these efforts, as
increased drug development leads to capital expansion, providing opportunities to sell the equipment we produce and the
consumable supplies we provide that support our products.
Developments within the industries we serve have a direct, and sometimes material, impact on our operations.
Currently, many large pharmaceutical companies have major "block-buster" drugs that are nearing the end of their patent
protections. This puts significant pressure on these companies both to develop new drugs with large market appeal, and
to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations ("CRO's")
have benefited from these developments, as the pharmaceutical industry has turned to out-sourcing to both reduce fixed
costs and to increase the speed of research and data development necessary for new drug applications. The number of
significant drugs that have reached or are nearing the end of their patent protection has also benefited the generic drug
industry. Generic drug companies provide a significant source of new business for CROs as they develop, test and
manufacture their generic compounds.
A significant portion of innovation in the pharmaceutical industry is now being driven by biotech and small,
venture capital funded drug development companies. Many of these companies are "single-molecule" entities, whose
success depends on one innovative compound. While several of the biotech companies have reached the status of major
pharmaceuticals, the industry is still characterized by smaller entities. These developmental companies generally do not
have the resources to perform much of the research within their organizations, and are therefore dependent on the CRO
industry for both their research and for guidance in preparing their FDA submissions. These companies have provided
significant new opportunities for the CRO industry, including us. They do, however, provide challenges in selling, as
they frequently have only one product in development, which causes CROs to be unable to develop a flow of projects
from a single company. These companies may expend all their available funds and cease operations prior to fully
developing a product. Additionally, the funding of these companies is subject to investment market fluctuations, which
changes as the risk profiles and appetite of investors change.
Research services are capital intensive. The investment in equipment and facilities to serve our markets is
substantial and continuing. While our physical facilities are adequate to meet market needs for the near term, rapid
changes in automation, precision, speed and technologies necessitate a constant investment in equipment and software to
meet market demands. We are also impacted by the heightened regulatory environment and the need to improve our
business infrastructure to support our operations, which will necessitate additional capital investment. Our ability to
generate capital to reinvest in our capabilities, both through operations and financial transactions, is critical to our
success. While we are currently committed to fully utilizing capacity, sustained growth will require additional
investment in future periods. Our financial position could limit our ability to make such investments.
Executive Overview
Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely
monitor the market for our services. For a discussion of the trends affecting the market for our services, see “Item 1.
Business – Trends Affecting the Drug Discovery and Development Industry.” In fiscal 2014, we experienced increased
demand as compared to fiscal 2013 in our Contract Research services segment. Most notably significant revenue gains
were reported by our Preclinical Services unit which supports our clients' Phase II & III clinical trials. In our Product
segment revenue was down slightly compared to the prior fiscal year due in part from lower sales of certain analytical
instruments, offset in part by increased sales of our Culex®, in vivo sampling systems.. For fiscal 2015, we plan to focus
on sales execution, operational excellence and building strategic partnerships with pharmaceutical and biotechnology
companies, to differentiate our company and create value for our clients and shareholders.
We review various metrics to evaluate our financial performance, including revenue, margins and earnings.
Revenues increased approximately 11.4% in fiscal 2014; and gross margin increased 0.4% from fiscal 2013. Operating
expenses increased 16.5% in fiscal 2014 from fiscal 2013 due in large part to rebuilding the organization with the
addition of new business development personnel and increased spending for engineering and product development. In
addition, at September 30, 2014, our annual goodwill impairment test was completed for Vetronics, a reporting unit
within our Products Segment, resulting in an impairment charge totaling $374 in fiscal 2014. In late 2014 we began
shifting our market focus and will no longer actively market the Vetronics product offering. However, we will continue
to service the units in the field. The benefit of higher revenues in fiscal 2014 was more than offset by the increase in
operating expenses and the impairment charge resulting in a reported operating income of $334 in fiscal 2014 compared
to operating income of $830 in fiscal 2013. For a detailed discussion of our revenue, margins, earnings and other
financial results for the fiscal year ended September 30, 2014, see “Results of Operations – 2014 Compared to 2013”
below.
As of September 30, 2014, we had $981 of cash and cash equivalents as compared to $1,304 of cash and cash
equivalents at the end of fiscal 2013. In fiscal 2014, we generated $1,726 in cash from operations as compared to $1,594
in fiscal 2013. Total capital expenditures increased in fiscal 2014 to a level of $523 reflecting ongoing investment in our
business due to our improved liquidity position.
On May 14, 2014, we entered into a Credit Agreement (“Agreement”) with Huntington Bank. The Agreement
includes both a term loan and a revolving loan and is secured by mortgages on our facilities in West Lafayette and
Evansville, Indiana and liens on our personal property. The term loan for $5,500 bears interest at LIBOR plus 325 basis
points with monthly principal payments of approximately $65 plus interest. The term loan matures in May 2019. On
May 15, 2014, we used the proceeds from the term loan to pay off our outstanding indebtedness to Regions Bank. The
revolving loan for $2,000 matures in May 2016 and bears interest at LIBOR plus 300 basis points with interest paid
monthly. More information regarding this credit facility is provided in “Liquidity and Capital Resources – New Credit
Facility”.
We believe that the development of innovative new drugs is going through an evolution, evidenced by the
significant reduction of expenditures on research and development at several major international pharmaceutical
companies, accompanied by increases in outsourcing and investments in smaller start-up companies that are performing
the early development work on new compounds. Many of these companies are funded by either venture capital or
pharmaceutical investment, or both, and generally do not build internal staffs that possess the extensive scientific and
regulatory capabilities to perform the various activities necessary to progress a drug candidate to the filing of an
Investigative New Drug (“IND”) application with the FDA.
While continuing to maintain and develop our relationships with large pharmaceutical companies, we intend to
aggressively promote our services to developing businesses, which will require us to expand our existing capabilities to
provide services early in the drug development process, and to consult with clients on regulatory strategy and compliance
leading to their FDA filings. We have launched our Enhanced Drug Discovery services as part of this strategy, utilizing
our proprietary Culex® technology to provide early experiments in our laboratories that previously would have been
conducted in the sponsor’s facilities. As we move forward, we must balance the demands of the large pharmaceutical
companies with the personal touch needed by smaller biotechnology companies to develop a competitive advantage. We
intend to accomplish this through the use of and expanding upon our existing project management skills, strategic
partnerships and progressive relationship management.
Our long-term strategic objective is to maximize the Company’s intrinsic value per share. While we remain
focused on reducing our costs through productivity and better processes and a continued emphasis on generating free
cash flow, we are dedicated to the strategies that drive our top-line growth. We are intensifying our efforts to improve
our processes, embrace change and wisely employ our stronger liquidity position. We will continue to make BASi a
stronger company.
Results of Operations
The following table summarizes the consolidated statement of operations as a percentage of total revenues:
Service revenue
Product revenue
Total revenue
Cost of service revenue (a)
Cost of product revenue (a)
Total cost of revenue
Gross profit
Operating expenses
Year Ended September 30,
2014
2013
77.7%
22.3
100.0%
74.6%
25.4
100.0%
72.7
49.8
67.6
75.4
46.4
68.0
32.4
32.0
31.0
28.2
Operating income
1.4
3.8
Other expense
5.7
0.2
(Loss) income before income taxes
(4.3)
3.6
0.1
0.0
(4.3)%
3.5%
Income tax expense
Net (loss) income
(a) Percentage of service and product revenues, respectively.
2014 Compared to 2013
Service and Product Revenues
Revenues for the year ended September 30, 2014 increased 11.4% to $24,584 compared to $22,068 for the year
ended September 30, 2013. In fiscal 2014, we experienced increased demand in our Contract Research services segment.
Most notably, significant revenue gains were reported by our Preclinical services unit which supports our client’s Phase
II & III clinical trials. In our Product segment revenue was down slightly compared to same period one year ago due in
part from lower sales of certain analytical instruments offset in part by increased sales of our Culex®, in vivo sampling
systems over the same period one year ago.
Our Services revenue increased 15.9% in fiscal 2014 to $19,097 compared to $16,473 for the prior fiscal year.
An increase in the number of primate studies and an increase in post-IND chronic studies reported by our Preclinical
Services unit were the main drivers for the increase in revenue. The following table details our Service revenue.
Fiscal Year Ended
September 30,
Bioanalytical Analysis
Preclinical Services
Other Laboratory Services
2014
2013
Change
$
7,146
9,626
2,325
$
7,930
6,532
2,011
$
(784)
3,094
314
%
-9.9%
47.4%
15.6%
Sales in our Products segment decreased 1.9% from $5,595 to $5,487 when compared to the prior fiscal year.
The majority of the decline stems from lower sales of certain analytical instruments offset in part by increased sales of
our Culex®, in vivo sampling systems over the same period one year ago. The following table details our Product
revenue.
Fiscal Year Ended
September 30,
2014
2013
Change
Culex, in-vivo sampling systems
Analytical instruments
Other instruments
$
2,535
2,120
832
$
2,322
2,399
874
$
213
(279)
(42)
%
9.2%
-11.6%
-4.8%
Cost of Revenue
Cost of revenue for the year ended September 30, 2014 was $16,622 or 67.6% of revenue compared to $15,013,
or 68.0% of revenue for the prior fiscal year.
Cost of Service revenue as a percentage of Service revenue decreased to 72.7% in the current fiscal year from
75.4% in the prior fiscal year. The main reason for the decrease was our ability to leverage the higher revenue in fiscal
year 2014 over our fixed cost base as well as strict spend monitoring during the fiscal year.
Cost of Product revenue as a percentage of Product revenue in the current fiscal year increased to 49.8% from
46.4% in the prior fiscal year. This increase is mainly due to a change in the mix of products sold in the current fiscal
year, higher expediting costs as well as an increase in cost for selected purchased parts used in assembly operations.
Operating Expenses
Selling expenses for the year ended September 30, 2014 increased by 21.2% to $1,656 from $1,366 for the year
ended September 30, 2013. This increase stems from the hiring of three Business Development employees, two in the
fourth quarter of fiscal 2013 and one in fiscal 2014, in addition to an increase in employee health care costs,
commissions, travel, and other employee costs including tuition reimbursement.
Research and development expenses for the year ended September 30, 2014 increased 44.9% to $658 from
$454 for the year ended September 30, 2013. Higher personnel costs due to the addition of one scientist, increased
benefit costs, and higher spending for outside services drove the increase.
General and administrative expenses for the current fiscal year increased 12.1% to $4,940 from $4,405 for the
prior fiscal year. The principal reasons for the increase were higher personnel costs due to the addition of personnel in
Finance and Client Services, increased employee health care costs, higher spending for legal and consulting expenses
and costs in our fourth fiscal quarter of $68 associated with the separation agreement between the Company and the Vice
President of Preclinical Services.
We performed our annual goodwill impairment test as of September 30, 2014, the end of our fiscal year. The
estimated fair value of our Vetronics reporting unit was less than its related book value and we determined that its
goodwill balance was impaired. In late 2014 we began shifting our market focus and will no longer actively market the
Vetronics product offering. However, we will continue to service the units in the field. Accordingly, step two of the
goodwill impairment test was completed for the Vetronics reporting unit which resulted in an impairment charge totaling
$374 in the fourth quarter. There was no indication of impairment for the Bioanalytical Services and Preclinical Services
reporting units as of September 30.
Other Income/Expense
Other expense, net, was $1,397 for the year ended September 30, 2014 as compared to $41 for the year ended
September 30, 2013. The primary reason for the increase in expense was due to an increase in the fair value of the
warrant liability offset in part by lower interest costs in fiscal 2014 resulting from the refinancing of our credit facility.
Income Taxes
Our effective tax rate for the year ended September 30, 2014 was (0.6)% compared to 2.1% for the prior fiscal
year. The current year expense primarily relates to federal alternative minimum tax. The prior year expense primarily
relates to state franchise taxes. No net benefits have been provided on taxable losses in the current fiscal year.
Restructuring Activities
In March 2012, we announced a plan to restructure our bioanalytical laboratory operations. We consolidated our
laboratory in McMinnville, Oregon into our 120,000 square foot headquarters facility in West Lafayette, Indiana. This plan
was implemented to reduce operating costs and strengthen our ability to meet clients’ needs by improving laboratory
utilization. In the fourth quarter of fiscal 2012, we decided to initiate closure of our facility and bioanalytical laboratory
in Warwickshire, United Kingdom after careful evaluation of its financial performance and analysis of our strategic
alternatives. We continue to sell our products globally while further consolidating delivery of our CRO services into our
Indiana locations. As part of the overall evaluation of our business, personnel reductions in the Selling, R&D and
General and Administrative functions were also implemented at both of our Indiana locations during the second half of
fiscal 2012
We reserved for lease payments at the cease use date for our UK facility and have considered free rent, sublease
rentals and the number of days it would take to restore the space to its original condition prior to our improvements. In
the first quarter of fiscal 2013, we began amortizing into general and administrative expense, equally through the cease
use date, the estimated rent income of $200 when the reserve was originally established. We have been unsuccessful at
subleasing the facility. Based on these, we have $961 reserved for UK lease related costs.
The following table sets forth the roll-forward of the restructuring activity for the year ended September 30,
2014.
Lease related costs
Receivable from sale of equipment
Other costs
Total
Balance,
September 30,
2013
$
877
(16)
117
978
$
Total
Charges
84
$
-
-
$
84
Cash
Payments
$
-
$
-
Other
-
$
16
-
$
16
Balance,
September 30,
2014
961
$
-
117
1,078
$
Other costs include legal and professional fees and other costs incurred in connection with transitioning services
from sites being closed as well as costs incurred to remove improvements previously made to the UK facility. Other
activity in the reserve roll-forward primarily reflects a receivable for settlement of the capital lease in the UK.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At September 30, 2014, we had cash and cash equivalents of $981 compared to $1,304 at September 30, 2013.
Net cash provided by operating activities was $1,684 for the year ended September 30, 2014, compared to net
cash provided by operating activities of $1,594 for the year ended September 30, 2013. The increase in cash provided by
operating activities in the current fiscal year results from the increase in the fair value of warrant liability of $918
compared to a decline in the fair value of $601 in the prior fiscal year. Other contributing factors to our cash from
operations in fiscal 2014 were noncash charges of $1,597 for depreciation and amortization and $84 for stock option
expense. Changes in working capital in fiscal 2014 consisted of an increase in customer advances of $175 and a decrease
in accounts receivable of $910, a decrease of accounts payable amounting to $863, an increase in inventory of $185 and
a decrease in accrued expenses of $153. Included in operating activities for fiscal 2013 are non-cash charges of $1,723
for depreciation and amortization and $225 for stock option expense. Working capital changes in fiscal 2013 included a
decrease in inventory of $277 offset by a decrease in accounts payable of $269, a decrease in accrued expenses
amounting to $378 and a decrease in customer advances of $197.
Investing activities used $490 in fiscal 2014 as opposed to providing cash of $12 in fiscal 2013. The investing
activity in fiscal 2014 consisted of investments in capital improvements and equipment replacement. The increase in
capital expenditures in fiscal 2014 reflects the stronger liquidity position of the Company and the investments being
made to support our growth initiatives. The cash provided in fiscal 2013 relates to proceeds from the sale of equipment
disposed of in our West Lafayette facility.
Financing activities used $1,513 in fiscal year 2014 as compared to $1,022 used in fiscal 2013. The main uses
of cash in fiscal 2014 were for net payments on our line of credit of $ 1,213, capital lease payments of $276 as well as
net payments on our long-term debt of $16 net of new borrowings, offset in part by proceeds for warrant exercises
amounting to $183. The main uses of cash in fiscal 2013 were for long-term debt and capital lease payments of $918 as
well as net payments on our line of credit of $29.
Capital Resources
Prior to obtaining the new credit facility described below, we had a term loan from Regions Bank (“Regions”),
which was secured by mortgages on our facilities in West Lafayette and Evansville, Indiana. In addition, prior to its
termination in January 2014, we had a $3,000 line of credit with EGC. The EGC line of credit was subject to availability
limitations.
On November 9, 2012, we executed a sixth amendment with Regions which we further modified on December
21, 2012. In the sixth amendment, Regions agreed to extend the term loan and mortgage loan maturity dates to October
31, 2013. The unpaid principal on the notes was incorporated into a replacement note payable for $5,786 bearing interest
at LIBOR plus 400 basis points (minimum of 6.0%) with monthly principal payments of approximately $47 plus interest.
The replacement note payable was secured by real estate at our West Lafayette and Evansville, Indiana locations. The
replacement note payable had a balance of $5,254 at September 30, 2013.
On October 31, 2013, we executed a seventh amendment with Regions to extend the note payable maturity date
to October 31, 2014.
Regions required us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.00 and a total liabilities
to tangible net worth ratio of not greater than 2.10 to 1.00. Failure to comply with those covenants would have been a
default under the Regions loans, requiring us to negotiate with Regions regarding loan modifications or waivers. If we
were unable to obtain such modifications or waivers, Regions could have accelerated the maturity of the loans and
caused a cross default with our other lender. The Regions loan agreements contained cross-default provisions with each
other and formerly with the revolving line of credit with EGC described below that was terminated in January 2014.
Revolving Line of Credit
On January 31, 2014, we paid off the remaining balance on our $3,000 revolving line of credit agreement
(“Credit Agreement”) with EGC. Pursuant to the terms of the Credit Agreement, the line of credit would have
automatically renewed on January 31, 2014 unless either party gave a 60-day notice of intent to terminate or withdraw.
On October 30, 2013, we informed EGC of our intent not to renew the line of credit on January 31, 2014 and the line of
credit terminated on that date.
During the first four months of fiscal 2014, borrowings under the Credit Agreement bore interest at an annual
rate equal to Citibank’s Prime Rate plus five percent (5%) with minimum monthly interest of $15. Interest was paid
monthly. The line of credit also carried an annual facilities fee of 2% and a 0.2% collateral monitoring fee. Borrowings
under the Credit Agreement were secured by a blanket lien on our personal property, including certain eligible accounts
receivable, inventory, and intellectual property assets, a second mortgage on our West Lafayette and Evansville real
estate and all common stock of our U.S. subsidiaries and 65% of the common stock of our non-United States subsidiary.
Borrowings were calculated based on 75% of eligible accounts receivable. Under the Credit Agreement, as amended, the
Company had agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures and
maintain a minimum tangible net worth of at least $8,000. The Credit Agreement also contained cross-default provisions
with the Regions loan and any future EGC loans. At September 30, 2013, we had $1,415 outstanding on this line.
New Credit Facility
On May 14, 2014, we entered into a Credit Agreement (“Agreement”) with Huntington Bank. The Agreement
includes both a term loan and a revolving loan and is secured by mortgages on our facilities in West Lafayette and
Evansville, Indiana and liens on our personal property.
The term loan for $5,500 bears interest at LIBOR plus 325 basis points with monthly principal payments of
approximately $65 plus interest. The term loan matures in May 2019. On May 15, 2014, we used the proceeds from the
term loan to pay off the Regions Bank replacement note payable. The balance on the term loan at September 30, 2014
was $5,238.
The revolving loan for $2,000 matures in May 2016 and bears interest at LIBOR plus 300 basis points with
interest paid monthly. The revolving loan also carries a facility fee of .25%, paid quarterly, for the unused portion of the
revolving loan. The revolving loan includes an annual clean-up provision that requires the Company to maintain a
balance of not more than 20% of the maximum loan of $2,000 for a period of 30 days in any 12 month period while the
revolving loan is outstanding. The revolving loan balance was $202 at September 30, 2014.
The Agreement requires us to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 and a
maximum total leverage ratio of not greater than 3.00 to 1.00 from the date of the Agreement through September 30,
2015 and 2.50 to 1.00 commencing after October 1, 2015 until maturity. The Agreement also contains various other
covenants, including restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions, asset sales
and cash dividends. At September 30, 2014, we were in compliance with these covenants.
We entered into an interest rate swap agreement with respect to the above loans to fix the interest rate with
respect to 60% of the value of the term loan at approximately 5.0%. We entered into this derivative transaction to hedge
interest rate risk of the related debt obligation and not to speculate on interest rates.
Based on our expected revenue and the impact of the cost reductions implemented as well as the availability of
the new line of credit, we project that we will have the liquidity required to fund the initiatives in support of our strategy
for fiscal 2015 in addition to meeting our debt obligations.
The following table summarizes the cash payments under our contractual term debt and other obligations at
September 30, 2014 and the effect such obligations are expected to have on our liquidity and cash flows in future fiscal
periods (amounts in thousands). The table does not include our revolving line of credit. Additional information on the
debt is described in Note 7, Debt Arrangements.
2015
2016
2017
2018
2019
Total
Term loan
$
786
$
786
$
786
$
785
$
2,095
$
5,238
Capital lease obligations
Operating leases
308
856
242
16
31
1
27
-
16
-
624
873
$
1,950
$
1,044
$
818
$
812
$
2,111
$
6,735
Equity Offering (amounts in this section not in thousands)
On May 11, 2011, we completed a registered public offering of 5,506 units at a price of $1,000 per unit. Each
unit consists of one 6% Series A convertible preferred share which is convertible into 500 common shares at a
conversion price of $2.00 per share, one Class A Warrant to purchase 250 common shares at an exercise price of $2.00
per share, and one Class B Warrant to purchase 250 common shares at an exercise price of $2.00 per share.
The designation, rights, preferences and other terms and provisions of the Preferred Shares are set forth in the
Certificate of Designation. Until May 11, 2014, the Series A preferred shares had a stated dividend rate of 6% per
annum, payable quarterly in cash or, subject to certain conditions, in common shares or a combination of cash and
common shares, at our election. After May 11, 2014, the Series A preferred shares participate in any dividends payable
upon our common shares on an "as converted" basis. If the preferred shares were converted prior to May 11, 2014, we
would have also been required to pay to the converting holder in cash, or subject to certain conditions, in common shares
or a combination thereof, $180 per $1,000 of the stated value of the preferred shares less any dividends paid prior to
conversion (a “make-whole” payment). The Class A Warrants are exercisable currently and expire in May 2016. The
Class B Warrants expired in May 2012. The Class A Warrants are accounted for as a liability using the fair value for
each on the issuance date and are marked to fair value at each reporting date. The net proceeds from the sale of the units,
after deducting the fees and expenses of the placement agent and other expenses were $4.6 million. We used the
proceeds for the purchase of laboratory equipment and for working capital and general corporate purposes. Because the
preferred dividend or make-whole payment is triggered at the option of the preferred shareholder, we recorded the
dividend liability at the time of the offering close and will not have any preferred dividend liability subsequent to the
fiscal quarter ended June 30, 2011.
As of September 30, 2014, 4,321 preferred shares had been converted into 2,564,108 common shares and
217,366 common shares have been issued for quarterly preferred dividends for remaining outstanding, unconverted
preferred shares. As of September 30, 2014, 577,897 warrants have been exercised. At September 30, 2014, 1,185
preferred shares and 798,603 warrants remained outstanding.
Inflation
We do not believe that inflation has had a material adverse effect on our business, operations or financial
condition.
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Liquidity and
Capital Resources" discusses the consolidated financial statements of the Company, which have been prepared in
accordance with accounting principles generally accepted in the United States. Preparation of these financial statements
requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosures of contingent assets and liabilities. Certain significant accounting policies applied in
the preparation of the financial statements require management to make difficult, subjective or complex judgments, and
are considered critical accounting policies. We have identified the following areas as critical accounting policies.
Revenue Recognition
The majority of our Bioanalytical and analytical research service contracts involve the development of
analytical methods and the processing of bioanalytical samples for pharmaceutical companies and generally provide for a
fixed fee for each sample processed. Revenue is recognized under the specific performance method of accounting and
the related direct costs are recognized when services are performed. Our preclinical research service contracts generally
consist of preclinical studies, and revenue is recognized under the proportional performance method of accounting.
Revisions in profit estimates, if any, are reflected on a cumulative basis in the period in which such revisions become
known. The establishment of contract prices and total contract costs involves estimates we make at the inception of the
contract. These estimates could change during the term of the contract and impact the revenue and costs reported in the
consolidated financial statements. Revisions to estimates have generally not been material. Research service contract fees
received upon acceptance are deferred until earned, and classified within customer advances. Unbilled revenues
represent revenues earned under contracts in advance of billings.
Product revenue from sales of equipment not requiring installation, testing or training is recognized upon
shipment to customers. One product includes internally developed software and requires installation, testing and training,
which occur concurrently. Revenue from these sales is recognized upon completion of the installation, testing and
training when the services are bundled with the equipment sale.
Long-Lived Assets, Including Goodwill
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized of the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
We carry goodwill at cost. Other intangible assets with definite lives are stated at cost and are amortized on a
straight-line basis over their estimated useful lives. All intangible assets acquired that are obtained through contractual or
legal right, or are capable of being separately sold, transferred, licensed, rented, or exchanged, are recognized as an asset
apart from goodwill. Goodwill is not amortized.
Goodwill is tested annually for impairment and more frequently if events and circumstances indicate that the
asset might be impaired. First, we can assess qualitative factors in determining whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. Then, we follow a two-step quantitative process. In the first
step, we compare the fair value of each reporting unit, as computed primarily by present value cash flow calculations, to
its book carrying value, including goodwill. We do not believe that market value is indicative of the true fair value of the
Company mainly due to average daily trading volumes of less than 1%. If the fair value exceeds the carrying value, no
further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill
of the reporting unit is potentially impaired and we would then complete step 2 in order to measure the impairment loss.
In step 2, the implied fair value is compared to the carrying amount of the goodwill. If the implied fair value of goodwill
is less than the carrying value of goodwill, we would recognize an impairment loss equal to the difference. The implied
fair value is calculated by allocating the fair value of the reporting unit (as determined in step 1) to all of its assets and
liabilities (including unrecognized intangible assets) and any excess in fair value that is not assigned to the assets and
liabilities is the implied fair value of goodwill.
The discount rate, gross margin and sales growth rates are the material assumptions utilized in our calculations
of the present value cash flows used to estimate the fair value of the reporting units when performing the annual goodwill
impairment test. Our reporting units with goodwill at September 30, 2014 are Vetronics, which is included in our
Products segment, Bioanalytical Services and Preclinical Services, which are both included in our contract research
services segment, based on the discrete financial information available which is reviewed by management. We utilize a
cash flow approach in estimating the fair value of the reporting units, where the discount rate reflects a weighted average
cost of capital rate. The cash flow model used to derive fair value is sensitive to the discount rate and sales growth
assumptions used.
We performed our annual goodwill impairment test for all reporting units mentioned above at September 30,
2014. The estimated fair value of our Vetronics reporting unit was less than its related book value and we determined
that its goodwill balance was impaired. This was a result of the rates of growth, earnings and cash flow expectations for
future performance that were below the Company’s previous projections. In late 2014, we began shifting our market
focus and will no longer actively market the Vetronics product offering. As a service to our existing customers,, we will
continue to service the units in the field. Accordingly, step two of the goodwill impairment test was completed for the
Vetronics reporting unit which resulted in an impairment charge totaling $374 in the fourth quarter of fiscal 2014. There
was no indication of impairment for the Bioanalytical Services and Preclinical Services reporting units as of September
30, 2014.
Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic
changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted sales
growth rates and our cost of capital or discount rate, are based on the best available market information. Changes in these
estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of
goodwill and potentially result in a non-cash impairment loss in a future period. The assumptions used in our
impairment testing could be adversely affected by certain of the risks discussed in “Risk Factors” in Item 1A of this
report. There have been no significant events since the timing of our impairment tests that would have triggered
additional impairment testing.
At September 30, 2014 and 2013, remaining recorded goodwill was $1,009 and $1,383, respectively. The
changes in the carrying amount of goodwill for the year ended September 30, 2014, are as follows:
Vetronics
Bioanalytical
Services
Preclinical
Services
Total
Balance as of October 1, 2013
$
374
$
971
$
38
$
1,383
Impairment loss
(374)
-
-
(374)
Balance as of September 30, 2014
$
-
$
971
$
38
$
1,009
Stock-Based Compensation
We recognize the cost resulting from all share-based payment transactions in our financial statements using a
fair-value-based method. We measure compensation cost for all share-based awards based on estimated fair values and
recognize compensation over the vesting period for awards. We recognized stock-based compensation related to stock
options of $84 and $225 during the fiscal years ended September 30, 2014 and 2013, respectively.
We use the binomial option valuation model to determine the grant date fair value. The determination of fair
value is affected by our common stock price as well as assumptions regarding subjective and complex variables such as
expected employee exercise behavior and our expected stock price volatility over the term of the award. Generally, our
assumptions are based on historical information and judgment is required to determine if historical trends may be
indicators of future outcomes. We estimated the following key assumptions for the binomial valuation calculation:
• Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for
the expected term of the option.
• Expected volatility. We use our historical stock price volatility on our common stock for our expected volatility
assumption.
• Expected term. The expected term represents the weighted-average period the stock options are expected to
remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting
termination patterns, options outstanding and future expected exercise behavior.
• Expected dividends. We assumed that we will pay no dividends.
Employee stock-based compensation expense recognized in fiscal 2014 and 2013 was calculated based on
awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates and an adjustment will be recognized at that time.
Changes to our underlying stock price, our assumptions used in the binomial option valuation calculation and
our forfeiture rate as well as future grants of equity could significantly impact compensation expense recognized in
future periods.
Income Tax Accounting
As described in Note 8 to the consolidated financial statements, we use the asset and liability method of
accounting for income taxes. We recognize 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. We measure 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. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period
that includes the enactment date. We record valuation allowances based on a determination of the expected realization
of tax assets.
We recognize 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. We measure the amount of the accrual for which an
exposure exists as the largest amount of benefit determined on a cumulative probability basis that we believe is more
likely than not to be realized upon ultimate settlement of the position.
We record interest and penalties accrued in relation to uncertain income tax positions as a component of income
tax expense. Any changes in the accrued liability for uncertain tax positions would impact our effective tax rate. Over
the next twelve months we do not anticipate resolution to the carrying value of our reserve. Interest and penalties are
included in the reserve.
As of September 30, 2014 and 2013, we had a $16 liability for uncertain income tax positions, respectively.
We file income tax returns in the U.S. and several U.S. states. We remain subject to examination by taxing
authorities in the jurisdictions in which we have filed returns for years after 2009.
We have an accumulated net deficit in our UK subsidiary. With the closure of the UK facility, we no longer
have any filing obligations in the UK. Consequently, the related deferred tax asset on such losses and related valuation
allowance on the UK subsidiary have been removed.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) cost method of
accounting. We evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of
current and future projected market demand. For inventory deemed to be obsolete, we provide a reserve for this
inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates
the estimate of future demand.
Fair Value of Warrant Liability
In May 2011, we issued Class A and B Warrants that are measured at fair value on a recurring basis. We
recorded these warrants as a liability determining the fair value at inception on May 11, 2011. Subsequent quarterly fair
value measurements, using the Black Scholes model which is considered a level 2 fair value measurement, are calculated
with fair value changes charged to the statement of operations and comprehensive income (loss). Class B Warrants
expired in May 2012 and the liability was reduced to zero. As of September 30, 2014, 578 Class A warrants have been
exercised, leaving 799 outstanding. The fair value of the warrants exercised was $854. The following table sets forth
the changes in the fair value of the warrant liability since inception:
$
Fair Value per Share
Warrant A Warrant B
0.779
$
0.811
0.091
0.074
0.001
-
-
-
-
-
-
-
-
-
-
1.433
1.536
0.844
0.901
0.933
0.602
0.881
0.796
0.899
0.668
0.444
1.396
1.152
1.067
0.846
Warrant A
Fair Value
Warrant B
$
1,973
2,114
1,162
1,240
1,284
828
1,213
1,096
1,238
920
612
1,573
934
852
676
$
1,072
1,116
124
102
2
-
-
-
-
-
-
-
-
-
-
Total
$
3,045
3,230
1,286
1,342
1,286
828
1,213
1,096
1,238
920
612
1,573
934
852
676
Change in Fair Value
(Income) Expense
$
-
185
(1,944)
56
(56)
(458)
385
(117)
142
(318)
(308)
961
200
(66)
(160)
Evaluation Date
5/11/2011
6/30/2011
9/30/2011
12/31/2011
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
6/30/2014
9/30/2014
Interest Rate Swap
The Company uses an interest rate swap designated as a cash flow hedge to fix 60% of the Huntington debt due
to mitigate changes in interest rates. The changes in the fair value of the interest rate swap are recorded in Accumulated
Other Comprehensive Income (AOCI) to the extent effective. We assess on an ongoing basis whether the derivative that
is used in the hedging transaction is highly effective in offsetting changes in cash flows of the hedged debt. The terms of
the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. When we determine that a
derivative is not highly effective as a hedge, hedge accounting is discontinued and we reclassify gains or losses that were
accumulated in AOCI to other income (expense), net on the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss).
New Accounting Pronouncements
Effective October 1, 2017, the Company will be required to adopt the new guidance of ASC Topic 606,
Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC
Topic 605,
Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the
contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4)
allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the
Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full
retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative
effect of initially applying the new guidance recognized at the date of initial application. If the Company elects the
modified retrospective approach, it will be required to provide additional disclosures of the amount by which each
financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect
before the change, and an explanation of the reasons for significant changes. The Company has not yet assessed the
impact of the new guidance on its consolidated financial statements.
In July 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires
that an entity net its liability for unrecognized tax positions against a net operating loss carry forward, a similar tax loss
or a tax credit carry-forward when settlement in this manner is available under the tax law. The Company will adopt this
guidance effective at the beginning of its 2015 fiscal year. The adoption of this updated authoritative guidance is not
expected to have a significant impact on the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued authoritative guidance that amends the presentation of accumulated other
comprehensive income and clarifies how to report the effect of significant reclassifications out of accumulated other
comprehensive income. The guidance became effective for the Company on a prospective basis at the beginning of its
2014 fiscal year, requires footnote disclosures regarding the changes in accumulated other comprehensive income by
component and the line items affected in the statements of operations. The adoption of this updated authoritative
guidance is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
[Remainder of page intentionally left blank.]
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Consolidated Financial Statements of Bioanalytical Systems, Inc.
Consolidated Balance Sheets as of September 30, 2014 and 2013
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended
September 30, 2014 and 2013
Consolidated Statements of Shareholders’ Equity for the Years Ended September 30, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended September 30, 2014 and 2013
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
Financial Statement Schedules:
Schedules are not required, are not applicable or the information is shown in the Notes to the Consolidated
Financial Statements.
Pag
e
35
36
37
38
39
59
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Trade, net of allowance of $54 and $87 at September 30,
As of September 30,
2014
2013
$ 981
$
2014
Unbilled revenues and other
Inventories
Prepaid expenses
Total current assets
Property and equipment, net
Goodwill
Debt issue costs, net
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Customer advances
Income tax accruals
Revolving line of credit
Fair value of warrant liability
Current portion of capital lease obligation
Current portion of long-term debt
Total current liabilities
Fair value of interest rate swap
Capital lease obligation, less current portion
Long-term debt, less current portion
Total liabilities
2,557
878
1,564
675
6,655
15,949
1,009
122
39
3,621
691
1,379
238
7,233
16,913
1,383
21
47
$ 23,774
$ 25,597
$ 2,672
1,842
2,990
20
202
676
279
786
9,467
21
298
4,452
14,238
$ 3,584
1,689
2,815
30
1,415
612
268
613
11,026
—
471
4,641
16,138
Shareholders’ equity:
Preferred shares, authorized 1,000,000 shares, no par value:
1,185 Series A shares at $1,000 stated value issued and
outstanding at September 30, 2014 and 1,335 at September
30, 2013
Common shares, no par value:
Authorized 19,000,000 shares; 8,075,335 issued and
outstanding at September 30, 2014 and 7,703,891 at
September 30, 2013
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total shareholders’ equity
1,185
1,335
1,980
21,154
(14,790)
7
1,887
19,925
(13,720)
32
9,536
9,459
Total liabilities and shareholders’ equity
$ 23,774
$ 25,597
The accompanying notes are an integral part of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In thousands, except per share amounts)
Service revenue
Product revenue
Total revenue
Cost of service revenue
Cost of product revenue
Total cost of revenue
Gross profit
Operating expenses:
Selling
Research and development
General and administrative
Impairment of goodwill
Total operating expenses
For the Years Ended
September 30,
2014
2013
$ 19,097 $ 16,473
5,595
5,487
22,068
24,584
13,889
2,733
16,622
7,962
1,656
658
4,940
374
7,628
12,416
2,597
15,013
7,055
1,366
454
4,405
—
6,225
Operating income
334
830
Interest expense
Change in fair value of warrant liability – (increase) decrease
Other income
(Loss) income before income taxes
(488) (649)
601
(918)
7
9
(1,063) 789
Income tax (benefit) expense
7
16
Net (loss) income
$ (1,070) $ 773
Other comprehensive (loss) income :
Fair value adjustment of interest rate swap
Foreign currency translation adjustment
(21) —
(4) 3
Comprehensive (loss) income
$ (1,095) $ 776
Basic net (loss) income per share:
Diluted net (loss) income per share:
Weighted common shares outstanding:
Basic
Diluted
$ (0.13) $ 0.10
$ (0.13) $ 0.09
7,960
7,960
7,664
8,371
The accompanying notes are an integral part of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except number of shares)
Preferred Shares
Common Shares
Number
Amount
Number
Amount
Additional
paid-
in capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
Balance at October 1, 2012
1,335
$
1,335
7,638,738
$
1,871
$
19,635
$
(14,493)
$
29
$
8,377
Comprehensive loss:
Net income
Foreign currency translation
adjustments
Stock based compensation expense
773
3
225
Stock option exercise
1,372
Common shares issued for
dividends/make-whole payment
-
-
63,781
16
65
773
3
225
-
81
Balance at September 30, 2013
1,335
$
1,335
7,703,891
$
1,887
$
19,925
$
(13,720)
$
32
$
9,459
Comprehensive income:
Net loss
Foreign currency translation
adjustments
Fair value adjustment of
interest rate swap
Stock based compensation expense
Stock option exercise
7,692
Conversion of preferred shares to common s
(150)
(150)
75,000
Common shares issued for
dividends/make-whole payment
Common shares issued for Class A
Warrant exercises
20,774
267,978
(1,070)
(1,070)
(4)
(21)
(4)
(21)
84
3
-
48
1,037
84
1
131
43
970
2
19
5
67
Balance at September 30, 2014
1,185
$
1,185
8,075,335
$
1,980
$
21,154
$
(14,790)
$
7
$
9,536
The accompanying notes are an integral part of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization
Employee stock compensation expense
Change in fair value of warrant liability – increase (decrease)
(Gain) loss on sale of property and equipment
Provision for doubtful accounts
Impairment of goodwill
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Income tax accruals
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Customer advances
Net cash provided by operating activities
Years Ended September 30,
2014
2013
$ (1,070)
$ 773
1,597
84
918
(21 )
(33 )
374
910
(185 )
(10 )
(345 )
(863 )
153
175
1,684
1,723
225
(601 )
(13 )
(36 )
—
11
277
13
66
(269 )
(378 )
(197 )
1,594
Investing activities:
Capital expenditures
Proceeds from sale of equipment
Net cash (used) provided by investing activities
(490 )
—
(490 )
(8 )
20
12
Financing activities:
Payments of long-term debt
Borrowings of long-term debt
Payments of debt issuance costs
Proceeds from exercise of stock options
Proceeds from Class A warrant exercises
Payments on revolving line of credit
Borrowings on revolving line of credit
Payments on capital lease obligations
Net cash used by financing activities
(5,516 )
5,500
(194 )
3
183
(10,542 )
9,329
(276 )
(1,513 )
(588 )
—
(75 )
—
—
(21,814 )
21,785
(330 )
(1,022 )
Effect of exchange rate changes
(4 )
(1)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(323 )
1,304
$ 981
583
721
$ 1,304
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash financing activities:
Preferred stock dividends paid in common shares
Equipment financed under capital leases
Conversion of preferred shares to common shares
Fair value of Class A Warrants exercised
$ 389
$ 17
$ 649
$ 3
$ (48 )
$ 114
$ 150
$ 854
$ (81)
$ —
$ —
$ —
The accompanying notes are an integral part of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands unless otherwise listed)
1. DESCRIPTION OF THE BUSINESS
Bioanalytical Systems, Inc. and its subsidiaries (“We,” the “Company” or “BASi”) engage in contract
laboratory research services and other services related to pharmaceutical development. We also manufacture scientific
instruments for life sciences research, which we sell with related software for use in industrial, governmental and
academic laboratories. Our customers are located throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
All significant inter-company accounts and transactions have been eliminated.
(b)
Revenue Recognition
The majority of our bioanalytical and analytical research service contracts involve the development of analytical
methods and the processing of bioanalytical samples for pharmaceutical companies and generally provide for a fixed fee
for each sample processed. Revenue is recognized under the specific performance method of accounting and the related
direct costs are recognized when services are performed. Our preclinical research service contracts generally consist of
preclinical studies, and revenue is recognized under the proportional performance method of accounting. Revisions in
profit estimates, if any, are reflected on a cumulative basis in the period in which such revisions become known. The
establishment of contract prices and total contract costs involves estimates we make at the inception of the contract.
These estimates could change during the term of the contract and impact the revenue and costs reported in the
consolidated financial statements. Revisions to estimates have generally not been material. Research service contract fees
received upon acceptance are deferred until earned, and classified within customer advances. Unbilled revenues
represent revenues earned under contracts in advance of billings.
Product revenue from sales of equipment not requiring installation, testing or training is recognized upon
shipment to customers. One product includes internally developed software and requires installation, testing and training,
which occur concurrently. Revenue from these sales is recognized upon completion of the installation, testing and
training when the services are bundled with the equipment sale.
(c)
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to
be cash equivalents. At September 30, 2014, we did not have any cash accounts that exceeded federally insured limits.
(d)
Accounts Receivable
We perform periodic credit evaluations of our customers’ financial conditions and generally do not require
collateral on trade accounts receivable. We account for trade receivables based on the amounts billed to customers. Past
due receivables are determined based on contractual terms. We do not accrue interest on any of our trade receivables.
The allowance for doubtful accounts is determined by management based on our historical losses, specific customer
circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the
allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have
failed. Our allowance for doubtful accounts was $54 and $87 at September 30, 2014 and 2013, respectively.
A summary of activity in our allowance for doubtful accounts is as follows:
2014
2013
Opening balance
Charged to expense
Accounts recovered
Accounts written off
$ 87
12
—
(45)
$ 123
41
(18)
(59)
Ending balance
$ 54
$ 87
(e)
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) cost method of
accounting. We evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of
current and future projected market demand. For inventory deemed to be obsolete, we provide a reserve. Inventory that is
in excess of current and projected use is reduced by an allowance to a level that approximates the estimate of future
demand. A summary of activity in our inventory obsolescence is as follows for the years ended September 30:
2014
2013
Opening Balance
$
359
$
310
Provision for Slow Moving & Obsolesence
Write-off of Obsolete & Slow Moving Inventory
29
(89)
49
-
Closing Balance
$
299
$
359
(f)
Property and Equipment
We record property and equipment at cost, including interest capitalized during the period of construction of
major facilities. We compute depreciation, including amortization on capital leases, using the straight-line method over
the estimated useful lives of the assets, which we estimate to be: buildings and improvements, 34 to 40 years; machinery
and equipment, 5 to 10 years, and office furniture and fixtures, 10 years. Depreciation expense was $1,589 in fiscal 2014
and $1,715 in fiscal 2013. Expenditures for maintenance and repairs are expensed as incurred.
Property and equipment, net, as of September 30, 2014 and 2013 consisted of the following:
Land and improvements
Buildings and improvements
Machinery and equipment
Office furniture and fixtures
Construction in progress
Less: accumulated depreciation
2014
2013
$
914
21,374
18,135
690
13
41,126
(25,177)
$
914
21,250
17,571
690
92
40,517
(23,604)
Net property and equipment
$
15,949
$
16,913
(g)
Long-Lived Assets including Goodwill
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized of the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
We carry goodwill at cost. Other intangible assets with definite lives are stated at cost and are amortized on a
straight-line basis over their estimated useful lives. All intangible assets acquired that are obtained through contractual or
legal right, or are capable of being separately sold, transferred, licensed, rented, or exchanged, are recognized as an asset
apart from goodwill. Goodwill is not amortized.
Goodwill is tested annually for impairment and more frequently if events and circumstances indicate that the
asset might be impaired. First, we can assess qualitative factors in determining whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. We elected to bypass the qualitative assessment aspect of
this guidance. We proceeded directly to a two-step quantitative process. In the first step, we compare the fair value of
each reporting unit, as computed primarily by present value cash flow calculations, to its book carrying value, including
goodwill. We do not believe that market value is indicative of the true fair value of the Company mainly due to average
daily trading volumes of less than 1%. If the fair value exceeds the carrying value, no further work is required and no
impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is
potentially impaired and we would then complete step 2 in order to measure the impairment loss. In step 2, the implied
fair value is compared to the carrying amount of the goodwill. If the implied fair value of goodwill is less than the
carrying value of goodwill, we would recognize an impairment loss equal to the difference. The implied fair value is
calculated by allocating the fair value of the reporting unit (as determined in step 1) to all of its assets and liabilities
(including unrecognized intangible assets) and any excess in fair value that is not assigned to the assets and liabilities is
the implied fair value of goodwill.
The discount rate, gross margin and sales growth rates are material assumptions utilized in our calculations of
the present value cash flows used to estimate the fair value of the reporting units when performing the annual goodwill
impairment test. Our reporting units with goodwill at September 30, 2014 are Vetronics, which is included in our
Products segment, bioanalytical services and preclinical services, which are both included in our contract research
services segment, based on the discrete financial information available which is reviewed by management. We utilize a
cash flow approach in estimating the fair value of the reporting units, where the discount rate reflects a weighted average
cost of capital rate. The cash flow model used to derive fair value is sensitive to the discount rate and sales growth
assumptions used.
We performed our annual goodwill impairment test for all reporting units mentioned above at September 30,
2014. The estimated fair value of our Vetronics reporting unit was less than its related book value and we determined
that its goodwill balance was impaired. This was a result of the rates of growth, earnings and cash flow expectations for
future performance that were below the Company’s previous projections. In late 2014 we began shifting our market
focus and will no longer actively market the Vetronics product offering. However, we will continue to service the units
in the field. Accordingly, step two of the goodwill impairment test was completed for the Vetronics reporting unit which
resulted in an impairment charge totaling $374 in the fourth fiscal quarter of fiscal 2014. There was no indication of
impairment for the Bioanalytical Services and PreclinicalServices reporting units as of September 30, 2014.
Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic
changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted sales
growth rates and our cost of capital or discount rate, are based on the best available market information. Changes in these
estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of
goodwill and potentially result in a non-cash impairment loss in a future period. The assumptions used in our
impairment testing could be adversely affected by certain risks. There have been no significant events since the timing
of our impairment tests that would have triggered additional impairment testing.
At September 30, 2014 and 2013, remaining recorded goodwill was $1,009 and $1,383, respectively. The
changes in the carrying amount of goodwill for the year ended September 30, 2014, are as follows:
Vetronics
Bioanalytical
Services
Preclinical
Services
Total
Balance as of October 1, 2013
$
374
$
971
$
38
$
1,383
Impairment loss
(374)
-
-
(374)
Balance as of September 30, 2014
$
-
$
971
$
38
$
1,009
We amortize costs of patents and licenses. For the fiscal years ended September 30, 2014 and 2013, the
amortization expense associated with these was $8 and $8, respectively.
(h)
Advertising Expense
We expense advertising costs as incurred. Advertising expense was $41 and $40 for the years ended September
30, 2014 and 2013, respectively.
(i)
Stock-Based Compensation
We have a stock-based employee compensation plan and a stock-based employee and outside director
compensation plan, which are described more fully in Note 9. All options granted under these plans have an exercise
price equal to the market value of the underlying common shares on the date of grant. We expense the estimated fair
value of stock options over the vesting periods of the grants. Our policy is to recognize expense for awards subject to
graded vesting using the straight-line attribution method, reduced for estimated forfeitures.
We use a binomial option-pricing model as our method of valuation for share-based awards, requiring us to
make certain assumptions about the future, which are more fully described in Note 9.
(j)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized 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. Deferred
tax assets and liabilities are measured 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 effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. We record valuation
allowances based on a determination of the expected realization of tax assets.
We may recognize 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 amount of the accrual for which an exposure exists
is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely
than not to be realized upon settlement of the position.
We record 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 our effective tax rate. We do not
expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
(k)
Fair Value of Financial Instruments
The provisions of the Fair Value Measurements and Disclosure Topic defines fair value, establishes a consistent
framework for measuring fair value and provides the disclosure requirements about fair value measurements. This Topic
also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
Company’s judgment about the assumptions market participants would use in pricing the asset or liability based on the
best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as
follows:
• Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the
Company has the ability to access.
• Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are
observable, either directly or indirectly.
• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value
measurement.
In May 2011, we issued Class A and B Warrants that are measured at fair value on a recurring basis. We
recorded these warrants as a liability determining the fair value at inception on May 11, 2011. Subsequent quarterly fair
value measurements, using the Black Scholes model which is considered a level 2 measurement, are calculated with fair
value changes charged to the statement of operations and comprehensive income (loss). Class B Warrants expired in
May 2012 and the liability was reduced to zero. The assumptions used to compute the fair value of the warrants at
September 30, 2014 and 2013 were as follows:
September 30, 2014 September 30, 2013
Warrant A
Warrant A
Risk-free interest rate
Dividend yield
Volatility of the Company's common
stock
Expected life of the options (years)
0.41%
0.00%
63.58%
0.51%
0.00%
71.15%
1.6
2.6
Fair value per unit
$0.846
$0.444
The carrying amounts for cash and cash equivalents, accounts receivable, inventories, prepaid expenses and
other assets, accounts payable and other accruals approximate their fair values because of their nature and respective
duration. The carrying value of the note payable entered into this fiscal year approximates fair value due to the variable
nature of the interest rates.
We use an interest rate swap, designated as a hedge, to fix 60% of the debt from our new Huntington credit
facility. We did not enter into this derivative transaction to speculate on interest rates, but to hedge interest rate risk.
The swap is recognized on the balance sheet at its fair value. The fair value is determined utilizing a cash flow model
that takes into consideration interest rates and other inputs observable in the market from similar types of instruments,
and is therefore considered a level 2 measurement. Using a level 3 measurement, the fair value of the goodwill of the
Vectronics reporting unit was $0 with a carrying value of $374, leading to the goodwill impairment expense in fiscal
2014 of $374.
The following table summarizes fair value measurements by level as of September 30, 2014, for the Company’s
financial liabilities measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Interest rate swap agreement
$
-
$
21
$
-
Class A warrant liability
$
-
$
676
$
-
The following table summarizes fair value measurements by level as of September 30, 2013, for the Company’s
financial liabilities measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Interest rate swap agreement
$
-
$
-
$
-
Class A warrant liability
$
-
$
612
$
-
(l)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us
to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Significant estimates as part of the issuance of these consolidated financial statements include but
are not limited to the determination of fair values, allowance for doubtful accounts, inventory obsolescence, deferred tax
valuations, depreciation, impairment charges and stock compensation. Our actual results could differ from those
estimates.
(m)
Research and Development
In fiscal 2014 and 2013, we incurred $658 and $454, respectively, on research and development. Separate from
our contract research services business, we maintain applications research and development to enhance our products
business. We expense research and development costs as incurred.
(n)
Comprehensive Income (Loss)
We report comprehensive income (loss) on our Consolidated Statements of Operations. Other comprehensive
income (loss) represents changes in shareholders’ equity and is comprised of foreign currency translation adjustments as
well as changes in the fair value of our interest rate swap.
(o)
Foreign Currency
For our subsidiary outside of the United States that operates in a local currency environment, income and
expense items are translated to United States dollars at the monthly average rates of exchange prevailing during the year,
assets and liabilities are translated at year-end exchange rates and equity accounts are translated at historical exchange
rates. Translation adjustments are accumulated in a separate component of shareholders' equity in the consolidated
balance sheets and are included in the determination of Accumulated Other Comprehensive Income (AOCI) in the
consolidated statements of shareholders' equity. Transaction gains and losses are included in the determination of net
income (loss) in the consolidated statements of operations and comprehensive income (loss). The balance in AOCI at
September 30, 2014 and 2013 was $28 and $32, respectively.
(p)
Interest Rate Swap
The Company uses an interest rate swap designated as a cash flow hedge to fix 60% of the Huntington debt due to
mitigate changes in interest rates. The changes in the fair value of the interest rate swap are recorded in Accumulated
Other Comprehensive Income (AOCI) to the extent effective. We assess on an ongoing basis whether the derivative that
is used in the hedging transaction is highly effective in offsetting changes in cash flows of the hedged debt. The terms of
the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. When we determine that a
derivative is not highly effective as a hedge, hedge accounting is discontinued and we reclassify gains or losses that were
accumulated in AOCI to other income (expense), net on the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss). The balance in AOCI at September 30, 2014 and 2013 was ($21) and $0, respectively.
(q)
Reclassifications
Certain amounts in the fiscal 2013 consolidated financial statements have been reclassified to conform to the
fiscal 2014 presentation without affecting previously reported net income or stockholders’ equity.
(r)
Debt issuance costs
The Company capitalizes costs associated with the issuance of debt and amortizes them as additional interest
expense over the lives of the debt on a straight-line basis. Upon prepayment of the related debt, the Company accelerates
the recognition of an appropriate amount of the costs as refinancing or extinguishment of debt. Additional expense
arising from such prepayments during fiscal 2014 was $48.
On May 14, 2014, the Company entered into a Credit Agreement (“Agreement”) with Huntington Bank. The
Agreement includes a term loan maturing in May 2019. The term loan proceeds were used to pay off the Regions
replacement note payable. In connection with the credit facility, the Company recorded fees of $134 which were
deferred and will be amortized over the life of the credit facility. In addition, the Company accelerated the recognition of
the deferred issuance costs from the previous Regions replacement note payable extension.
(s)
New Accounting Pronouncements
Effective October 1, 2017, the Company will be required to adopt the new guidance of ASC Topic 606,
Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in
ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps:
(1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize
revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606
either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the
cumulative effect of initially applying the new guidance recognized at the date of initial application. If the Company
elects the modified retrospective approach, it will be required to provide additional disclosures of the amount by which
each financial statement line item is affected in the current reporting period, as compared to the guidance that was in
effect before the change, and an explanation of the reasons for significant changes. The Company has not yet assessed
the impact of the new guidance on its consolidated financial statements.
In July 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires
that an entity net its liability for unrecognized tax positions against a net operating loss carry forward, a similar tax loss
or a tax credit carry-forward when settlement in this manner is available under the tax law. The Company will adopt this
guidance effective at the beginning of its 2015 fiscal year. The adoption of this updated authoritative guidance is not
expected to have a significant impact on the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued authoritative guidance that amends the presentation of accumulated other
comprehensive income and clarifies how to report the effect of significant reclassifications out of accumulated other
comprehensive income. The guidance, which became effective for the Company on a prospective basis at the beginning
of its 2014 fiscal year, requires footnote disclosures regarding the changes in accumulated other comprehensive income
by component and the line items affected in the statements of operations.
3. SALE OF PREFERRED SHARES AND WARRANTS (not in thousands)
On May 11, 2011, we completed a registered public offering of 5,506 units at a price of $1,000 per unit. Each
unit consisted of one 6% Series A convertible preferred share which is convertible into 500 common shares, one Class A
Warrant to purchase 250 common shares at an exercise price of $2.00 per share, and one Class B Warrant to purchase
250 common shares at an exercise price of $2.00 per share.
The designation, rights, preferences and other terms and provisions of the Series A preferred shares are set forth
in the Certificate of Designation. Until May 11, 2014, the Series A preferred shares had a stated dividend rate of 6% per
annum, payable quarterly in cash or, subject to certain conditions, in common shares or a combination of cash and
common shares, at our election. After May 11, 2014, the Series A preferred shares participate in any dividends payable
upon our common shares on an "as converted" basis. If the preferred shares had converted prior to May 11, 2014, we
would have also been required to pay to the converting holder in cash, or subject to certain conditions, in common shares
or a combination of cash and common shares, a “make-whole” payment of $180 per $1,000 of the stated value of the
preferred shares less any dividends paid prior to conversion. The Class A Warrants are exercisable currently and expire
in May 2016. The Class B Warrants expired in May 2012. The net proceeds from the sale of the units, after deducting
the fees and expenses of the placement agent and other expenses were $4.6 million. We used the proceeds for the
purchase of laboratory equipment and for working capital and general corporate purposes.
The holders of the preferred shares are not entitled to vote together with common shareholders unless converted
to common shares. The Series A preferred shares are considered to be an equity instrument. The warrants have been
accounted for as a liability and valued using the Black Scholes pricing model. The total fair value of the Class A
Warrants at issuance was $1.973 million and the total fair value of the Class B Warrants at issuance was $1.072 million
for a total liability of $3.045 million. The assumptions used to compute the fair value of the warrants at the time of
issuance were as follows:
Risk-free interest rate
Dividend yield
Volatility of the Company's common stock
Expected life of the options (years)
Warrant A
1.87%
0.00%
106.91%
5.0
Warrant B
0.18%
0.00%
116.01%
1.0
Fair value per unit
$1.433
$0.779
The Series A preferred shares were valued using the common shares available upon conversion of all preferred
shares of 2,753,000 and the closing market price of our stock on May 11, 2011 of $1.86. Adding in the total possible
dividend for the preferred shares of 18% over three years, or $991,080, the total calculated fair value of the preferred
shares was $6.112 million. We then allocated the gross proceeds of the offering of $5.506 million to the preferred shares
after deducting the fair value of the warrants described above.
We have also recognized a beneficial conversion feature related to the Series A preferred shares, to the extent
that the conversion feature, based on the proceeds allocated to the Series A preferred shares, was in-the-money at the
time they were issued. Such beneficial conversion feature amounted to approximately $2.461 million on May 11, 2011.
Because the Series A preferred shares do not have a stated redemption date and may be converted by the holder at any
time, the discount recognized by the allocation of proceeds to the beneficial conversion feature has been immediately
charged through accumulated deficit as a deemed dividend to the holders of the Series A preferred shares in the amount
of $5.506 million. This will be the only deemed distribution recorded for the Series A preferred shares included in this
offering. Further, because the preferred dividends or make-whole payments are payable any time after the closing on
May 11, 2011 at the option of the holder, we recognized the full value, $991,080, as a liability included in accounts
payable and charged immediately through accumulated deficit. There will be no other dividends recorded for the Series
A preferred shares included in this offering.
As of September 30, 2014, 4,321 preferred shares have been converted into 2,564,108 common shares and
217,366 common shares have been issued for quarterly preferred dividends for remaining outstanding, unconverted
preferred shares. As of September 30, 2014, 577,897 warrants have been exercised. At September 30, 2014, 1,185
preferred shares and 798,603 warrants remained outstanding. Also at September 30, 2014, $0 of the $991,080 in
preferred dividends remains accrued in accounts payable for future preferred dividends. All dividends have been paid
according to the agreement. The assumptions used to compute the fair value of the warrants at September 30, 2014 and
2013 were as follows:
September 30, 2014 September 30, 2013
Warrant A
Warrant A
Risk-free interest rate
Dividend yield
Volatility of the Company's common
stock
Expected life of the options (years)
0.41%
0.00%
63.58%
0.51%
0.00%
71.15%
1.6
2.6
Fair value per unit
$0.846
$0.444
The following table summarizes the change in the estimated fair value of the Company’s Class A warrants as of
September 30:
Balance at beginning of year
Fair value of Class A warrants exercised
Increase (decrease) in fair value of Class A warrants
Balance at end of year
2014
$ 612
(854 )
918
$ 676
2013
$ 1,213
—
(601 )
$ 612
For the years ended September 30, 2014 and 2013, the Company recognized (expense) income of ($918) and $601,
respectively, due to the change in the estimated fair value of the Company’s warrants. This expense (income) was
recorded as Change in fair value of warrant liability on the Company’s consolidated statements of operations and
comprehensive (loss) income for the respective periods.
4. INCOME (LOSS) PER SHARE
We compute basic income (loss) per share using the weighted average number of common shares outstanding.
The Company has three categories of dilutive potential common shares: the Series A preferred shares issued in May
2011 in connection with the registered direct offering, the Warrants issued in connection with the same offering in May
2011, and shares issuable upon exercise of options. We compute diluted earnings per share using the if-converted
method for preferred stock and warrants and the treasury stock method for stock options. Shares issuable upon exercise
of options were not considered in computing diluted income (loss) per share for the year ended September 30, 2014,
because they were anti-dilutive. Warrants for 799 common shares and 592 common shares issuable upon conversion of
preferred shares were not considered in computing diluted income (loss) per share for the year ended September 30,
2014, because they were also anti-dilutive.
The following table reconciles our computation of basic net income (loss) per share to diluted net income (loss)
per share:
Years Ended
September 30,
2014
2013
Basic net income (loss) per share:
Net income (loss)
$ (1,070)
$ 773
Weighted average common shares outstanding
7,960
7,664
Basic net income (loss) per share
$ (0.13)
$ 0.10
Diluted net income (loss) per share:
Net income (loss) applicable to common shareholders
$ (1,070)
$ 773
Weighted average common shares outstanding
7,960
7,664
Plus: Incremental shares from assumed conversions:
Series A preferred shares
Dilutive stock options/shares
—
—
705
2
Diluted weighted average common shares outstanding
7,960
8,371
Diluted net income (loss) per share
$ (0.13)
$ 0.09
5. INVENTORIES
Inventories at September 30 consisted of the following:
Raw materials
Work in progress
Finished goods
Obsolescence reserve
2014
2013
$ 1,228 $ 1,157
322
295
259
340
$ 1,863
$ 1,738
(299 )
(359 )
$ 1,564 $ 1,379
6. LEASE ARRANGEMENTS
The total amount of equipment capitalized under capital lease obligations as of September 30, 2014 and 2013
was $5,892 and $5,778, respectively. Accumulated amortization on capital leases at September 30, 2014 and 2013 was
$5,358 and $5,083, respectively. Amortization of assets acquired through capital leases is included in depreciation
expense.
In fiscal 2014, we had one new capital lease addition of $114 for laboratory equipment at our Evansville
facility. Due to restructuring activities outlined in Note 12, we terminated a capital lease for laboratory equipment in the
UK. The activity resulted in a liability reduction of $322. Future minimum lease payments on capital leases at
September 30, 2014 for the next five years are as follows:
2014
2015
2016
2017
2018
Principal
$
Total
$
Interest
$
29
12
4
2
-
$
47
279
230
27
25
16
577
$
$
308
242
31
27
16
624
We lease office space and equipment under non-cancelable operating leases that terminate at various dates
through 2016. The UK building lease expires in 2023 but includes an opt out provision after 7 years, or in fiscal 2015.
Certain of these leases contain renewal options. Total rental expense under these leases was $87 and $66 in fiscal 2014
and 2013, respectively.
Future minimum lease payments for the following fiscal years under operating leases at September 30, 2014 are
as follows:
2015
2016
2017
2018
2019
$
856
16
1
-
-
$
873
[Remainder of page intentionally left blank.]
7. DEBT ARRANGEMENTS
Long-term debt consisted of the following at September 30:
Term loan payable to a bank, payable in monthly principal installments of
$65. Interest is variable at LIBOR plus 325 basis points which was 3.4%
at September 30, 2014. Collateralized by underlying property. Due May,
2019.
Replacement note payable to a bank, payable in monthly principal
installments of $47 plus interest. The interest rate is 6%. Collateralized
by West Lafayette and Evansville properties. Due October, 2014.
2014
2013
$
5,238
$
-
-
5,254
$
5,238
$
5,254
Less: Current portion
786
613
$
4,452
$
4,641
Cash interest payments of $389 and $649 were made in 2014 and 2013, respectively. The following table
summarizes the annual principal payments under our term loan through maturity in May 2019:
2015
2016
2017
2018
2019
Total
Term loan
$
786
$
786
$
786
$
785
$
2,095
$
5,238
Note payable
Prior to obtaining the new credit facility described below, we had a term loan from Regions Bank (“Regions”),
which was secured by mortgages on our facilities in West Lafayette and Evansville, Indiana. Prior to termination in
January 2014, we had a $3,000 line of credit with EGC. The EGC line of credit was subject to availability limitations.
On November 9, 2012, we executed a sixth amendment with Regions which we further modified on December
21, 2012. In the sixth amendment, Regions agreed to extend the term loan and mortgage loan maturity dates to October
31, 2013. The unpaid principal on the notes was incorporated into a replacement note payable for $5,786 bearing interest
at LIBOR plus 400 basis points (minimum of 6.0%) with monthly principal payments of approximately $47 plus interest.
The replacement note payable was secured by real estate at our West Lafayette and Evansville, Indiana locations. The
replacement note payable had a balance of $5,254 at September 30, 2013.
On October 31, 2013, we executed a seventh amendment with Regions to extend the note payable maturity date
to October 31, 2014.
Regions required us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.00 and a total liabilities
to tangible net worth ratio of not greater than 2.10 to 1.00. Failure to comply with those covenants would have been a
default under the Regions loans, requiring us to negotiate with Regions regarding loan modifications or waivers. If we
were unable to obtain such modifications or waivers, Regions could have accelerated the maturity of the loans and
caused a cross default with our other lender. The Regions loan agreements contained cross-default provisions with each
other and formerly with the revolving line of credit with EGC described below that was terminated in January 2014.
Revolving Line of Credit
On January 31, 2014, we paid off the remaining balance on our $3,000 revolving line of credit agreement
(“Credit Agreement”) with EGC. Pursuant to the terms of the Credit Agreement, the line of credit would have
automatically renewed on January 31, 2014 unless either party gave a 60-day notice of intent to terminate or withdraw.
On October 30, 2013, we informed EGC of our intent not to renew the line of credit on January 31, 2014 and the line of
credit terminated on that date.
During the first four months of fiscal 2014, borrowings under the Credit Agreement bore interest at an annual
rate equal to Citibank’s Prime Rate plus five percent (5%) with minimum monthly interest of $15. Interest was paid
monthly. The line of credit also carried an annual facilities fee of 2% and a 0.2% collateral monitoring fee. Borrowings
under the Credit Agreement were secured by a blanket lien on our personal property, including certain eligible accounts
receivable, inventory, and intellectual property assets, a second mortgage on our West Lafayette and Evansville real
estate and all common stock of our U.S. subsidiaries and 65% of the common stock of our non-United States subsidiary.
Borrowings were calculated based on 75% of eligible accounts receivable. Under the Credit Agreement, as amended, the
Company had agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures and
maintain a minimum tangible net worth of at least $8,000. The Credit Agreement also contained cross-default provisions
with the Regions loan and any future EGC loans. At September 30, 2013, we had $1,415 outstanding on this line.
New Credit Facility
On May 14, 2014, we entered into a Credit Agreement (“Agreement”) with Huntington Bank. The Agreement
includes both a term loan and a revolving loan and is secured by mortgages on our facilities in West Lafayette and
Evansville, Indiana and liens on our personal property.
The term loan for $5,500 bears interest at LIBOR plus 325 basis points with monthly principal payments of
approximately $65 plus interest. The term loan matures in May 2019. On May 15, 2014, we used the proceeds from the
term loan to pay off the Regions replacement note payable. The balance on the term loan at September 30, 2014 was
$5,238.
The revolving loan for $2,000 matures in May 2016 and bears interest at LIBOR plus 300 basis points with
interest paid monthly. The revolving loan also carries a facility fee of .25%, paid quarterly, for the unused portion of the
revolving loan. The revolving loan includes an annual clean-up provision that requires the Company to maintain a
balance of not more than 20% of the maximum loan of $2,000 for a period of 30 days in any 12 month period while the
revolving loan is outstanding. The revolving loan balance was $202 at September 30, 2014.
The Agreement requires us to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 and a
maximum total leverage ratio of not greater than 3.00 to 1.00 from the date of the Agreement through September 30,
2015 and 2.50 to 1.00 commencing after October 1, 2015 until maturity. The Agreement also contains various other
covenants, including restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions, asset sales
and cash dividends.
We entered into an interest rate swap agreement with respect to the above loans to fix the interest rate with
respect to 60% of the value of the term loan at approximately 5.0%. We entered into this derivative transaction to hedge
interest rate risk of the related debt obligation and not to speculate on interest rates. The changes in the fair value of the
interest rate swap are recorded in Accumulated Other Comprehensive Income (AOCI) to the extent effective. We assess
on an ongoing basis whether the derivative that is used in the hedging transaction is highly effective in offsetting changes
in cash flows of the hedged debt. The terms of the interest rate swaps match the terms of the underlying debt resulting in
no ineffectiveness.
We incurred $134 of costs in connection with the issuance of the credit facility. These costs were capitalized
and are being amortized to interest expense on a straight-line basis over five years based on the contractual term of the
credit facility. As of September 30, 2014, the unamortized portion of debt issuance costs related to the credit facility was
$122, and was included in Debt issue costs, net on the consolidated balance sheets. We incurred $60 of costs in
connection with the seventh amendment with Regions. These costs and $21 of unamortized costs at September 30, 2013
were expensed during the year ended September 30, 2014.
8. INCOME TAXES
Significant components of our deferred tax assets and liabilities as of September 30 are as follows:
Deferred tax assets - Current:
Inventory
Accrued compensation and vacation
Accrued expenses and other
Total current deferred tax assets
Deferred tax liabilities – Current:
Prepaid expenses
Total net current deferred tax assets
Deferred tax assets - Noncurrent:
Domestic net operating loss carryforwards
Stock compensation expense
Foreign tax credit carryover
AMT credit carryover
Total noncurrent deferred tax assets
Deferred tax liabilities - Noncurrent:
Unrealized gain/loss - warrant liability
Investment in subsidiary
Basis difference for fixed assets
2014
2013
$ 187
246
178
611
$ 208
192
185
585
(72)
539
(49)
536
4,828
54
-
58
4,940
5,737
45
119
54
5,955
(180)
(3,173)
(408)
(3,761)
(530)
(3,214)
(461)
(4,205)
Total net noncurrent deferred tax assets
1,179
1,750
Valuation allowance for net deferred tax assets
Net deferred tax asset (liability)
(1,718)
$ -
(2,286)
$ -
[Remainder of page intentionally left blank.]
Significant components of the provision (benefit) for income taxes are as follows as of the year ended
September 30:
Current:
Federal
State and local
Foreign
Deferred:
Federal
State and local
Foreign
Income tax (benefit) expense
2014
2013
$ 5
2
-
$ 13
3
-
-
-
-
$ 7
-
-
-
$ 16
The effective income tax rate on continuing operations varied from the statutory federal income tax rate as
follows:
Federal statutory income tax rate
Increases (decreases):
State and local income taxes, net of Federal tax benefit, if applicable
Nondeductible expenses
Nontaxable foreign (gains) losses
Uncertain tax positions
Valuation allowance changes
Other
Effective income tax rate
2014
2013
34.0
%
34.0
%
(0.1)
(15.2)
-
-
(19.3)
(0.6)
%
0.3
7.2
-
-
(39.4)
-
%
2.1
An impairment of goodwill in the amount of $374 was recorded that was not deductible for tax purposes.
Therefore, no tax benefit was recorded.
In the prior year, we had foreign net operating loss carry forwards of $8,626 under current UK tax law that will
never be recognized due to the closure of the UK facility. Consequently, the deferred tax asset and the valuation
allowance related to the foreign net operating losses have been removed.
Realization of deferred tax assets associated with the net operating loss carry forward and credit carry forward
is dependent upon generating sufficient taxable income prior to their expiration. The valuation allowance in fiscal 2014
and 2013 was $1,718 and $2,286, respectively for our domestic operations. Payments made in fiscal 2014 and 2013 for
income taxes amounted to $17 and $3, respectively.
At September 30, 2014, we had domestic net operating loss carry forwards of approximately $11,959 for federal
and $15,744 for state, which expire from September 30, 2015 through 2032. Further, we have an alternative minimum
tax credit carry forward of approximately $58 available to offset future federal income taxes. This credit has an
unlimited carry forward period.
We may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained
upon regulatory examination based on the technical merits of the position. The amount of the benefit for which an
exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that we believe
is more likely than not to be realized upon ultimate settlement of the position. At September 30, 2014, a $16 liability
remained for other uncertain income tax positions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Change in unrecognized tax benefits:
Balance at beginning of the year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at end of the year
2014
2013
$
16
$
16
-
-
-
-
-
-
-
-
$
16
$
16
As noted in the table above, there has been no change in our gross uncertain tax positions during fiscal 2014
based on a state tax position.
We are no longer subject to U.S. federal tax examinations for years before 2010 or state and local for years
before 2009, with limited exceptions. For federal purposes, the tax attributes carried forward could be adjusted through
the examination process and are subject to examination 3 years from the date of utilization. Furthermore, we are no
longer subject to income tax examinations in the United Kingdom for years prior to 2009.
We have assessed the application of Internal Revenue Code Section 382 regarding certain limitations on the
future usage of net operating losses. No limitation applies as of September 30, 2014, and we will continue to monitor
activities in the future.
9. STOCK-BASED COMPENSATION
Summary of Stock Option Plans and Activity
In March 2008, our 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. Future common shares will be granted from the
2008 Stock Option Plan. The purpose of the Plan is to promote our long-term interests by providing a means of
attracting and retaining officers, directors and key employees. The Compensation Committee shall administer the Plan
and approve the particular officers, directors or employees eligible for grants. Under the Plan, employees are granted the
option to purchase our common shares at fair market value on the date of the grant. Generally, options granted vest and
become exercisable in four equal installments commencing one year from date of grant and expire upon the earlier of the
employee’s termination of employment with us, or ten years from the date of grant. This plan terminates in fiscal 2018.
The maximum number of common shares that may be granted under the Plan is 500 shares. At September 30, 2014, 234
shares remain available for grants under the Plan.
The Compensation Committee has also issued non-qualified stock option grants with vesting periods different
from the Plan. As of September 30, 2014 and 2013, total non-qualified stock options outstanding were 155.
The weighted-average assumptions used to compute the fair value of options granted for the fiscal years ended
September 30 were as follows:
Risk-free interest rate
Dividend yield
Volatility of the expected market price
of the Company's common stock
Expected life of the options (years)
2014
2.36%
0.00%
94.50%-
94.70%
8.0
2013
1.42%
0.00%
93.60%-
93.70%
8.0
A summary of our stock option activity for all options and related information for the years ended September
30, 2014 and 2013, respectively, is as follows (in thousands except for share prices):
Options
(shares)
Weighted-
Average
Exercise Price
Weighted-
Average Grant
Date Fair Value
Weighted-Average
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic
Value
$
$
$
$
$
1.99
1.35
1.46
2.35
1.77
$
$
1.14
1.20
$
1.35
7.9
$
43
Outstanding - October 1, 2012
Exercised
Granted
Terminated
Outstanding - September 30, 2013
Outstanding - October 1, 2013
Exercised
Granted
Terminated
Outstanding - September 30, 2014
354
(7)
178
(46)
479
479
(11)
40
(82)
426
$
$
$
$
$
1.77
1.14
2.69
2.00
1.83
$
$
0.95
2.25
$
1.41
7.2
6.7
$
348
$
279
Exercisable at September 30, 2014
317
$
1.83
$
1.38
The aggregate intrinsic value is the product of the total options outstanding and the net positive difference of
our common share price on September 30, 2014 and the options’ exercise price. A summary of non-vested options for
the year ended September 30, 2014 is as follows:
Number of
Shares
Weighted-
Average Grant
Date Fair Value
Non-vested options at October 1, 2013
Granted
Vested
Forfeited
Non-vested options at September 30, 2014
261
40
(131)
(61)
109
$
$
$
$
$
1.11
2.25
1.08
1.20
1.51
Eight options with an intrinsic value of $13 were exercised using a cashless exercise and 3 options with an
intrinsic value of $4 were exercised using cash in fiscal 2014, which resulted in the issuance of 7 common shares, In
fiscal 2013, 7 options with an intrinsic value of $1 were exercised using a cashless exercise, resulting in the issuance of 1
common share. As of September 30, 2014, our total unrecognized compensation cost related to non-vested stock
options was $116 and is expected to be recognized over a weighted-average service period of 1.06 years. As of
September 30, 2014, there are 155 shares outstanding that were granted outside of the Plan. Stock-based compensation
expense for employee stock options for the years ended September 30, 2014 and 2013 was $84 and $225, respectively.
The following table summarizes outstanding and exercisable options as of September 30, 2014 (in thousands
except per share amounts):
Range of Exercise
Prices
Shares
Outstanding
$ 0.79 - 1.01
$ 1.02 - 4.59
$ 4.60 - 8.79
86
296
44
10. RETIREMENT PLAN
Weighted-
Average
Remaining
Contractual
Life (Years)
6. 54
8 .12
2 .13
Weighted-
Average
Exercise Price
Shares
Exercisabl
e
Weighted-
Average
Exercise Price
$
0 .96
$
1 .58
$
5 .18
62
211
44
$
0 .96
$
1 .38
$
5 .18
We have a 401(k) Retirement Plan (the “Plan”) covering all employees over twenty-one years of age with at
least one year of service. Under the terms of the Plan, we contribute 1% of each participant’s total wages to the Plan and
match 22% of the first 10% of the employee contribution. The Plan also includes provisions for various contributions
which may be instituted at the discretion of the Board of Directors. The contribution made by the participant may not
exceed 30% of the participant’s annual wages. We made no discretionary contributions under the plan in 2014 and 2013.
Similar to fiscal 2013, we suspended our match of the employee contribution as part of our cost reduction efforts.
Contribution expense was $1 and $1 in fiscal 2014 and 2013, respectively. The amounts recorded in fiscal 2013 relate to
statutory contributions for our European location.
11. SEGMENT INFORMATION
We operate in two principal segments – contract research services and research products. Our contract research
services segment provides research and development support on a contract basis directly to pharmaceutical companies.
Our products segment provides liquid chromatography, electrochemical and physiological monitoring products to
pharmaceutical companies, universities, government research centers, and medical research institutions. We evaluate
performance and allocate resources based on these segments. Certain of our assets are not directly attributable to the
Services or Products segments. These assets are grouped into the Corporate segment and include cash and cash
equivalents, deferred income taxes, refundable income taxes, debt issue costs and certain other assets. We do not allocate
such items to the principal segments because they are not used to evaluate their financial position. The accounting
policies of these segments are the same as those described in the summary of significant accounting policies.
[Remainder of page intentionally left blank.]
(a)
Operating Segments
Revenue:
Service
Product
Operating income (loss) :
Service
Product
Years Ended September 30,
2014
2013
$
$
19,097
5,487
24,584
$
469
(135)
$ 334
$
$
$
$
16,473
5,595
22,068
77
753
830
Interest Expense
Change in fair value of warrant
liability- (increase) decrease
Other income
(488)
(649)
(918)
9
601
7
(Loss) income before income taxes
$ (1,063) $
789
Years Ended
September 30,
2014
2013
Identifiable assets:
Service
Product
Corporate
Goodwill, net:
Service
Product
Depreciation and amortization:
Service
Product
Capital Expenditures:
$
$
$
$
$
$
14,132 $
5,837
3,805
23,774 $
15,149
6,399
4,049
25,597
1,009 $
—
1,009 $
1,009
374
1,383
1,421 $
176
1,597 $
1,519
204
1,723
Service
Product
$
426
$ (1)
64
9
$
490
$
8
(b)
Geographic Information
Years Ended
September 30,
2014
2013
Sales to External Customers:
North America
Pacific Rim
Europe
Other
$
$
22,184 $
740
1,086
574
24,584 $
19,635
1,019
1,111
303
22,068
Long-lived Assets:
North America
$ 17,119 $
18,364
$ 17,119 $
18,364
(c)
Major Customers
In fiscal 2014 our preclinical services group significantly expanded its presence at two important existing
customers. In fiscal 2014, Arrowhead accounted for approximately 12.1% of total sales and 18.5% of total trade
accounts receivable at September 30, 2014. In fiscal 2013, Arrowhead accounted for approximately 0.4% of total sales
and 4.6% of total trade accounts receivable at September 30, 2013. In fiscal 2014, Principia Biopharma accounted for
approximately 8.7% of total sales and 8.4% of total trade accounts receivable at September 30, 2014. In fiscal 2013,
Principia Biopharma accounted for approximately 0.4% of total sales and7.1% of total trade accounts receivable at
September 30, 2013. Both Arrowhead and Principia Biopharma are included in our contract research services segment.
In fiscal 2014, Boehringer Ingelheim remained an important customer, accounting for approximately 5.9% of
total sales and 2.5% of total trade accounts receivable at September 30, 2014. In fiscal 2013, Boehringer Ingelheim
accounted for approximately 6.0% of total sales and 2.6% of total trade accounts receivable at September 30, 2013.
Pfizer, Inc. also remains an important large client, accounting for approximately 1.7% and 4.9% of our total revenues in
fiscal 2014 and 2013, respectively. Pfizer, Inc. accounted for 1.5% and 3.3% of total trade accounts receivable at
September 30, 2014 and 2013, respectively. Both Boehringer Ingelheim and Pfizer are included in our contract research
services segment.
12. RESTRUCTURING
In March 2012, we announced a plan to restructure our bioanalytical laboratory operations. We consolidated our
laboratory in McMinnville, Oregon into our 120,000 square foot headquarters facility in West Lafayette, Indiana. This plan
was implemented to reduce operating costs and strengthen our ability to meet clients’ needs by improving laboratory
utilization. In the fourth fiscal quarter of 2012, we decided to initiate closure of our facility and bioanalytical laboratory
in Warwickshire, United Kingdom after careful evaluation of its financial performance and analysis of our strategic
alternatives. We continue to sell our products globally while further consolidating delivery of our CRO services into our
Indiana locations. As part of the overall evaluation of our business, personnel reductions in the Selling, R&D and
General and Administrative functions were also implemented at both of our Indiana locations during the second half of
fiscal 2012. In total, 74 employees were terminated as part of the restructuring activities.
We reserved for lease payments at the cease use date and have considered free rent, sublease rentals and the
number of days it would take to restore the space to its original condition prior to our improvements. In the first quarter
of fiscal 2013, we began amortizing into general and administrative expense, equally through the cease use date, the
estimated rent income of $200 when the reserve was originally established. We have been unsuccessful at subleasing the
facility. Based on these, we have $961 reserved for UK lease related costs.
The following table sets forth the rollforward of the restructuring activity for the year ended September 30,
2014.
Lease related costs
Receivable from sale of equipment
Other costs
Total
Balance,
September 30,
2013
$
877
(16)
117
978
$
Total
Charges
84
$
-
-
$
84
Cash
Payments
-
$
-
-
$
-
Other
-
$
16
-
$
16
Balance,
September 30,
2014
961
$
-
117
1,078
$
Other costs include legal and professional fees and other costs incurred in connection with transitioning services
from sites being closed as well as costs incurred to remove improvements previously made to the UK facility. Other
activity in the reserve rollforward primarily reflects a receivable for settlement of the capital lease in the UK.
13. SELF-INSURANCE
The Company is self-insured for certain costs related to its employee health plan. Costs resulting from
noninsured losses are charged to income when incurred. The Company has purchased insurance which limits its
exposure for individual claims to approximately $75 and has an aggregating specific deductible of $85 at September 30,
2014. The Company’s expense related to the plan was $1,055 and $1,035 for the years ended September 30, 2014 and
2013.
14. MANAGEMENT’S PLAN
Our long-term strategic objective is to maximize the Company’s intrinsic value per share. While we remain
focused on reducing our costs through productivity and better processes and a continued emphasis on generating free
cash flow, we are dedicated to the strategies that drive our top-line growth. We are intensifying our efforts to improve
our processes, embrace change and wisely employ our stronger liquidity position.
Revenues for the year ended September 30, 2014 increased 11.4% to $24,584 compared to $22,068 for the year
ended September 30, 2013. In fiscal 2014, we experienced increased demand in our Contract Research services segment.
Most notably significant revenue gains were reported by the Preclinical Services which supports our clients' Phase II &
III clinical trials. In our Product segment, revenue was down slightly compared to same period one year ago due in part
from lower sales of certain analytical instruments. Cost of revenue for the year ended September 30, 2014 was $16,622
or 67.6% of revenue compared to $15,013 or 68.0% of revenue for the prior fiscal year. The main reason for the decrease
was our ability to leverage the higher revenue in fiscal year 2014 over our fixed cost base as well as strict spend
monitoring during the fiscal year.
As of September 30, 2014, we had $981 of cash and cash equivalents as compared to $1,304 of cash and cash
equivalents at the end of fiscal 2013. In fiscal 2014, we generated $1,684 in cash from operations primarily from the net
income and working capital management as compared to $1,594 in fiscal 2013. Total capital expenditures increased in
fiscal 2014 to a level of $490 reflecting our improved liquidity position.
On May 14, 2014, we entered into a Credit Agreement (“Agreement”) with Huntington Bank. The Agreement
includes both a term loan and a revolving loan and is secured by mortgages on our facilities and personal property in
West Lafayette and Evansville, Indiana. We used the proceeds from the term loan to pay off the Regions Bank
replacement note payable.
Over the past two years, we have focused on targeted initiatives that were designed to stabilize our business,
improve our liquidity and lower our break-even point. While we remain dedicated to increasing our productivity and
internal processes with the intent to continue to grow free cash flow, we are actively pursuing strategies to drive top-line
growth. In fiscal 2015, we plan to focus on sales execution, operational excellence and building strategic partnerships
with pharmaceutical and biotechnology companies, to differentiate our company and create value for our clients and
shareholders. By improving revenue growth and managing our costs effectively, combined with the availability of a new
credit facility with substantially more favorable terms than the long-term debt and line of credit it replaces, we enhance
our ability to implement our growth plan. We have taken several steps to strengthen our management team in roles that
will be vital to helping drive our top line performance. We are expanding our marketing efforts by building on the
Company’s inherent strengths in specialty assay and drug discovery, regulatory excellence, and our Culex® automated
sampling system. We recognize that our growth depends upon our ability to continually improve and create new client
relationships. In addition, strengthening the overall leadership team represents an important step forward in the
Company’s continuing program to build a management team with the depth, experience and dedication in order to
position the Company to deliver profitable growth over the long-term. We are determined to follow through on the
initiatives that support of our strategy to strengthen the Company for fiscal 2015 and beyond.
[Remainder of page intentionally left blank.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Bioanalytical Systems, Inc.
We have audited the consolidated balance sheets of Bioanalytical Systems, Inc. as of September 30, 2014 and 2013 and
the related consolidated statements of operations and comprehensive (loss) income, shareholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Bioanalytical Systems, Inc. as of September 30, 2014 and 2013, and the results of its operations and its cash
flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey LLP
Indianapolis, Indiana
December 29, 2014
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A-CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance to our
management and board of directors that information required to be disclosed in the reports we file or submit to the
Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. Based on an evaluation conducted under the supervision and with
the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2014,
including those procedures described below, we, including our Chief Executive Officer and Chief Financial Officer,
determined that those controls and procedures were effective as of September 30, 2014.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Under the supervision and with the participation of our management, including our Principal Executive
Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the 1992 framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Based upon this evaluation, management determined that the Company's internal control over financial
reporting was effective as of September 30, 2014.
Changes in Internal Controls
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act, during fiscal 2014 that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit
the Company to provide only Management’s report in this report.
ITEM 9B-OTHER INFORMATION
None.
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information concerns the persons who served as the directors of the Company as of September
30, 2014. Except as indicated in the following paragraphs, the principal occupations of these persons have not changed in
the past five years. Information concerning the executive officers of the Company, including Ms. Lemke’s biographical
information, may be found in “Executive Officers of the Registrant” under Item 1 of this report, which is incorporated
herein by reference.
Age Position
61
68
Name
Chairman
John B. Landis, Ph.D.
Director
Larry S. Boulet
Merrill Osheroff, Ph.D. 60 Director
Director
Richard A. Johnson
Director
David L. Omachinski
Director
A. Charlene Sullivan, Ph.D.
Director, President, Chief Executive Officer
Jacqueline M. Lemke
69
62
65
52
John B. Landis, Ph.D. was elected as a director of the Company on November 12, 2009 and elected as the
Chairman of the Board on February 11, 2010. Dr. Landis retired from his position as Senior Vice President,
Pharmaceutical Sciences of Schering-Plough in October 2008 and is currently an Adjunct Professor at Purdue
University's Department of Chemistry. Prior to joining Schering-Plough in 2003, Dr. Landis served in various
management positions with Pharmacia Corporation and The Upjohn Company, including Director of Quality Control,
Executive Director of Quality Control, Vice President of Quality Control, Vice President of Analytical Research, Vice
President of CNS Psychiatry, and Senior Vice President of Preclinical Development. Dr. Landis received his Bachelor
of Science in Chemistry from Kent State University, his Masters in Analytical Chemistry from Purdue University and his
Ph.D. in Analytical Chemistry from Purdue University. Dr. Landis provides our Board of Directors with leadership,
insight and perspective on scientific and management matters, stemming from his extensive experience in the
pharmaceutical industry.
Larry S. Boulet has served as a director of the Company since May 2007. Mr. Boulet was a Senior Audit
Partner with PricewaterhouseCoopers (PwC) and a National Financial Services Industry Specialist. For the last five
years of his career with PwC, Mr. Boulet served as Partner-in-charge of the Indianapolis office’s Private Client Group.
Prior to serving on our Board, he served on the Board of Directors of Century Realty Trust, an Indiana based, real estate
investment trust. He also served as Audit Committee Chairman until the Trust’s sale and liquidation in 2007. Currently,
Mr. Boulet also serves on the Indiana State University Foundation Board of Directors, where he is a past Chairman of the
Board. He holds a Bachelor of Science degree in Accounting from Indiana State University. Mr. Boulet provides our
Board of Directors with insight and perspective on financial matters, stemming from his extensive experience as an audit
partner.
Merrill Osheroff, Ph.D. was elected as a director of the Company on January 25, 2014. Dr. Osheroff is a
board-certified toxicologist, drug development consultant, and President of Osheroff Consulting Services, LLC. He has
35 years of experience in the nonclinical CRO industry and as manager/managing director at Searle/Monsanto,
Pharmacia, and Pfizer. His specialties include drug development planning and strategy, due diligence of compounds for
in-licensing, generation of the nonclinical sections of regulatory submissions (IND, NDA, MAA), outsourcing and
monitoring of nonclinical studies, report review expertise, mentoring of CRO study directors, outsourcing strategies, and
white paper expert reports. Dr Osheroff received his B.S. in Animal Sciences from the University of Maryland and his
Ph.D. in Experimental Pathology and Laboratory Medicine/Toxicology from the University of Wisconsin
Richard A. Johnson, Ph.D. was elected as a director of the Company on May 9, 2012. Dr. Johnson is
currently an executive scientific consultant. From 1990 to 2008, he served as Founder and President of AvTech
Laboratories. Prior to founding AvTech Laboratories, he served in various positions with The Upjohn Company,
including Senior Research Scientist, Manager of Product Control, Manager of Quality Assurance Product Support and
Director of Strategic Planning. Dr. Johnson received his Bachelor of Science in Chemistry from the Illinois Institute of
Technology and his Ph.D. in Chemical Physics from Michigan State University. Dr. Johnson brings to the Board of
Directors knowledge and insight on scientific matters, stemming from his extensive experience in the pharmaceutical
industry.
David L. Omachinski was elected as a director of the Company on October 8, 2009. Mr. Omachinski is
currently an independent executive management consultant. He was President and Chief Executive Officer (from
October 2005 to August 2006) of Magnum Products, LLC (since sold to Generac Holdings Inc.), a company which
supplied light towers, mobile generators and other construction equipment for a variety of industries. Prior thereto, he
was President and Chief Operating Officer (since February 2004), Executive Vice President, Chief Operating &
Financial Officer, and Treasurer (since 2002) and Vice President-Finance, Chief Financial Officer & Treasurer (since
1993) of Oshkosh B’ Gosh, Inc. Mr. Omachinski also serves on the board Of Anchor BanCorp, Wisconsin, Inc. (since
2002) and its wholly owned subsidiary Anchor Bank, fsb (since 1999). Mr. Omachinski received his Bachelor of
Business Administration from the University of Wisconsin – Oshkosh and is a certified public accountant. Mr.
Omachinski is the Chairman of the Board of Directors of Anchor Bancorp and the Bank and Chair of the Audit
Committee of Anchor BanCorp. Anchor BanCorp and the Bank consented to the issuance of Orders to Cease and Desist
(together, the “Orders”) on June 26, 2009, and the Bank received a Prompt Corrective Action Directive on August 31,
2010 from federal bank examiners. These enforcement actions remain in place and require, among other things that the
Bank comply with heightened capital requirements and a capital restoration plan, prepare and comply with a revised
business plan that includes strategies for capital enhancement and an emphasis on reducing classified assets, the Bank
and Anchor BanCorp to generally be prohibited form declaring or paying dividends or making and other capital
distributions without receiving regulator prior written approval and restrictions on the Bank’s ability to accept, renew, or
roll over any brokered deposit or act as a deposit broker. The Orders further require, among other things that Anchor
BanCorp and the Bank notify, and in some cases receive permission from, its regulators prior to making certain
payments, incurring indebtedness, entering into certain contractual arrangements or changing its management or
directors. Mr. Omachinski provides the Board of Directors insight and experience in financial management.
A. Charlene Sullivan, Ph.D. was elected as a director of the Company in January 2010. Dr. Sullivan is an
Associate Professor of Management at the School of Management and the Krannert Graduate School of Management at
Purdue University since 1984 and has been a faculty member at Purdue since 1978. Throughout her career at Purdue,
Dr. Sullivan has taught undergraduate and graduate classes on corporate finance, financial institutions and markets and
financial and managerial accounting and has received numerous awards and honors from the university. Since 2000 Dr.
Sullivan also has served as the Management Faculty Advisor for the Technical Assistance Program at Purdue, which
consults with small businesses in Indiana. In addition, Dr. Sullivan has served as a financial analyst for the Indiana
Gaming Commission since 1995 and as a risk management consultant for Edgar Dunn & Company (a strategy and
consulting firm) since 1994. Dr. Sullivan has served on the boards of directors of several private financial institutions
and not-for-profit organizations, including the Federal Reserve Bank of Chicago from 1990 until 1996 and the Purdue
Employees Federal Credit Union from 1997 until April 2009. She currently serves on the board of directors of the
Greater Lafayette Community Foundation and on the Asset-Liability Committee for the Purdue Employees Federal
Credit Union. Dr. Sullivan earned a B.S. degree in Home Economics from the University of Kentucky and a M.S. and
Ph.D. in Management from Purdue University. A. Charlene Sullivan brings to the Board of Directors particular
knowledge and experience in finance and risk management.
The Board of Directors has established an Audit Committee. The Audit Committee is responsible for
recommending independent auditors, reviewing, in connection with the independent auditors, the audit plan, the
adequacy of internal controls, the audit report and management letter and undertaking such other incidental functions as
the board may authorize. Larry S. Boulet, David Omachinski and A. Charlene Sullivan are the members of the Audit
Committee. The Board of Directors has determined that each of Mr. Boulet and Mr. Omachinski is an audit committee
financial expert (as defined by Item 401(h) of Regulation S-K). All of the members of the Audit Committee are
“independent” (as defined by Item 7(d)(3)(iv) of Schedule 14A).
The Board of Directors has adopted a Code of Ethics (as defined by Item 406 of Regulation S-K) that applies to
the Company’s Officers, Directors and employees, a copy of which is incorporated herein by reference to Exhibit 14 to
Form 10-K for the fiscal year ended September 30, 2006.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers
and persons who beneficially own more than ten percent of BASi’s Common Shares and any other person subject to
section 16(a) with respect to BASi to file with the Securities and Exchange Commission reports showing ownership of
and changes in ownership of BASi’s Common Shares and other equity securities. On the basis of information available
to us, we believe that all filing requirements were met for fiscal 2014.
ITEM 11-EXECUTIVE COMPENSATION
The information included under the captions “Elections of Directors – Non-employee Director Compensation
and Benefits” and “Compensation of Executive Officers” in the Proxy Statement for the 2015 Annual Meeting is
incorporated herein by reference in response to this item.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the “Principal Shareholders Table” in the Proxy Statement for the 2015
Annual Meeting and Item 5 of this report is incorporated by reference in response to this item.
For additional information regarding our stock option plans, please see Note 9 in the Notes to the Consolidated
Financial Statements in this report.
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the captions “Certain Relationships and Related Transactions” and “Election of
Directors – Board Independence” in the Proxy Statement for the 2015 Annual Meeting is incorporated herein by
reference in response to this item.
ITEM 14-PRINCIPAL ACCOUNTING FEES AND SERVICES
The information included under the caption “Selection of Independent Registered Accounting Firm” in the
Proxy Statement for the 2015 Annual Meeting is incorporated herein by reference in response to this item.
PART IV
ITEM 15-EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report.
1. Financial Statements: See Index to Consolidated Financial Statements under Item 8 on Page 30 of
this report.
2. Financial Statement Schedules: Schedules are not required, are not applicable or the information
is shown in the Notes to the Consolidated Financial Statements.
3. Exhibits: See Index to Exhibits, which is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 29, 2014
By: /s/ Jacqueline M. Lemke
BIOANALYTICAL SYSTEMS, INC.
(Registrant)
Jacqueline M. Lemke
President and Chief Executive Officer
Date: December 29, 2014
By: /s/ Jeffrey Potrzebowski
Jeffrey Potrzebowski
Chief Financial Officer and Vice President of
Finance (Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Jacqueline M. Lemke President and Chief Executive December 29, 2014
______________________________ Officer (Principal Executive Officer)
Jacqueline M. Lemke
/s/ John B. Landis, Ph.D.
Chairman
December 29, 2014
John B. Landis, Ph.D.
/s/ Larry S. Boulet
Larry S. Boulet
Director
December 29, 2014
/s/ Merrill Osheroff
Director
December 29, 2014
Merrill Osheroff
/s/ Richard A. Johnson, Ph.D.
Director
December 29, 2014
Richard A. Johnson, Ph.D.
/s/ David L. Omachinski
Director
December 29, 2014
David L. Omachinski
/s/ A. Charlene Sullivan, Ph.D.
Director
December 29, 2014
A. Charlene Sullivan, Ph.D.
Number
Description of Exhibits
EXHIBIT INDEX
(3)
3.1 Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. as amended
through May 9, 2011 (incorporated by reference to Exhibit 3.1 to Form-10Q for the quarter ended
June 30, 2011).
3.2 Second Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended
(incorporated by reference to Exhibit 3.2 to Form 10-K for the fiscal year ended September 30,
2009).
(4)
4.1 Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration
Statement on form S-1, Registration No. 333-36429).
4.2 Form of Warrant (incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-1,
Registration No. 333-172508).
4.3 Certificate of Designation of Preferences, Rights, and Limitations of Convertible Preferred Shares
(incorporated by reference to Exhibit 3.1 on Form 8-K, dated May 12, 2011).
4.4 Specimen Certificate for 6% Series A Convertible Preferred Shares (incorporated by reference to
Exhibit 4.3 to Registration Statement on Form S-1, Registration No. 333-172508).
(10)
10.1 Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank dated December 18, 2007
(incorporated by reference to Exhibit 10.7 of Form 10-K for the fiscal year ended September 30,
2007).
10.2 Agreement for Lease, by and among Bioanalytical Systems, Inc., Bioanalytical Systems Limited
and Pettifer Estates Limited, dated October 11, 2007 (incorporated by reference to Exhibit 10.1 to
Form 8-K filed October 17, 2007).
10.3 Form of Lease, by and among Bioanalytical Systems, Inc., Bioanalytical Systems Limited and
Pettifer Estates Limited (incorporated by reference to Exhibit 10.2 to Form 8-K filed October 17,
2007).
10.4 Bioanalytical Systems, Inc. 2008 Director and Employee Stock Option Plan (*) (incorporated by
reference to Appendix A to the Revised Definitive Proxy Statement filed February 5, 2008, SEC
File No. 000-23357).
10.5 Form of Employee Incentive Stock Option Agreement under Bioanalytical Systems, Inc. 2008
Director and Employee Stock Option Plan (*) (incorporated by reference to Exhibit 10.31 to Form
10-K for the fiscal year ended September 30, 2008).
10.6 Loan and Security Agreement by and between Bioanalytical Systems, Inc., and Entrepreneur
Growth Capital LLC, executed January 13, 2010 (incorporated by reference to Exhibit 10.35 to
Form 10-K for the fiscal year ended September 30, 2009).
10.7 Amendment to Loan Agreement between Bioanalytical Systems, Inc., and Entrepreneur Growth
Capital LLC, dated May 13, 2010 (incorporated by reference to Exhibit 10.9 to Form 10-Q for the
fiscal quarter ended March 31, 2010).
Number
Description of Exhibits
10.8 Fourth Amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank,
executed November 29, 2010 (incorporated by reference to Exhibit 10.1 for Form 8-K filed
December 2, 2010).
10.9 Amendment to Loan Agreement between Bioanalytical Systems, Inc., and Entrepreneur Growth
Capital LLC, dated December 23, 2010 (incorporated by reference to Exhibit 10.1 for Form 8-K
filed December 30, 2010).
10.10 Fourth Amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank,
as amended on December 29, 2010 (incorporated by reference to Exhibit 10.1 for Form 8-K filed
January 5, 2011).
10.11 Fifth Amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank,
executed February 22, 2011 and effective February 11, 2011 (incorporated by reference to Exhibit
10.1 for Form 8-K filed February 24, 2011).
10.12 Form of Securities Purchase Agreement between Bioanalytical Systems, Inc. and certain
purchasers, dated May 5, 2011 (incorporated by reference to Exhibit 10.27 to Registration
Statement on Form S-1, Registration No. 333-172508).
10.13 Non-Qualified Employee Stock Option Agreement between Jacqueline M. Lemke and
Bioanalytical Systems, Inc., dated April 9, 2012 (incorporated by reference to Exhibit 10.4 to
Form 10-Q for the fiscal quarter ended March 31, 2012).
10.14 Sixth Amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank,
executed November 9, 2012 and effective November 1, 2012 (incorporated by reference to Exhibit
10.1 for Form 8-K filed November 9, 2012).
10.15 Amended and Restated Sixth Amendment to Loan Agreement between Bioanalytical Systems,
Inc. and Regions Bank, executed on December 21, 2012 (incorporated by reference to Exhibit
10.1 for Form 8-K filed December 27, 2012).
10.16 Amendment to Loan Agreement between Bioanalytical Systems, Inc. and Entrepreneur Growth
Capital LLC, dated December 21, 2012 (incorporated by reference to Exhibit 10.1 for Form 8-K
filed December 28, 2012).
10.17 Employee Incentive Stock Option Agreement between Jacqueline M. Lemke and Bioanalytical
Systems, Inc., dated February 7, 2013(*) (incorporated by reference to Exhibit 10.1 for Form 10-Q
filed May 15, 2013).
10.18 Seventh Amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank,
executed and effective October 31, 2013 (incorporated by reference to Exhibit 10.1 for Form 8-K
filed November 5, 2013).
10.19 Notice of non-renewal to Entrepreneur Growth Capital LLC, dated October 30, 2013
(incorporated by reference to Exhibit 10.22 to Form 10-K filed December 30, 2014).
10.20 Severance Agreement between Lori D. Payne and Bioanalytical Systems, Inc., dated October 25,
2013 (incorporated by reference to Exhibit 10.3 to Form 10-Q filed February 14, 2014).
10.21 Credit Agreement between Bioanalytical Systems, Inc and The Huntington National Bank, dated
May 14, 2014 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed August 14, 2014).
Number
Description of Exhibits
10.22 Offer letter by and between Bioanalytical Systems, Inc. and Dr. James S. Bourdage, effective June
2, 2014 (filed herewith).*
10.23 Offer Letter by and between Bioanalytical Systems, Inc. and Jeffrey Potrzebowski, effective June
9, 2014 (incorporated by reference to Exhibit 10.2 to Form 10-Q filed August 14, 2014).
10.24 Second Amended and Restated Employment Agreement by and between Bioanalytical Systems,
Inc. and Jacqueline M. Lemke, effective July 1, 2014 (filed herewith).*
10.25 Offer Letter by and between Bioanalytical Systems, Inc. and Connie Dougherty, effective
September 15, 2014 (filed herewith).*
10.26 Separation Agreement between John P. Devine, Jr. and Bioanalytical Systems, Inc., effective
October 3, 2014 (filed herewith).*
(14)
14.1 Code of Ethics (incorporated by reference to Exhibit 14 to Form 10-K for the fiscal year ended
September 30, 2006).
(21)
21.1 Subsidiaries of the Registrant (filed herewith).
(23)
23.1 Consent of Independent Registered Public Accounting Firm McGladrey LLP (filed herewith).
(31)
31.1 Certification of Chief Executive Officer (filed herewith).
31.2 Certification of Chief Financial Officer (filed herewith).
(32)
32.1 Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith)..
32.2 Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350) (filed herewith)..
101
XBRL data file (filed herewith).
* Management contract or compensatory plan or arrangement.