Inotiv, Inc. (NOTV) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bioanalytical Systems First Quarter Fiscal Year 2016 Earnings Release Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jackie Lemke. Ma'am, you may begin.

Thank you, operator. Good morning and thank you all for joining us for BASI's fiscal 2016 first quarter earnings conference call and webcast. While the financial results reported this morning which will be reviewed by Jeff shortly, do not reflect the growth that we are steadfastly pursuing. You should know that we are determined in our strategy to increase revenue as we provide a scientific connection for our clients to bring new drugs to market, safely and with the desired efficacy. Primarily as service industry, the impact of increased or decreased sales revenue creates a substantial increase or decrease in our bottom line. The leveled revenue in the first quarter resulted in low EBITDA which created a non-compliant condition with the financial covenants in our credit facility and recorded to make specific disclosures regarding risks. The commentary to the revenues reported in the short term, we are experiencing several successes with our client outreach and we are all committed to turning these successes into revenue growth. As I have mentioned in previous earnings releases, the nature of the industry and very competition of our client base make determination of study start dates, thus revenue difficult to precisely forecast. However, we will continue to make positive progress building and retaining our clients by delivering excellence. We know that we need to be prepared through steady delays or interim purchase delays by closely monitoring our schedules and those of our clients and by keeping our quote pipeline full. And they are listening to, and reaching out to our current path and new clients to visit interim grand [ph] tradeshows, workshops and client audits. For fiscal year 2016 we have launched targeted initiative designed to increase revenue in four key areas; by adding more IND-enabling studies in nonhuman primates, the core competency of our preclinical services business line by partnering with clinics for sample analysis and sample kit preparation. By recruiting more generics clients with our bioequivalence expertise, both in vivo and in vitro, and by increasing sales of BASi Culex Automated In-vivo Sampling System and consumables through the introduction of starter version of systems to convert those thousands of Swivel sample manually with a low cost highly efficient alternative. I understand that shareholders and creditors alike want to see more immediate progress. We at BASi are committed to delivering on our growth initiative. As we partner with our clients, we will succeed. I will now turn the call over to Jeff Potrzebowski, our Vice President of Finance and CFO, who will provide more details on our performance for the quarter followed by my closing comments. Jeff?

Thanks, Jackie and good morning everyone, and thanks for joining us on today's first quarter conference call. Before we begin the discussion, again, I'd like to remind you that the statements we make during today's conference call about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our 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'll discuss certain non-GAAP financial measures, EBITDA, this quarter on this call and which should be considered a supplement to and not a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP measure to the comparable GAAP measure is included in the press release that we issued today. As Jackie mentioned at the opening of the call, our financial performance for the first quarter of fiscal 2016 resulted in a non-compliance condition with the financial covenants included in our credit facility. As background, on May 14, 2014 we entered into a credit agreement with Huntington Bank. The Agreement includes both a term loan as well as a revolving loan and is secured by mortgages on our facilities here in West Lafayette and Evansville, and liens on our personal property. As of December 31, 2015, we were not in compliance with certain financial covenants of the Agreement. And on February 10, 2016, Huntington Bank advised us that the failure to meet these financial covenants constitutes an event of default under the Agreement and that they have reserved all of their rights with respect thereto, but Huntington Bank has not exercised its available remedies to date. These remedies may include the ability to accelerate the outstanding debt under the term loan and revolving loan, to exercise their security interest and collect on the underlying collateral, to refrain from making additional advances under the revolving loan and to terminate our interest rate swap. Were Huntington Bank to accelerate the outstanding debt, we would have insufficient funds to satisfy that obligation, and their exercise of alternative remedies could also have a material adverse effect on our operations and financial condition. We will continue to take measures to mitigate that possibility. Until such time, we've classified the entire term loan payable to Huntington Bank as the current liability of the company and our balance sheet for the first quarter. We're in discussion with Huntington to secure a forbearance whereby Huntington Bank would agree for a limited time period to forbear from exercising certain of their rights and remedies under the credit facility available to them as a result of our non-compliance. A forbearance agreement would provide us with additional time to engage in discussions with Huntington Bank and other parties as needed regarding restructuring or replacing our debt, including amounts outstanding under the revolving loan scheduled to mature in May of 2016, and to explore alternative liquidity solutions. We're actively engaged in exploring initiatives to address solutions to the overall credit issues, which include the evaluation and pursuit of various sources of financing. We're also undergoing a detailed review of all current pricing strategies and market programs and have introduced new initiatives referenced by Jackie designed to increase revenue. Lastly, we continue to find ways to drive operating costs lower by more effectively controlling our operating and manpower costs. Now with the results for the first quarter, revenues for the first quarter amounted to $4,895,000, a decrease of 16% compared to one year ago. In the first quarter we saw increased preclinical services revenue but this was more than offset by lower other laboratory services revenue, a decline in Bioanalytical revenue, and lower product shipments in the first three months of fiscal 2016 versus the comparable period in fiscal 2015. We reported a net loss for the three months of fiscal 2016 amounting to $506,000 or $0.06 per diluted share. And this compares to net income for the first quarter one year ago of $182,000 or $0.01 per diluted share. The decline in earnings performance this quarter was primarily due to the lower reported revenue which was partially offset by a decrease in operating expenses. Let's turn to the segment breakdown of our performance this quarter. Service revenue for this year's first quarter decreased 7.8% to just over $4,055,000 compared to $4,398,000 for the same period one year ago. An increase in preclinical services revenue was more than offset by lower lab services revenue due to fewer bioequivalence studies, and a decline in Bioanalytical revenue due to fewer samples received and analyzed, as well as the revenue mix favoring method development and validation projects which generate over revenue but involve more dedicated resources. Product revenue for the first quarter of fiscal '16 amounted to $840,000 compared to $1,447,000 for the first quarter in fiscal year 2015. The majority of the decrease stems from lower sales of our Culex automated sampling systems and our analytical instruments over the same period in fiscal 2015. Gross profit for the first quarter amounted to $984,000, or 20.1% of revenue, was down significantly compared to $1,904,000, or 32.6% of revenue, one year ago. The principal causes of the decrease were the decline in revenue which led to lower absorption of fixed costs in our business, and the sales mix favoring method development and validation projects I mentioned earlier. Operating expenses for the first quarter of fiscal 2016 decreased 14.1% to $1,513,000 compared to $1,762,000 during the first quarter of fiscal 2015. The principal reasons for the decrease were lower utilization of outsourced professional engineering services, decreased commissions and building rental income of $159,000 which was deducted from general and administrative expenses. We reported an operating loss during the first quarter which amounted to $529,000, this compares to an operating income level of $142,000 for the same period one year ago. EBITDA was negative for the first quarter of fiscal 2016, amounting to $171,000, compared to a positive EBITDA level of $505,000 for the first quarter of fiscal 2015. Again, the primary driver to both the decline in operating income and EBITDA for the first quarter was the overall -- and the cash flows this quarter, the company used $348,000 in operating activities for the first quarter of fiscal 2016, this was due in part to the operating loss this quarter and slightly higher working capital levels. The Company had $403,000 in cash and cash equivalents at December 31, 2015. And during the quarter, proceeds from the net of repayments and our borrowings, and cash on hand helped to fund capital expenditures for plants and equipment of approximately $166,000, as well as the operating loss we reported this quarter. Now I'll turn the call back over to the operator. We will be open for questions.

[Operator Instructions]

Any questions?

Our first question comes from the line of Lenny Dunn with Freedom Investors. Your line is now open.

Good morning. As you are very disappointed with the results but we need to work forward and see what's going on and I really think it's time for you to give us a little more forward guidance, I know that you did that in the past and thought the world burned, but we need some help out here. I have some questions, the laboratory animal science virtual conference that you had on February 3rd and 4th, how did that go and what's going to come from that?

Well, it was interesting. It's a really interesting concept. I think it went well. Basically we could see who was travelling into our booth and see what materials they were looking at and we're following up by calling them and asking them their interest in what we have. So it's -- we have a full list of who was -- of participants in terms of coming into our booth and then who else had display booths. We're looking at who is interested and what we have and how can we partner with others.

Okay. And also now you hired a couple of new sales people which -- they seemed at least from the resume as to be highly qualified and better than the ones that you've had in the past. I know that it's a little early, but how are they working out?

Well, so far as what I see is really, really great. I mean Tone [ph], it's in the Boston, Connecticut area. She was here to train for about three weeks and really got to understand what we do, what our specialty is and she is making a lot of contacts for us and we've gotten into several clients and we're starting to see some pick up already. Brian, just started two weeks ago. So I expect big things from him, I hope he is listening. But he is out in the West Coast and we have quite a rich list of clients existing, current, past clients and he is getting in touch with, and then he brought within his contacts. So that's all that we have on what we're doing. And I know you're asking for guidance Lenny and I can't give you month-to-month, quarter-to-quarter guidance but I can tell you that we have a lot of projects in work right now. A lot of it is a partnering process, it's not as simple as go and tell them what you do when you get the order. So there is a lot of understanding and uniqueness in each client and we're seeing some win, you just have to for the sake of the shareholders and the creditors and for everybody get those wins all in one place so that we can report them as revenue.

Okay, but we need -- the time is now, and you can no longer keep.

Absolutely. Yes, and that's why because we have so many things going on and ultimately we have a limited number of resources, we have a lot more ideas than we have people and lot more thing started than we have people. We are trying to focus now, just a real intense focus on those four areas that I outlined.

Okay. And the -- I hope I'm pronouncing it right, the Raturn Systems that you recently sent us the news release on. Could you explain a little more about that and what kind of timeframe to revenue that we be looking at?

Yes, I'd say that one more represents letting the market know that we are leaders in providing solutions for them. Optogenetics is a relatively new field and something that we can partner with our equipment to help them get all the data at any one point in time and really do some excellent studies. That there might be a revenue piece in there that I don't think is going to be huge, it depends on the optogenetics market. So that one is more market builder, more of making sure that people know that we're not just in it for one sale here and there, we're in it to create the solutions for people to get their sights.

And just a way that I look at it, Lenny that Jackie explained as, there are plenty of users of this type of technology that would complement what they are trying to get solutions to. So from that standpoint we're kind of seeding this one because they may not have looked to this type of technology in order to help them streamline their testing processes and how they go about it. So to Jackie's point, it's not pie in the sky, it's real, that's what I mean but this is absolute interested them to see if this technology will impact deliver on what they perceive to be the benefits.

Okay. And I also know that the companion animal market is huge and people were certainly going to spend a lot of money and it would seem like the Culex could be something that could be integrated into that. Have you looked into that?

Yes, we have. Right now we have a study going on with Purdue in their veterinary school to test it out and to make sure that there would a definite definable use towards a companion market and then we're going to go from there.

Okay. And I assume that whenever you and Huntington Bank have an amicable resolution which I hope is very soon, that there will be an immediate news release on that.

Lenny, that's correct. We're taking guidance obviously with the pace of those discussions and talking with our attorneys to make certain that at what point the information becomes disclosable and subject to a 8-K update but obviously it's focus of myself and Joe Blumop [ph] working with Jackie to -- as you said, strive to find a solution that is going to work best for us going forward.

I mean is there early -- and that might show considering the real estate values but I think that they are just looking for operating income as are the shareholders too.

Right.

No, we understand their position.

Okay. Well, that's all I have for now but I would love to see some of your director step up to the play, buy a little stock here, either buying some reassurance. So hopefully that will happen too.

Thank you. [Operator Instructions] Our next question comes from the line of Evan Greenberg with Legend Capital. Your line is open.

Hey Jackie, how are you?

Hello, Evan. How are you?

Okay, just enjoying the very interesting weather on the northeast we've had in the past couple of weeks. So anyway, one of the questions I had was -- had to do with, how did the covenant records just have to do with two quarters of negative earnings reports or a lower level of cash or…

No, the -- Evan, without going into too much on the weeds on the call, it is tied to our EBITDA performance on a rolling four quarter. And then essentially it's the multiple of two different thresholds, one has to do with what they would call our fixed charge payments, so they bring in capital expenditures, principal interest, as well as capital lease payments, they look at that as a multiple of EBITDA. And then the other is the relationship between the line of credit balance and the term loan that combined balance as of the end of a quarter, they look at the rolling four quarter to look at the coverage they get from the rolling four quarter EBITDA. So, as Jackie mentioned in her opening comments, the revenue performance has a dramatic impact, really quickly because of our high fixed cost nature of our business with manpower being the biggest piece. That if we see a drop in revenue, we did report obviously even a negative EBITDA this quarter which is not something we're proud off. And then our performance in quarter four was weak on the EBITDA positive but not where we wanted to be. So when you put that calculation together on a rolling four quarters, we tripped the multiple on those covenants.

Right, and last quarter I talked about the customer advances and the unbuilt revenues and those kind of slip this quarter, where do we stand there? Are we starting to see improvements there? I guess you talked about distance sales person in Boston. And also in February you talked about a couple of new orders, Boston it's…

Yes, and I look at those metrics, we follow them pretty closely. December was a low month, I mean a really -- I don't think I've ever seen a December this low and it really just took us by surprise. And it is getting better. So I'm not saying its head over heels better, but when you take a snapshot December 31 and note, that didn't look as good as our September 30 when you're talking about the advance. But it was really just the last couple of weeks in December, I think everybody -- not last, but our customers went -- there just wasn't much going on.

And then just we mentioned in the comments, our TOX business is actually fairly robust and they had some positive momentum going into the second quarter, that's a business that tends to have a high percentage of customer advances because of the upfront cost. And so you will see that fluctuate but right now you'd say there is a driver to that in Q2 that will most likely be a part of our continued quote acceptance rate for the TOX business which will positively influence our cash.

Okay. And also one final question had to do with the cost of the service revenue increasing, even on uneven dollar amount that is obviously sales mix oriented versus the service revenue itself. What was that due to?

I think that's a higher mix of TOX which has a higher mix of cost. Our TOX margins are not incredibly high because quite a bit of their cost are the cost of the animals and the feed. So that is more variable. As the revenue goes up, their cost go up quite a bit, quite substantially as opposed to more than the labor part of the cost.

Then the method development piece is also an element there where the resources devoted to that relative to the revenue being generated is very tight for us, so that would be unfavorable.

Okay, very fantastic guys. Let's just keep going in the right direction. I know this was a disappointing quarter but this company has a great future, I believe that.

Thank you.

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

Okay. I just wanted to mention that as with all longstanding companies, we've been through the economic high and low cycles of acquisition, divestiture, attempts to become more horizontally and more vertically integrated are all in the pursuit of creating that connection with our clients and what they need. We know that increasing revenue opportunities and addressing our current credit facility situation is our central focus for the immediate term and we're doing everything in our power to stabilize the situation. We know that growth takes time too, and I look forward to the day and the point when I can tell you that we have grown to our limits and we are showing the revenue that you're all looking for because I think we have the cost side under control, I think we have the outreach, I know we have the clients that like our work, we just have to put it all together and we'll get there. So thank you for being with us. And at this point I would like to end our conference call, thank you for joining us. And we look forward to speaking with you on our next conference call in the second quarter. This concludes our conference call.

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