Inotiv, Inc. (NOTV) Q2 2016 Earnings Report, Transcript and Summary

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 a 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 BSI’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 BSI and during her nearly 9 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 detail about the quarter shortly. I’d also like to thank Jeff Potrzebowski for his service to BSI. 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 2 operating results reflects a 9.1% sequential revenue increase over quarter 1 is very encouraging. Our outreach efforts in fiscal year 2015 and through today have been paid 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 4 key areas include initiatives to increase our IND-enabling studies to 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. The cross functional teams focused in outreach we are making great strides. We have new experienced business development representative in Boston and San Francisco area creating partnering opportunities between potential clients and the other clients. We have designed new modularity into our BASi Culex worse patients to allow the benchmark single patient and four patient actions. Our great automation grant program newly launched where we give new users a benchmark BASi and everything needed to get this study started in order for them to have a test run although in efficiency it has proven third party is very promising. We have recently launched BS26 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 of potential rates. The customers for our electrochemical instruments and consumables, have always been loyal to the BSI quality and customer care, and are happy to innovate for them. We have launched a new Web site which is a major step forward in our ability to reach our clients making easier for them to reset and then 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 pave initiatives to introduce the user friendly informative nature of our site. I understand that shareholders and creditors like wants to see immediate progress. We at BSI are committed to delivering on our growth initiatives as we partner with our clients in 2016. 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, Jacqueline. 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 BSI. 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 provision 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 comparable GAAP measures in included in our press release and company’s presentation. Before addressing our operating performance in the second quarter and the first half of the year let me address the latest information with regards 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 second amendment to the credit agreement. Under the forbearance agreement, Huntington bank agreed to forebear from exercising in price amenities under the credit agreement and from culminating the company’s related stock agreement with respect to the company’s non compliance of the applicable financial covenants under the agreement and any further non-compliance with those covenants during the forbearance period ending June 30, 2016. Because the forbearance period under the forbearance agreement at 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 creditor suite, which include the evaluation and pursuit of various sources of financing to replace our debt. Management is also under going legal review of our current pricing strategies and market programs and has introduced new initiatives to design increased revenue. Now to the result, 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 and 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 those are Culex automated in-vivo sampling lines 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 amounted 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 compare 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 increased 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 principle causes for the decrease in gross profit and gross margin percent were twofold. First, the significant portion of our cost of production capacity in our service segment, are fixed. The decreases in revenue we felt 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 impart 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 principle cause of this decrease in gross profit dollars and gross margin percentage was the decline in revenue 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 principle reason for the decrease in operating expense 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 252,000 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 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 6 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 BSI 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 activity due impart by 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 Jacque for her closing comments before we open up the call for questions.

Thanks Jill and nice summary there, I know that’s a lot just to say. Overall the financials in quarter 2 are indicating an upswing in business. Revenues have increase, accounts receivables have increased, 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 taking positive steps with our BASi Culex and the automated 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 period. As I mentioned in the prior call, BSI 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 a constant. The much of what we do at BSI, 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 say when we have grown organically and may consider further strategies to advance our reach. Now more than ever BSI is seeking to have it all, provide the scientific connections of innovative services and products and build 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 Legend Capital. Your line is now open.

Legend Capital, Legend Capital, anyway Jacque how are you?

Good how are you?

Good, I want 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 are 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 is going to offset appeared revenue, because often it’s a hurry up and wait, and people want study, they think they are ready to go and then something happens so, you know we’re at a variable cost. But I just think that, we’re starting to see a pretty strong request in demand from both our IND-enabling studies and for Bioequivalent study and as far as it is coming from new or existing it is really a combination of both I know nobody likes that kind of answers, it sounds generic but it’s true, we find that there is a lot of movement in the industry and people who have been out clients before might in a different company and then we get referred in that way, so that’s clearly a new client but it is kind of an existing relationship but we’re seeing some pick up in the fact that, we financed there a lot in the past couple of years trying to make new contracts as we bring new people in and new scientists they bring then contacts. So right now the split I couldn’t tell you because it varies by business and by study.

Okay one follow up as it relates to 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 have the bank has put us into the work out position, even if we get back to compliance they would like us to move our credit from another banks that is what we’re working on.

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 and sure weren’t aware of them, they will get 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 economies of right person in charge of business development, a how are we two sales people that you recently hired one in Northeast and West Coast, working out are they up to your expectations?

Yes. First I just want to touch that the company has historically had higher revenues that’s true, but they want profitable revenue so, you can go out and buy this instead and pack them on and have a nice revenue but it doesn’t meet the bottom-line, it becomes a zero 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 and 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.

Obviously call it at least there is a lot less revenue the product sales are much more profitable to the bottom-line, how, but we saw an increase this quarter but I want you think, are we continuing to see that develop better?

Yes I’m pretty excited about the products that we trade now, we have put this initiative together, we have always been trying to focus on increasing our revenue but we weren’t necessarily a cross functionally paying the same high degree of attention 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 if can.

Okay and I know that you took a pay cut at the beginning of the year, which is I think appropriate and obviously with Jeffrey Potrzebowski gone, you will have less expense I assume, I have nothing against Jill. [indiscernible] too good job nut 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. As they took it off for both of those [indiscernible]. Now, we want Jill on our call quarter Lenny, so don’t insult her.

Okay. I’m not insulting, because Jill was a…

Yes. We’re constantly looking at that.

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

I felt we got Jeff at a deal actually. You should what he made at his last company.

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

Well you still need talent no matter what type of company, that [indiscernible] you still need a certain level of talent and experience to keep a company going no matter how high their revenues are. So I think if we leverage from the revenues I think that will be in line.

Well the nickels and dimes won’t beat us much if we have a $100 bills coming in the door. I understand that totally and I would assume also now with the warrants expiring and all these extra filings expiry 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 with that perspective unless we do something else in the public arena.

Well we certainly would want to see if we can stock at anywhere to these prices 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 cheques. But 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 sound real.

Yes, it does feel like that, doesn’t it. Yes, as I entered we've seen some uptick on the server side and happily it sounds like a more immediate drop in than a lot of the service cycle could be 12 to 18-months to actually close. 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 up year-over-year and also can you just comment on the deconversion rates? Thanks.

Okay. You pipeline, we don’t really comment on volume in the pipeline but if you mean revenue we can go back and like the revenues for services, six=months this year versus six-months last year was 11.8%. - it went from 11,571,000 to 10,234,000.

I don’t need the revenue numbers. I was just looking for basically the sales pipeline.

We don’t disclose our pipeline.

Okay. But you can just comment whether is 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 court acceptance. Court issues are a little bit lower, but that shows me that we’re getting more corrective and spending more times with our clients upfront to make sure what they looking for so we can help them with.

Okay. Thank you.

Sure.

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

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

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 great day.