Inotiv Inc (NOTV) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bioanalytical Systems, Inc. Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference call over to Ms. Jacqueline Lemke, CEO. Please go ahead.

Thank you, operator. Good morning and thank you all for joining us for BASi's fiscal 2016 second quarter earnings conference call and webcast. Before I begin my meeting concerning our performance this past quarter, I am pleased to introduce Ms. Jill Blumhoff, our newly appointed Vice President of Finance and CFO preceding Jeff Potrzebowski. Jill has extensive finance experience both prior to joining BASi and during her nearly nine years with the company. As a senior leader of the company, Jill will lead the finance and IT functions in support all areas of business as well as representing us to shareholders and interested parties as the lead for Investor Relations. Jill will be providing more details about the quarter shortly. I'd also like to thank Jeff Potrzebowski for his service to BASi. He has done a great job for us, and we appreciated all his hard work and experience.

So, for the quarter, the fact that our current fiscal year 2016 quarter two operating results reflects a 9.1% sequential revenue increase over quarter one is very encouraging. Our outreach efforts in fiscal year 2015 and through today are beginning to pay off. Our targeted key business initiatives launched at the beginning of the second quarter focusing our efforts on four key areas of the business are starting to gain traction. These four key areas include initiatives to increase our IND-enabling studies in nonhuman primates, to partner with clinics for sample analysis and sample kit preparation, to offer bioequivalence study expertise to our generics clients, and to increase market awareness and adoption of the BASi Culex In-vivo Sampling System. With cross functional teams focused in outreach, we are making great strides.

We have new experienced business development representatives in the Boston and San Francisco area creating partnering opportunities between potential clients and BASi. We have designed new modularity into our BASi Culex workstations to allow for benchtop, single-station and four station option. Our [Embrace] automation grant program's newly launched where we give new users a benchtop BASi Culex and everything needed to get this study started in order for them to have a test run. Although in its infancy, it has proven so far to be very promising.

We have recently launched Epsilon EClipse, an updated version of the BASi electrochemical analyzer invented early in the company's history. With this new product, we're excited to provide our customers with enhanced software, improved technique sequences, and an increased supply for potential range. The customers for our electrochemical instruments and consumables have always been loyal to the BASi quality and customer care, and we are happy to innovate for them.

We have launched a new Web site, which was a major step forward in our ability to reach our clients making easier for them to reach us and to be able to continuously update all information on the Web site. We are starting to see what is coming into the Web site, and we'll continue to create initiatives to introduce the user-friendly, informative nature of our site.

I understand that shareholders and creditors alike want to see immediate progress. We at BASi are committed to delivering on our growth initiatives as we partner with our clients, we will succeed.

I will now turn the call over Jill Blumhoff, who will provide further details on our operating performance for the quarter and first half of fiscal 2016 followed by my closing comments.

Thank you, Jackie. Good morning, everyone. Thank you for joining us on today's second quarter conference call. Let me begin by saying that I am very excited about my new role with BASi. I very much look forward to working with all of you as we go forward.

Before we begin the discussion, I would like to remind you that the statements we may make during today's conference call about future expectations, plans and prospects for the company constitutes forward-looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's filings with the Securities and Exchange Commission. The statements made on this call are made only as of the date of this call and the company assumes no obligation to update these statements.

In addition, we will discuss certain non-GAAP financial measures, adjusted EBITDA this quarter, on this call that should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation.

Before addressing our operating performance in the second quarter and the first half of the year, let me address the latest information with regard to our non-compliance condition with the financial covenants and our credit facility which was figured by our financial performance in the first quarter of fiscal '16. On February 10, 2016, Huntington Bank advised us that the failure to meet the financial covenants for the December 31, 2015 period constituted an event of default under the agreement, and Huntington reserved all the rights with respect to the default condition.

On April 27, 2016, we executed a forbearance agreement and second amendment to the credit agreement. Under the forbearance agreement, Huntington bank agreed to forebear from exercising its rights and remedies under the credit agreement, and from terminating the company's related swap agreement with respect to the company's noncompliance of the applicable financial covenants under the agreement and any further noncompliance with those covenants during the forbearance period ending June 30, 2016. Because of forbearance period under the forbearance agreement ends June 30, 2016, we have continued to classify the entire term loan payable to Huntington and interest rate swap with Huntington as a current liability of the company.

The company continues to vigorously assess the variety of options to address solutions to our credit issues, which include the evaluation in pursuit of various sources of financing to replace our debt. Management is also undergoing [initial] review of our current pricing strategies and market programs, and has introduced new initiatives to design increase revenue.

Now to the results. Revenues for the second quarter of fiscal '16 amounted to $5,339,000, a decrease of 6.8% compared to the second quarter one year ago, but a 9.1% increase sequentially from the first quarter of fiscal '16. In the second quarter, we saw increases in our Culex in-vivo sampling Instrument sales, which were more than offset by a slight decline in pre-clinical services revenue due to custom delays, a decline in bioanalytical and other laboratory services revenue in the second quarter of fiscal '16 versus the comparable period in fiscal '15.

Revenues for the sixth month ended March 31, 2016, decreased 11.6% to $10,234.000 compared to $11,571,000 for the same period in the prior year. Revenues in pre-clinical services were essentially flat year-over-year. Bioanalytical revenues declined due to fewer sample received and analyzed in fiscal '16. Other laboratory services revenues were negatively impacted by fewer bioequivalent studies in fiscal '16 versus the comparable period in fiscal '15.

Product revenue was down year-over-year due to a decline in instrument sales from both our Culex Automated in-vivo sampling line and our analytical instruments. We reported a net loss for the second quarter of fiscal '16 amounting to $254,000 or $0.03 per diluted share. This compares to our diluted net loss for the second quarter one year ago of $49,000 or $0.01 per diluted share, which includes the adjustment for the change in fair value of warrant liability. The decline in our earnings performance this quarter was primarily due to the lower reported revenue compared to one year ago, partially offset by a decrease in operating expenses.

For the first six months of fiscal '16, we reported a net loss amounting to $760,000 or $0.09 per diluted share. For the first six months of fiscal '15, diluted net income, which includes the adjustment for the change in the fair value of warrant liability, was $13,000 or essentially breakeven per diluted share. The decline in our earnings performance in the first half of the year was primarily due again to the lower reported revenue compared to one year ago, partially offset by a slight decrease in operating expenses.

Now let's turn to the segment breakdown of our performance this quarter. Service revenue for this year's second quarter decreased 10.5% to $4,053,000 compared to $4,530,000 for the same period one year ago. Pre-clinical services revenues declined slightly due to customer delays. Bioanalytical revenues declined due to fewer samples received and analyzed in the second quarter of fiscal '16. Other laboratory services revenues were negatively impacted by fewer Bioequivalent studies in the second quarter of fiscal '16 versus the comparable period in fiscal '15.

For the first six months of fiscal '16, our service revenue decreased 9.2% to $8,108,000 compared to $8,928,000 for the prior fiscal year period. Declines in our Bioanalytical and other laboratory services revenues in the first half of the year were negatively impacted by the same trend we continued to experience through the second quarter. Pre-clinical services revenues were essentially flat for the first six months of both years.

Sales in our product segment increased 7.5% in the second quarter of fiscal '16 from $1,196,000 to $1,286,000 in the prior fiscal year. The majority of the increase stems from increased instrument sales from our Culex automated in-vivo sampling line, plus an increase in other instruments over the same period in the prior fiscal year. These increases were partially offset by a decrease in revenue attributable to the analytical instruments and consumables.

For the first six months of fiscal '16, sales in our product segment decreased 19.6% from $2,643,000 to $2,126,000 when compared to the same period in prior fiscal year. The majority of the decrease is derived from declines in instrument sales from our Culex automated in-vivo sampling line and our first fiscal quarter as well as a decline in revenue attributable to our analytical instruments. The overall decline was partially offset by increase in other instrument revenue over the same period.

Gross profit for the second quarter amounted to $1,316,000 or 24.6% of revenue was down compared to $1,802,000 or 31.5% of revenue one year ago. The principal causes for the decrease in gross profit and gross margin percent were twofold. First, the significant portion of our cost of productive capacity in our service segment are fixed. The decreases in revenue we saw this quarter led to lower overall gross profit and to an increase in cost as a percentage of revenue. Secondly, due to the timing of certain studies, we incurred higher scientific professional services in the second quarter of fiscal '16 to increased cost versus the same period fiscal '15. The negative factors I just explained were offset in part by higher product sales and a more favorable mix of products sold in the second quarter of fiscal '16 compared to one year ago.

On a year-to-date basis, gross profit amounted to $2,300,000 or 22.5% of revenue compared to $3,706,000 or 32% of revenue one year ago. The principal cause of this decrease in gross profit dollars and gross margin percentage was the decline in revenues which led to lower absorption of fixed cost.

Operating expenses for the second quarter of fiscal '16 decreased 11.1% to $1,578,000 compared to $1,774,000 during the second quarter of fiscal '16. The principal reason for the decrease in operating expenses were due to lower utilization of outsourced professional engineering services and the addition of building rental income of $109,000 recognized this quarter.

Operating expenses for the six months ended March 31, 2016, decreased 12.5% to $3,091,000 from $3,536,000 for the comparable fiscal '15 period. This decrease was mainly due to the same drivers we just discussed for the second quarter.

We reported an operating loss during the second quarter of $262,000, which compares to an operating income of $28,000 for the same period one year ago. Adjusted EBITDA for the second quarter of fiscal '16 amounted to $84,000 compared to an adjusted EBITDA of $399,000 for the second quarter of fiscal '15. The primary driver in the decline in both operating income and adjusted EBITDA for the second quarter compared to the same period last year was the overall lower revenue for BASi.

During the first half of fiscal '16, we reported an operating loss of $791,000, which compares to an operating income level of $170,000 for the same period one year ago. Adjusted EBITDA for the first six months of fiscal '16 was a negative $87,000 compared to a positive adjusted EBITDA of $949,000 for the first half of fiscal '15. The decline in overall revenue for BASi led to the decline in both operating income and adjusted EBITDA for the first half of fiscal '16 compared to the same period of prior year.

For balance sheet highlights, with regard to cash flows for the first half of fiscal '16, the company generated $126,000 in cash from operating activities due impart by slightly lower working capital levels offset by the operating loss in the first half of the year. The company had $453,000 in cash and cash equivalents at March 31, 2016. During the first half of the year, proceeds from borrowings net of repayment and lower working capital levels funded capital expenditures for plant, machinery, and equipment of approximately $632,000.

Now a quick note on the Class A warrant. The remaining unexercised Class A warrant from the 2011 public offering expired on May 11, 2016, and the liability will be reduced to zero in our third fiscal quarter of 2016. We do not expect further charges to the P&L going forward from this date.

Now, I will turn the call back over to Jackie for her closing comments before we open up the call for questions.

Thanks, Jill, and nice summary there. I know that's a lot to say. Overall, the financials in quarter two are indicating an upswing in business. Revenues have increased, accounts receivables have increased, customer advances have increased, the operating income has improved but does not in any way is reflective of our upside potential. Our customers are seeing positive steps with our BASi Culex, [Embrace] automation grant, the new Epsilon EClipse, the new Web site, and our active participation in industry trade shows and events.

As Jill mentioned, we're doing everything in our power to stabilize the current hedge situation and has made progress as evidenced by the forbearance agreement. As I mentioned in the prior call, BASi has generated over $1.5 billion in revenue since going public in 1997. In 41 years, our ability to provide high quality, innovative scientific connections has been constant. Much of what we do at BASi is tailored to our client and requires multiple discussions, detailed data, and studies which may take several years to complete thus growth takes time. I look forward to the day when we have grown organically and may consider further strategies to advance our reach.

Now more than ever, BASi is seeking to have it all, provide the scientific connections with innovative services and products and build the strong pipeline of studies and orders to ensure financial stability. We believe in the power of the scientific connections made by BASi and want to continue to earn the belief you have in us.

Operator, we're ready for the first question.

Thank you. (Operator Instructions) And our first question comes from Evan Greenberg with [Lexington Refund]. Your line is now open.

Legend Capital, Legend Capital. Anyway, Jackie, how are you?

Good. How are you?

Good. I wanted to get a handle on -- obviously machine sales have improved. When do you see the uptick in services? Do you think that's coming in [slower]? I guess you're talking about your backlog improving. And then what are your -- what steps have you taken? What have you started to see? Are there any more recurring clients or a lot of the new clients that you're starting to see? Where do you see the improvements occurring in the business?

Good question. Where do I see, when do I see the uptick in services? We're starting to see a lot of --

Yes.

Yes, we are starting to see a lot of requests for drop-ins for studies that they want done at the end of third quarter and the fourth quarter. But I hesitate to say that (inaudible) [appeared] revenue because often it's a hurry up and wait, and people want to study, they think they are ready to go, and then something happens. So, you know, we're at a variable cost. But I do think that we're starting to see a pretty strong request in demand from both our IND-enabling studies and for our Bioequivalent study.

And as far as it is coming from new or existing, it's really a combination of both. I know nobody likes that kind of answer. It sounds generic but it's true. We find that there is a lot of movement in the industry, and people who have been our clients before might be in a different company and then we get referred in that way. So that's really a new client, but it's kind of an existing relationship. But we're seeing some pickup in the fact that we financed there a lot in the past couple of years trying to make new contracts as we bring new [BD] people in, new scientists, they bring with them contacts. So right now, the split, I couldn't tell you because it varies by business and by study.

Okay one follow-up having to do with forbearance. In your positive EBITDA for the quarter and things look to be a little bit better financially, do you think that you're going to be able to be back in compliance by the time the forbearance is done?

Well, I think that the fact that the bank has put us into the workout position, even if we get back in compliance, they would like us to move our credit from another bank. That's what we're working on.

Okay. Thanks a lot, Jackie.

Thank you. (Operator Instructions) Our next question comes from Lenny Dunn with Freedom Investors. Your line is open.

Yes. It's just -- this has been a very, very, very painfully [so] process as I'm sure you're more than aware of, of getting the sales back to where they were. And this is a company that historically had much higher level of sales, and the opportunities are out there. I think you have, with Connie, the right person in charge of business development. How are we two sales people that you've recently hired, the one in the Northeast and the West Coast, working out? Are they up to your expectations?

Yes. First, I just want to address that the company has historically had higher revenues, that's true, but they want profitable revenue. So, you can go out and buy businesses and pack them on and have nice revenues, but if it doesn't meet the bottom-line, it becomes a futile effort.

So how are the new reps doing? I think they are doing a great job. They are making a lot of contacts. We're participating in a lot of different shows. And even when we find the best way to connect to potential clients is the smaller shows in in-town, the small industry meetings, we're doing a lot of connecting, and I think they are taking off in terms of being able to help us.

Okay. Obviously, though it produces a lot less revenue, the product sales are much more profitable to the bottom-line. Are you -- we saw an increase in this quarter, but are we seeing -- are we continuing to see that develop better?

Yes, I'm pretty excited about the products business right now. And we've put this initiative together. We have always been trying to focus on increasing our revenue but we weren't necessarily cross-functionally paying the same high degree of intention to it, and we are starting to now. And we are able to get quite a few things moving in the right direction. So I think we're going to see it picking up.

Okay. And I know that you took a pay cut at the beginning of the year, which, I think, is appropriate. And obviously with Jeff Potrzebowski gone, you will have less expense, I assume. I have nothing against Jill. I'm sure she'd do good job but you probably don't have to pay her quite as much. Is that accurate?

Well, I think you will be able to tell when you look through our filings. That will be filed soon --

Okay.

-- as the corporate office are both, both are there; (inaudible). Now, we want Jill on our call next quarter, Lenny, so don't insult her.

Okay. I'm not insulting her (multiple speakers) --

Yes. We're constantly looking at, you know --

I felt Jeff was a bit overpaid for what he was doing and --

I felt we got Jeff at a deal actually. You should look at what he made at his last company. It was probably twice (multiple speakers) --

No, I understand that but for this company, you know.

Well, you still need talent no matter what size of company. That's the conundrum, right? You still need a certain level of talent and experience to keep a company going no matter how high their revenues (multiple speakers). So I think if we leverage some of the revenues, I think it will be in line.

Well, obviously, while the nickels and dimes won't mean as much, if you have [less] $100 bills coming in the door --

That's right.

-- I understand that fully. And I would assume also now with the warrants expiring and all these extra filings expiring that the job won't be quite as complicated as it was.

That's always what we think, but things happen every day. I've been in the finance side for a long time, there is always things to take care of. But, yes, I mean (inaudible) prospectus, unless we do something else in the public arena.

Well, we certainly wouldn't want to see you issue stock at anywhere during these prices, so. And there will be a window now for insider buying for about three or four weeks. Is that accurate?

Yes.

Okay. Well, hopefully, we'll see some because that sends a message that you not only are issuing words, but you are willing to write checks.

Right.

But -- and, again, I understand that you can't really totally discuss the pipeline, but can you give us some general feel for are we getting some of these studies that seem like they are always down the road?

Yes, it does feel like that, doesn't it? Yes, as I answered Evan, we've seen some uptick on the service side. And happily it sounds like a more immediate drop-in than a lot of the service cycles could be, 12 to 18 months, to actually close some quotes.

And then on the product side, with the intensity around the grant program, it costs us a little bit because we're giving it to people for free, we're giving them everything they need to run it. But so far everybody who uses it doesn't want to take it back because they want to buy it. So that's a good thing. So, yes, I can see uptick in both areas coming.

Okay. Well, hopefully, we'll have a lot more pleasant conference calls going forward.

That's my hope.

Okay. Thank you.

Thanks, Lenny.

Thank you. Our next question comes from Ray Young with Dolphin Asset Management. Your line is open.

Hi, good morning. I'm sorry I joined the call late. Can you quantify your sales pipeline on the service side and also the product side? How much is it up year-over-year? And also can you just comment on the conversion rates? Thanks.

Okay. You said pipeline, we don't really comment on volume in the pipeline, but if you mean revenue, we can go back if you'd like. The revenue for services six months this year versus six months last year was, damn what, 11.8%?

It went from $11,571,000 to $10,234,000.

No, I don't need the service, the revenue numbers. I was just looking for basically the sales pipeline.

Yes, we don't disclose our pipeline.

Okay. But you can just comment whether it's up year-over-year, or is it down or up 10%, 15%?

I haven't looked at it that way in terms of six months last year to six months this year. Overall, it is up slightly in terms of [closed accepted]. [Closed issues] are a little bit lower, but that shows me that we're getting more selective and spending more time with our clients upfront to make sure that what they're looking for is what we can help them with.

Okay. Okay, thank you.

Sure.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Jacqueline Lemke for closing remarks.

Okay, I have no further questions. Thank you all for joining us on this conference call, and we look forward to speaking with you on our third quarter conference call to be held in August.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.