Inotiv Inc (NOTV) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bioanalytical Systems' first-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 is being recorded for Friday, February 10, 2012.

Please note that except for historical statements, statements in this release may constitute forward-looking statements within the meanings of Section 21e of the Securities Exchange Act of 1934. When used, these words anticipates, believes, expects, intends, future and other similar expressions, identify forward-looking statements. These forward-looking statements reflect management's current view with respect to future events and financial performance, and are subject to risks and uncertainties. Actual results may differ materially from the outcomes contained in the forward-looking statements.

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 of Bioanalytical Systems. Please go ahead, sir.

Thank you. Good morning, and thank you all for joining us today for our first-quarter earnings call for Bioanalytical Systems, Inc. for our fiscal year 2012. I am Tony Chilton, the President and CEO, and I'm joined today by Mike Cox, our CFO.

I'd like now to turn the call over to Mike, to give us some information on the earnings. Thank you, Mike.

Thanks, Tony. Good morning, and thank you for joining us today. Earlier today, we announced the results of our first quarter ended December 31, 2012 of our fiscal year 2012.

For the quarters, our revenues were 7% below last year's first quarter, totaling $7.5 million compared to $8.1 million last year. This resulted in a net loss for the current quarter of $1.5 million or $0.21 per share, compared to a net profit last year of $300,000 or $0.06 per share.

Our revenues were negatively impacted by a client delay of two large projects and by a shortfall in reaching our goals for new work in the quarter. We've since seen an improvement in opportunities for new projects, which will impact future periods. Our marketing expenses for the quarter increased in selling and operating, and marketing, due to completing our field sales force compared to last year, when we did not have all of our sales force positions filled.

Our research and development expenses were slightly higher in the current quarter, due to some outsourced development work on a new electrochemistry instrument we are introducing in the current quarter. Our G&A expenses were negatively impacted by increased health expenses for employees, professional fees for human resources, legal and accounting, and severance costs.

We are currently addressing all areas of expense in order to reduce this trend in the remainder of the year. We did, however, have positive cash flow from operations in the current quarter of $590,000 compared to a cash flow last year of $737,000. We expect revenues in our second-quarter fiscal 2012 to improve over the first quarter. And we believe we can show operating earnings for the year as a whole.

These details will be more fully discussed in our Quarterly Report on Form 10-Q, which will be filed next week. Tony has some additional comments for our first quarter.

Yes, thanks, Mike. Revenue in the first quarter was obviously below our expectations, primarily because of the cancellation of a large toxicology contract during that period. Together, with a planned increase in staff and equipment associated with their capacity expansion program, and new initiatives in support of our clients' drug discovery efforts, including the recently launched discovery center of our headquarters in West Lafayette, this resulted in a sharp decrease in gross margin that we've seen.

During the first quarter, we also expanded the sales team for our European operations, and increased our advertising and marketing spending as compared to the first three months of fiscal 2011, in line with our strategic growth plan. We do not expect any further increases in our cost structure in the coming quarters. In fact, we currently are evaluating a number of steps to sharply reduce our costs without sacrificing the gains we have made against our strategic plan.

We believe that the investments we already have made in our laboratory capabilities and capacity, and corporate infrastructure, including marketing program, will support a higher revenue beginning in the current quarter.

We'll now open for questions.

(Operator Instructions) Lenny Dunn, Freedom Investors Corporation.

Disappointing quarter, to say the least. The cash flow remained positive, which is least something I can hold onto, but is there anything that can be done to better match expense with revenue during the quarter? Or is the Company too locked into some of the fixed overhead to make adjustments as things go along, in the event you have something like the cancellation of the contract you had?

Lenny, the -- our expenses are basically -- the bear's portion of our expenses are basically in our facilities that are totally fixed, unless we abandon one, and in our personnel. So, we don't have operating expenses that go up and down so much with volume, once we have X number of employees on-hand. So any expense change that we make in a period will be primarily in staff changes. And we are looking at what we need to do in our staffing at this point.

Okay. And my second isn't a question, but a statement. The Directors is currently constituted. I mean you -- obviously, your new Director has a very large equity position in the Company and -- but there is no skin in the game from the other Directors. And we intend for people who are on the Board of Directors who do not buy stock, between now and the time we have to vote, to withhold votes for any Director that doesn't have serious skin in the game.

It's just -- it's really not right for a public company to not have Directors in this day and age, that have skin in the game. And if they're not willing to put skin in the game, we can't vote for them.

The only reason we're not going to immediately hold a proxy context to replace some of these guys is that we have skin in the game, and are not interested in seeing the Company spend money at this point on a proxy fight. But I assure you there will be no votes for any Directors that don't buy as soon as they can, and show us that they have a financial interest in this Company. And I would certainly urge anyone else that hears this to do the same.

Thank you, Lenny. This is Tony. Thank you for your comment and feedback, Lenny. I appreciate your candor. You're a long-time investor with the Company and your feedback is always valuable. I will make sure that that message gets passed back to the Board. I apologize.

The one exception would be the doctor from Indiana who is precluded by rules from the University of Indiana from buying stock in the Company. But he would be the only exception that we could possibly allow.

Yes, you're right on that. That individual does have a restriction there.

Okay. But the others, it's frankly inexcusable and unconscionable. And they're feeding you guys all sorts of ideas and telling you how to spend our money without any of it being their money. That's all I have to say. Thank you.

Thanks, Lenny.

Thank you, Lenny.

Tom Harenburg.

Tony, these figures are just, in one word, just plain pitiful. What I don't understand is a year ago, you hired a new sales team. You had a new head of sales and three new people, and your revenues are going the wrong way. What's -- I mean, instead of poking needles on the Board, you better poke needles in the sales team. Have we got the right people? And are they incentivized? Or what's going on here?

Thanks for your question, Tom. You know, sales is clearly important and, yes, we did make an investment in three new people. I believe we've got the right people onboard in the US. Those folks came onboard during the 2011 fiscal year.

I think now we're starting to see -- it takes typically three to four months for a new team to start really generating interest and generating confidence in our customer base, and generating that relationship with our customer to the business development person, in spite of the relationship that we already have in the operational side of things. But we are seeing some increases in new customers, new types of customers that we've not engaged before.

As you know, traditionally, we've been with large pharma companies, and now we've turned our focus more to small/medium-size companies. And, of course, there's a lot more of them out there, and it takes a little bit more time to hit them and build relationships with them. That said, we generated interest from over 20 new clients last year and we've started to see an increase in new clients again for this fiscal year.

So, I'm confident that we will start to see -- and certainly in this quarter, this coming quarter, this current quarter, we will start to see increasing quote activity as a result of their actions. And in fact, in December of last year, December 2011, we did start to see an uptake in the number of quotes that we were issuing out to customers. And a good number of those were new customers.

So I believe, Tom, that we have the right team in place. Believe me, the VP of Sales and Marketing is very conscious of how I'm feeling about the sales at the moment. And we are both working very diligently to give them the support and the drive and the reminders they need to move forward.

Are these people on salary or are they on commission?

It's a combination, Tom. They have a base salary with a fairly aggressive commission. Their target is a percentage over -- whatever we set our revenue to, we set our sales targets maybe 20%, 30% above that revenue. And their commissions are based on hitting 80% of their target or more.

Are all three of these new people still with you?

Yes.

They are, okay. Going back, I thought that you had indicated on the last conference call that you had 25 new clients? Now you're saying 20?

Well, we did -- but yes, we did actually have 25 new clients for the last fiscal year.

Okay. So, if many of these are $25,000, $50,000 clients, and you guys are doing a good job for them, it would seem to me that it isn't going to take much to get these -- the 25's to go to 50 and the 50's to go to 100.

No. It doesn't take much in terms of BDF, because once we have the folks onboard, typically those companies stay with us. The issue is, it's the kind of tie-in program for their particular projects.

If we get the customer fairly early, by the time for a $20,000 or $30,000 program, by the time we can move that into hundreds of thousands of dollars in the next stage, it takes a series of months and things to do the experiment, write the report, evaluate the information for them to make a decision to move on to the next step. So it's -- in catching them early, there's a time lag then before the significant dollars start coming in for us.

The other comment is that what we're trying to do here in aiming for new customers is we're trying to supplement the reduction that we're seeing in the trend we're seeing from our large pharma customers. We're still working with them, but that flow is slowing down. So, we're trying to build back up that revenue hopper, if you like, to compensate for the slowing down of the large pharma and building up the small pharma.

So looking at your release this morning, you talk about the delay of a large toxicology contract. Now I thought on the call here you indicated that that was lost. What's the answer there?

The contract has not been canceled. It's been delayed indefinitely. And the reason for the delay was a backup compound for one of our clients that is having such good success with their primary compound they delayed doing any more work on the backup. So we don't know the ultimate disposition of that and won't know until they decide their strategy.

Okay. And Mike, your contract is what, through the end of March? Tony, where do you stand on finding a replacement for Mike?

We're currently in the process of interviewing people. We've got some pretty good candidates out there, but that's where we are at the moment.

Okay. One of the things that I'm concerned about is, I look at the severance packages that both you and Mike have, and I would encourage you -- well, let me put it this way -- I would be very disappointed if whoever you bring in as the new CFO has any kind of an employment contract, a severance package, in today's atmosphere, these guys ought to be just happy they got a job. And if they're doing a good job, they're going to be rewarded. If they're not doing a good job, the last thing this Company needs to do is pay a full year's salary to ship somebody off somewhere else.

Okay. Going back, if memory serves me, on the prior call, I was under the impression that there was going to be material progress made between that loss of $0.10 in the fourth quarter and what you were going to report in the first quarter. And actually, the loss has doubled. Am I not correct in that?

And how -- if that's the case, that call was made on December 20, I believe. How could we go 50 days, and all of a sudden, things go from getting -- showing some improvement over the fourth quarter to actually seeing a loss twice what it was in the fourth quarter? I mean, have you guys really got a handle on what's going on with this company, or what?

That's a good point, Tom. We did not understand the full impact of these delays, and at that point, we weren't sure they were going to be delayed throughout the end. But we knew we were tied at that point on the plan. We had anticipated to do better than what we did.

So, in some of the opening remarks here, I think that you indicated that you expect revenue improvement in the second quarter. And did I catch this right? -- you're expecting profitability for the full year?

Yes.

Okay, so you're looking at making up this $0.20 loss in the balance of the year. What -- why in the world, with the Company struggling like it is, did you open up a health clinic for the benefit of your employees? And I realize you're opening it up to some others, but God Almighty, that just doesn't make sense to me.

That actually is a cost savings decision, Tom.

Well, obviously, it isn't apparent yet, because we were incurring higher costs than lesser costs.

Right. And we've -- the clinic is not open as yet. The experience of other people doing that has been a reduction in their healthcare costs for employees. We are self-insured up to a limit for our healthcare, so when we have bad experience, up to our reinsurance limits, it does impact us. We had some bad experience in the quarter just ended, but the clinic is not yet open and does not have an impact as yet.

So, at what point do you expect that to open? And are there going to be one-time opening costs and so forth?

No, they're not. We had to do some minor building renovations for where we put the clinic, and then there will be periodic ongoing costs of operating the clinic, that should be offset by the reduction in what we pay out in our insurance claims.

So when is this scheduled to open?

It's scheduled to open, I believe, in March now.

Okay. What about Europe? Is that still operating in the red? I see you added -- it looks like you've added a new salesperson over there?

It's still operating in the red, Tom. We took on some new business development people there, as you know. They came onboard in November. And so, again, back to my earlier comment about the time it takes for business development people to establish themselves.

We took on a couple of people to sell the services side and a single person to sell our Culex sales into Europe, which is a good market for us, I believe. And that's where we anticipate to see significant growth in those sales.

Already, that particular individual has made quite an impact on the market, and has started to get some significant interest and has already captured, I think, two or three sales out there with customers that we'd just not touched before. So I'm very optimistic that that strategy and that part of the plan is really going to bear fruit in the future. I'm very encouraged by the activity in this. And, of course, as you know, the Culex sales force is a high margin business for us. So if we can -- the idea here is if we can increase those sales, we can increase our cash flow into the Company.

On the CRO services side, again, like I said, that takes a little bit longer typically than instrument sales. So I'm hoping -- I'm expecting by the end of this quarter to start to see some activity from those people. They're already making headway further into organizations that we'd not been able to address historically for the last few years there.

So again, I believe that the investment in the sales and marketing team is a good one, and it's one that we, as a company, need. If we can't sell what we have, then we can't bring it to the door and make money out of it. You know, I think the time of selling scientists to scientists is gone. It's a different market out there and it's a different kind of sale that we have to have. And you know, this is our opportunity to make that change and have the right kind of people out there selling for the Company.

Okay. The mortgage debt -- you're attempting to refinance that, it looks like?

Yes.

Okay. And what -- your debt there is about $6.3 million. What is the value of the properties that are behind that mortgage?

The value -- as a fairly current appraisal in our distressed market was $12 million.

Okay. So will you be looking to increase the debt on that building? Or because -- one of your -- my assumption is one of your financing plans was to have those warrants that were tacked onto the offering here, that you had a little under a year ago, that you were looking to get some dollars off of that exercise of the warrants. Obviously, stock isn't going to be $2.00; you're not going to get any exercise of that.

Are you looking to increase the debt on that mortgage? Or just leave it at that? Question number one. And number two, are you looking at a reduction in the rate or an increase in the rate?

What we're looking at is replacing the debt, not increasing it, which it is advertising amortizing debt; by the time it matures, it will be under $6 million. We have quite favorable rates on it now. It's at LIBOR plus 300 basis points, so we're -- with a minimum of 4.5%. It's likely that it will cost us more to replace it than what we currently have.

Even though you're reducing the -- I mean the loan has got to be -- coming from a finance standpoint, that loan's got to be a better loan, because you've got less debt on the property.

That's correct. But our operating issues are going to impact the cost of money.

And with the idea that just, hopefully, things are going to be getting better down the line, are you going to -- how long are you going to renew that mortgage for?

I think that it will be five years. That's what we're looking for. We don't have a lender yet willing to do that, but that's -- that would be our objective. And then, it'd have -- again, it'd be amortizing. So, five years out, it'd be reduced again.

Who's your current lender?

Regions Bank.

Okay. Okay, well, good luck on that. You know, you've got about eight months to go. Don't let that get down to the last minute.

Okay.

Yes. Okay.

Thanks, Tom.

Yes.

(Operator instructions) Jeffrey Cohen, Ladenburg.

Hi, thanks for taking my questions. I appreciate the last caller's questions as well. Could you talk a little more about the -- I may have missed a few the first few minutes of the call -- could you talk a little bit about the flow slowing from large pharma customers?

Yes. Just to take a step back, Jeff, what we're seeing is the trend for large pharma companies to be moving towards larger CRO's to give a more kind of comprehensive service to them. So we're seeing that certainly in our core business of bioanalytical services. We're seeing a slowdown of bioanalytical sales from this sector of the market.

So we're shifting -- and there's been a shift in discovery investment to the small/medium-size companies. So, we've adjusted our focus towards the small/medium-size companies. And I'm trying to capture them earlier in the process of the discovery level, and trying to kind of compensate, if you like, to a certain extent, for the slower bioanalytical sales from the large pharma, and trying to address that with the small/medium-size companies.

We're still moving on -- we're still working with our large pharma company partners, but it's very clear that from their point of view, they're being asked to continue to work with the larger organizations they have these overreaching agreements with.

So it is a trend. It's a trend that we're seeing in the market. I think other CRO's that I talk to are experiencing the same kind of shift. And unfortunately, we're not big enough to be in the same category as the Covance's and the Quintiles of the world to be appealing to the large pharma for their broader programs.

But I'm pretty confident that we will be -- we will make a good impact on the small/medium-size companies. We've got a very good track record with those kind of companies, because we are relatively small and pretty flexible. And we do have this more of a consultative type of approach with small companies that they prefer.

So, again, it's a timing issue. It's getting out there and making sure we're hitting those people, and making sure we're hitting the right types of companies at the right time. But I believe that that strategy is the way to go for a company of our size right now.

Okay. I think I missed the first portion that you discussed. You said that there would be revenue improvement during Q2. Is that revenue improvement during Q2 as related to Q1? Or as related to Q2 2011?

As related to Q1.

As related to [7.52]?

Right.

Okay. And did you say something about profitability for the year?

We are anticipating that for the year, we will have operating profits.

Okay. Operating profits for the year 2012?

Yes.

Okay. Any insight as to growth rates of Q2, Q3 and Q4 over last year?

We do anticipate some growth over last year, but not heavy growth in those periods.

Okay. So Q2 greater than Q1?

Yes.

Okay. There's a comment in the press release about supporting higher revenue beginning in the current quarter. So -- but will there be higher revenue?

There will be -- we expect there to be higher revenue in the second quarter than there was in the first quarter.

Okay. Was there any other guidance that I missed besides Q2 and profitability for 2012?

No, that was it, Jeff.

Okay. Thanks for taking my questions.

Okay. Thank you, Jeff.

Lenny Dunn, Freedom Investors Corp.

Good morning, again. This is actually more of a positive comment than the previous one. Clearly, the Culex sales, both in the sales of the Culex and the recurring revenue that can be generated from the service, is a highly profitable segment. And what are you doing to monetize that?

Lenny, this is Tony. Thank you for raising that one. It is a key strategy for us for this fiscal year to increase the sales of the Culex, both in the US and in Europe. And we see -- we anticipate more growth in Europe than we do in the US.

To that, we've got two dedicated business development staff in that team for the US, and we're starting to -- who are also -- not only selling the Culex as an instrument, but they're also starting to talk to our customers about the Culex service that we provided to West Lafayette. Since they're talking to the same people that those folks are either going to be buying the Culex system or they're going to be needing our services, one of the other. So we have some dedicated focus on sales in the US for that.

We also see that our -- in the US, our second Culex or newer Culex system comes out in third, fourth quarter of this year. We're hoping to see some increase in sales from that, maybe upgrading or replacing older Culex systems that are already established in the larger pharma companies. So we see some upside potential there.

In Europe, as I've already commented on, on this call, we have a dedicated person out there in Europe who's primarily selling the Culex system to a relatively untapped market for us. We do -- we have had some Culex sales out in Europe. We have some key advocates out there in key organizations in Europe, but we have by no means penetrated that market to the extent that we can. And the success of the business development persons have so far, since basically December, when he really got moving, has really been quite optimistic for us.

So I see that it's clearly an obvious thing we need to do is increase the sales. It's a good profit margin business for us, and it's a relatively unique offering. And it's a good product out there. Our customers like it in preference to the one or two competitors that are out there in Europe. So I feel we've got a great opportunity there to really increase the sales and bring some cash into the Company.

Right. Well, you have a proprietary product. You have recurring revenue, and you have very high margins. I mean, were the margins -- aren't they around 50% on this type of business, as opposed to thin margins on the other business?

They're actually in excess of 50% on them. And I think for the past quarter on that, it was, like, 58%.

Okay. That's even better.

Yes. Yes.

But it's certainly -- and a proprietary product and recurring revenue are things that I think that we should be more focused on.

I agree. I agree. And that's exactly what we're doing. We've recognized that and started to put some -- making the business decision to put some investment behind our high-profit margin businesses, as well as keeping our pharma customers provided on the services side as well.

Oh, no, I'm not telling you to desert your historical business, but this is certainly a direction to go.

Yes. I agree.

Okay, thank you.

Thank you for raising it.

Tom Harenburg.

Yes, regarding Culex, how many Culex units did you sell in the -- are included in that revenue in the first quarter?

Tom, I'm not sure of the exact number, but I think we had something like 7 or 8 units in the first quarter.

Yes, yes.

Okay. And as we are halfway through the second quarter, how many units have you had orders for in the second quarter to date?

About the same number. I would -- off the top of my head, Tom, I would guess around the same number. Again, most of these are coming in from our European (multiple speakers) --.

Right. So anything that comes in in the balance of this quarter is going to be on top of whatever you had in the first quarter?

Yes, yes.

Okay. Okay, thank you.

Don't hold me to those of figures because I'm not -- I wouldn't put my hand on my heart and say it's definitely that number.

Yes.

But it's around that number.

Okay. Okay, thank you.

Robert Blameuser, Blameuser Asset Management.

On your website, and you briefly mentioned in the conference call, this new product that will be introduced some time, I guess, relatively soon, which is the electrochemistry product. And I was just wondering if you could give us any kind of a taste of a sneak peek of that, in terms of the market size it might be addressing, if it's supported by any patents or anything like that?

The market for that, it is a -- it's a teaching instrument and the market for it is not in the millions of dollars of product, but in the hundreds of thousands of dollars for us. We had -- the leading instrument for electrochemistry that is used in that type of science and a reputation for it, that's what the Company was founded on. But it's quite an expensive instrument.

And so -- the low budget teaching end, we don't penetrate that. There is one competitor out there that does pretty well in that, and so this is an upscale version from where they are. So we think that we'll get several hundred thousand new sales out of it. And we hope to take the technology that's in that product, and then incorporate it into an upgrade of our larger, more sophisticated product.

Okay, thanks. That was it.

Okay, thanks.

Okay, bye.

And gentlemen, at this time, there are no other questions in the queue. I would like to turn the call back over to Mr. Chilton for closing remarks.

Okay. Okay, thank you very much for all -- for your time and the questions. Thank you very much. Good bye.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a good day.