Inotiv Inc (NOTV) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Bioanalytical Systems third-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, Tuesday, August 9, 2011.

Please note that except for the historical statements, statements in this release may constitute forward-looking statements within the meaning of the Section 21-E of the Securities Exchange Act of 1934. When used, the words anticipates, believes, expects, intends, future, and other similar expressions identify forward-looking statements.

These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statement. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of new products and other risks and uncertainties discussed in the Company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. Bioanalytical Systems undertakes no obligation to update or revise any forward-looking statements.

I would now like to turn the conference over to Mr. Anthony Chilton, Chief Executive Officer. Sir, you may proceed.

Thank you. Good morning, and thank you for joining us today for the third-quarter earnings call for Bioanalytical Systems Incorporated. I'm Tony Chilton, President and CEO, and I'm joined here today by Michael Cox, our Chief Financial Officer.

Earlier today, we released our earnings for our third fiscal quarter ended June 30, 2011. I am pleased to report that we had our third consecutive quarter of profitability. It was also a noteworthy quarter in that in May, BASi had its first successful equity raise since our initial public offering in 1997. We raised $5.6 million through the sale of units of convertible preferred shares and warrants.

I'll now ask Mike to review the numbers for you that were in our release this morning. Mike?

Thank you, Tony. As Tony said, we're pleased to report today both a quarterly profit and a profit for the year-to-date for the 9 months, compared to last year's results, where we did have a third-quarter profit but a loss for the year-to-date for the 9 months. For the quarter, our revenues were 5% over last year's, totaling $8.5 million, and our net earnings were $418,000, an improvement of $130,000 over last year's profit of $288,000.

Our operating profit, however, was $77,000 less than last year due to increased selling expenses in the current quarter due to our increase in our field sales staff. In comparing quarterly results, please note that last year's third fiscal quarter was the best quarter of that year.

Our results for the first 9 months of fiscal 2011 came in with a 17% increase in revenues to $25 million for the period. Our net earnings were $1.2 million, an improvement of $4 million over our pretax loss of $2.8 million last year.

Earnings per share were $0.16 compared to -- I'm sorry -- wrong one. As a result of our offering in May, in accordance with current accounting procedures, we were required to compute the fair value of the components of the offering, which then required us to recognize a one-time non-cash deemed dividend in our preferred stock of $3.3 million from the offering, and $990,000 of commitments to pay dividends upon conversion. As a result, we had a loss per common share of $0.65 for the quarter and $0.58 for the 9 months.

For our pro forma EPS, we eliminated this deemed dividend, which resulted in pro forma net earnings per share of $0.07 basic in the current quarter, which is $0.06 diluted, compared to EPS last year of $0.06 per share, basic and diluted. For the 9 months, our pro forma EPS was $0.23 per share, $0.22 fully diluted, compared to a loss per share in the 9-month period last year of $0.49, basic and diluted.

Our cash flow for the year-to-date continued to be good. We generated $1.7 million in cash from operations in the current 9-month period, even after we paid down liabilities of $600,000 to get back within our vendor terms. Coupled with the unit offering we closed in May, our balance sheet, working capital, debt-to-equity measure have all dramatically improved. We've also acquired nearly $2 million of new state-of-the-art laboratory equipment across all our lab sites and are completing a building renovation at our toxicology facility, which increases our flexibility and capacity.

We continue to be optimistic about the remainder of the fiscal year. However, we are adjusting our guidance for the year to anticipate revenues in the $33 million to $34 million range, which is down from our $35 million anticipation earlier, and net earnings of $1.4 million to $1.5 million, down from our earlier guidance of $1.6 million. These details are more fully discussed in our quarterly report -- the press release filed this morning, and our quarterly report on Form 10-Q, which will be filed later in the week, and will be available on both the SEC's EDGAR system and at our website, www.basinc.com.

Okay. Thanks, Mike. Just a few more comments, and then we'll open up for some questions.

We continue to see improvement in the market for our services, particularly in the nonclinical area. Our backlog remains strong, and we are meeting our goals for new bookings in the current year. Our first quarter and our guidance were both impacted by a decline of sales in our products division, where we did not attain our anticipated level of sales. We do continue to have good opportunities there and are hopeful of significant conversions in our final quarter. I am proud of the effort in all our people and their significant contributions to bring this to a year-to-date profit this year.

We will now be happy to entertain any questions.

(Operator Instructions). Jay Kumar, Midsouth.

Yes. The question was -- looks like your revenue is going to be up for the fourth quarter, but your earnings are going to be down, like, between $200,000 to $300,000, according to your guidance, as opposed to $400,000. Is there a reason for that?

What we experienced this month -- and I'm not sure -- I mean this quarter -- I'm not sure if we'll see it next quarter -- is we had revenues that were higher in our services business but were not as high in our products. And the margins on our products are not as high as on our services. We also had some increased expenses in the fourth quarter because we have a full sales staff that we did not have last year.

Okay. In terms of the -- what's the two different dividend preferred shares? Is there a -- what's the differentiation between that first line and second line of $3.2 million and $991,000. What's the difference between the two?

That's a (inaudible) accounting issue, that we have to value the warrants that were part of the unit offering. As you may recall, we had -- each preferred share had warrants attached. One convertible -- one exercisable for 1 year and the other for 5 years. With applying the Black Scholes method to those two warrants, you come up with a $3.3 million valuation, which is treated as a deemed dividend to the preferred stockholders.

The warrants are exercisable at $2. For them to even be in the money, it will have to be near $5. So I find these valuations to be very academic, but that's the way the rules say do it; that's what we did.

Okay.

The $990,000, the second item you mentioned, is we had 3-year commitment to pay dividends on the preferred in cash or in stock, which would total 18% over 3 years. If the holders of the shares convert, they're entitled to that payment at the time they convert, so we recorded that entire amount as a deemed dividend in the current period.

Do you guys see sort of doing an acquisition in this market with the cash, or what's your -- what do you intend to do with the cash that you have on hand?

Right now, we don't have an acquisition in our vision. It's there for general corporate purposes. I think with current conditions, I'm pretty happy to have a little extra cash on our balance sheet right now. I'm a little bit scared by what's happening out in the market today. But right now, it's for liquidity and to have a solid balance sheet.

Okay. Thank you very much.

Jeffrey Cohen, Ladenburg Thalmann.

Hi, thanks for taking the question. Could you just discuss a little bit about the backlog, perhaps the total notional amount and the time frame that it is being measured over?

We have not disclosed our total backlog. It is healthy at this point in time. Some of it goes out as far as 2 years. Our backlog typically, though, is realized, to the extent of 75% or 80% of the backlog, in the ensuing 6 months. We don't run clinical trials, so we don't have the long-term backlog that some of the other CROs have. We do have some cancer studies on occasion that will run up to 2 years.

Okay. And could you say at least -- is the backlog increased or decreased over the past quarter or 2 quarters?

The backlog over the past 3 quarters has been very steady. As I say, since we don't have the long-term studies, if we get too large a backlog, we have trouble working the studies into our schedules, and it will drive clients elsewhere. So it's about -- right now, it's a healthy backlog that covers a significant portion of our next years' intended revenues.

Okay, that's very helpful. Could you comment at all about any new programs or any contracts or customers that you expect in the near term?

Well, our focus, from a sales point of view, is to continue to work with our large pharma companies that we currently work with. We have over the past year or so shifted our focus somewhat to the small, medium-sized company customer. And so we will continue to pursue that market. The size and position of BASi really falls well into that small, medium-sized company market. So we're hoping to target these kinds of companies who have early development programs and really try and develop a kind of preferred provider agreement type program with these types of companies, such as one we did with Pharmasset not too long ago, which was published on our website. So it's that kind of program that we're looking towards.

Perfect. Thank you very much.

Okay. Thank you.

(Operator Instructions). Lenny Dunn, Freedom Investors Corporation.

Good morning. The balance sheet because of the one-time charge that you took -- now that you're going to have an adjustment each quarter for the first year, I would assume, because the value of the $2 warrants will vary each quarter. I'm not an accountant, but it would appear to me that if the stock, for example, was $1.90 at the end of the third quarter, that the $2 warrants with just 7 months remaining would have less value than they would have now. Is that accurate?

No, Lenny. That's how you would probably evaluate it in your portfolio, but we measure it at the issue date using the Black Scholes method, and with some assumptions about interest rates and volatility; volatility being the one that creates the most value in it. And so we have a one-point measurement on that the day it's issued. So this noise won't be running through our earnings per share in future periods.

Okay, no, I now understand. I just wanted to clarify. The 5-year warrant is a different picture, but the 1-year warrants have a little bit of lag.

The second thing is, are you getting good results from the new sales people that you've hired using the money from the offering?

Hi, Lenny. Yes, we are. As we've commented, we've made significant investments in changing and adding to the field sales people, as it were. And they are starting now to have an impact in the sales. In fact, one of the focuses that we've had for the field sales people was to increase the number of new customers. And we actually now have 22 new customers this fiscal year so far, which is probably the highest increase in customer base that we've seen in the Company for as long as we've been keeping records on that.

So the business development team is being effective. We do have a strategy in penetrating our large pharma companies a little bit deeper than we have been in the past. And as I said earlier, focusing on the small, medium-sized companies. And we clearly do -- we have been getting a lot of success in that, with, at least, so far, 22 new companies on board.

We've also invested in a marketing person -- again, something that we haven't invested in in the past -- to make sure that we're getting some market intelligence back and customer feedback back, and also preparing the right message for our staff as well as our customers. So I think this is going to be an important asset to the organization and the way that the whole Company will respond as well as how we respond to our customers.

Great. It's unusual even for a company as obscure as Bioanalytical to sell at a substantial discount to book value when they're profitable. So hopefully, that gets cured by a little better exposure. But the book value you have is $2.17 fully diluted, and we certainly shouldn't be selling below that. And if we're running at a $0.06 quarterly -- and I'm using a very conservative number run rate -- stock should trading around $3.00, not at $1.70. So I guess we just need some exposure, and, obviously, the way the market has been the last week or two, it would be hard to have people look at a new idea. But it certainly looks undervalued to me at least.

Thanks, Lenny. Yes, we're continuing, as you know, to work and get more exposure. And as you say, it's probably hard to get attention right now, but I'm comfortable we'll get the message out there. I think the deemed dividend accounting sort of obscures it until someone takes -- makes the effort to get into our numbers and understand what to look forward to going forward.

Okay. Well, thank you. And the last thing is a mild disappointment, but nothing that would deter me from looking at the overall story, it's a slightly lower revenue run rate for the ongoing quarter. Is that because some of the new business that was sold will actually go into the subsequent quarter?

We just had some softness in the current quarter in our product sales. And we had lots of opportunities and we just didn't get the orders on some of them. And that caused us to say, well, we're not sure we're going to get all of those back in the fourth quarter, and we decided to lower our guidance on that, too.

And at the moment, the contracts and the quotes are still out there for the equipment. And we're hoping that we will see those come through in the fourth quarter. Obviously, we're hoping to get a few more in the third quarter, but they're holding on to money and seeing their budgets through. This is a capital -- it's a CapEx investment for companies rather than a service is. So the focus is a little bit different. But we're pretty optimistic that -- it's not as a consequence of the shortage of opportunity out there and quotes out there. There's a lot of quotes out there for the equipment. So we're hopeful that we'll be able to land some of those in the fourth quarter.

Okay. So there's a chance that we'll be able to overdeliver in the current quarter, but you prefer to keep guidance low?

Yes. At this point, yes.

Okay.

Tom Harenburg, Carl M. Hennig Corporation.

Just following up on Lenny's question a little bit there, regarding exposure. It seems to me that you hired a PR firm 3 months ago or so. Can you tell us what they're doing and how you expect to use them?

Yes, Tom. They've been working with us on the types of messaging we're doing as we deliver these messages. And we've been having investor meetings. We haven't gone on a specific roadshow, but as Tony and I make trips, we try to schedule meetings in the towns that we're going to. We've had a number of [phone] messages and conferences with investor groups. So we're getting some interest and some good exposure. I think that, as I read it, there's still a little bit of a wait and see on have we totally turned the corner on this. But we are getting exposure.

Okay. On your sales staff, it seems to me that since the first of the year, or roughly about that time -- maybe it was a little (inaudible) -- first of your fiscal year, you added a new Head of Sales, and then you hired three additional people. Are all of those people still with you?

Yes, they are. Yes.

Okay. And if you look at your revenue from last year versus your revenue from this year and the fact that you added 22 new clients, something is amiss. Your revenue ought to be up substantially. Are you losing business from past existing clients? Is this new sales force not carrying its weight? It would seem to me that we'd see a real explosion in revenue with, again, with 22 new clients and with a totally new -- or I shouldn't say a totally new, but three new actually sales people out there on the road.

Our revenues for the year-to-date are up 17%. Most of our sales people, Tom, are selling our services, not focusing so much on products. Again, our products are only up 5% for the year. So it's being dragged a little bit by the fact that we've not seen the product sales increase that we would like to see.

And typically, when we -- in the business, when we take on a new business development person, it typically takes anything from 3 to 6 months to refocus that individual and start -- and to be get them productive, building new relationships, building -- they're now bringing BASi to their customers instead of their previous organization. And so there is a transition period where we expect not much revenue coming in when they first start. And typically, that's about 3 to 6 months.

We're starting to see that kick in now. These 20 new customers have come in all relatively quickly, once these new folks have started to engage. And they bring in -- because they are new customers, they are not typically large contracts. It's we'll do a small contract, you see how it goes and then maybe we'll move on to the next one. So these are early-stage programs. Obviously, if we do a good job and keep them on, then the expectation is that we will move on then to further programs with them.

Okay. The Pharmasset agreement -- Pharmasset has more than doubled in price -- well, I didn't look at what it did yesterday -- but Pharmasset has more than doubled in price since you announced the agreement, which would mean that Wall Street is pretty intrigued with what Pharmasset is doing and their business has got to be expanding. Can you address that Pharmasset agreement and what that is doing for you? And more importantly, I guess, where it's going from here?

Yes. The Pharmasset agreement is basically we agreed to be a preferred provider for their toxicology programs for a certain number of their molecule -- their new molecules. With that agreement comes an opportunity to be at least a fairly high contender for the bioanalytical support. Clearly, Pharmasset have agreements with other CROs as well, and we were successful in shifting some bioanalytical work away from an existing vendor to us as a consequence of the agreement. They've been very influential for us in terms of some of the programs. Some of the longer-term toxicology programs that we're doing for them are 2- to 3-year carcinogen studies, where the animals are dosed for 2 to 3 years on that program. So that's a nice, steady, guaranteed set of revenue [for us] for a 2- to 3-year period. And we have a number of those carcinogen studies for Pharmasset.

Clearly, we are continuing to work with them and hopefully be able to follow those compounds into the clinical development program and be -- at least be able to support the -- provide the bioanalytical support to the Phase 1, Phase 2, and Phase 3 studies. That's our expectation there, and we anticipate that that's going to happen. But we don't know that yet.

But that hasn't materialized yet?

No, it's not because of [us]. It is just because the program -- the development of the program hasn't reached that point yet.

So have you seen any increased business from Pharmasset above and beyond your original early successes with them?

We continue, Tom, to get opportunities from them. And they're a great client. We have a great relationship with them. We expect to continue to get business with them off into the future as [there have been] additional new programs.

Okay. When you announce the -- and you have a call on the fourth quarter and the fiscal year and the figures, do you anticipate giving guidance for 2012 at that point?

We haven't made a call on that as yet, Tom. As you well know, it's such a hard business to predict. We did try to get some guidance when we were encouraging people to invest, and we felt the obligation to update that. You guys, when you get a minute, why don't you give me call, and we can talk about it offline. I'm not sure that we'll have that kind of confidence, but we can take a look at it.

Okay. Thank you.

(Operator Instructions). Sir, I show no questions in queue. I'll turn it back to management for any closing remarks.

Okay. Thank you very much for attending the call today and I appreciate the questions. And we look forward to talking to you again in another quarter with some more successful results. Thank you, all, for your time.

Thank you, sir, and thank you for your participation in today's conference. You may now disconnect. Have a great day.