Jacqueline Lemke - President & CEO Jill Blumhoff - VP, Finance & CFO.

Lenny Dunn - Freedom Investors.

Good day, ladies and gentlemen, and welcome to the Bioanalytical Systems’ Q3 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 call is being recorded.

I would now like to turn the conference over to Jacqueline Lemke, President and CEO of BASI. Please go ahead..

Thank you, operator. Good morning. Thank you to everyone for joining us for BSI’s fiscal 2016 third quarter earnings conference call and webcast.

As you know, this earnings call has been preceded by a press release this morning which contains summary information about our financial performance for the third quarter and year to date and will be followed with more details in the 10-Q when timely filed with the United States Securities and Exchange Commission.

This call will proceed with BSI’s Chief Financial Officer and Director of Investor Relations Jill Blumhoff outlining BSI’s key financial performance. Then I will discuss our progress and objectives and then as previously mentioned we will open the lines for questions and comments.

We at BSI are very proud of the scientific connection that we provide to our independent research and laboratory instruments and of the hundreds and thousands of people who have benefited from our hard work and dedication.

Our ability to deliver innovative services and products with attention to the details that allow our clients to proceed with critical go/no-go decisions enabling them to bring revolutionary new drugs providing medical relief and cures to our friends and family continues to be as strong as ever.

I will now turn the call over to Jill Blumhoff who will provide details on our financial performance for the quarter and first nine months of fiscal 2016 followed by my remarks. .

the lower revenue which resulted in lower absorption of fixed costs and higher use of outsourced scientific professional services. The change in gross margin for products is primarily due to the mix of products sold and some costs that we incurred earlier in the fiscal year to design and implement lean manufacturing incentives.

Operating expenses increased in the nine months of fiscal 2016 to $4.6 million versus $4.5 million in fiscal 2015. The principal reason for the increase, as noted in the third quarter discussion, was a favorable settlement of about $600,000 that reduced expenses in the prior year period, down to $4.5 million.

This was partially offset by additional building rental income of about $287,000 and decreased utilities in the current fiscal year. The items addressed above contributed to a net loss in the current year of $1.2 million or $0.05 per diluted share versus a net income of $1.8 million or $0.16 per diluted share in the prior year.

The decline in earnings is primarily due to the lower reported revenues in the period as well as the onetime benefits in fiscal 2015 that did not repeat. Now let’s turn to cash flow highlights. The company generated $270,000 in cash from operations in the current fiscal year with $492,000 in cash and cash equivalents at June 30.

In the nine months of fiscal 2016 the proceeds from borrowings from the line of credit net of repayment and lower working capital levels have been able to fund capital expenditures of about $887,000 in fiscal 2016 mainly for computing infrastructure, building improvements and lab equipment and software.

As a final note, the remaining unexercised Class A warrants from the 2011 public offering expired on May 11,2016 and the liability was reduced to zero on the balance sheet. Now I’ll turn the call back over to Jackie for her closing comments before we open up the call for questions. .

to increase our IND enabling studies in non-human primates; to partner with clinics for sample analysis and sample kit preparation; to offer bio-equivalence study expertise both in-vivo and in-vitro, to our generic clients, and to increase market awareness and adoption of the BSI Culex in-vivo automated blood sampling system and the related consumables via equipment grants and loan programs.

Health in the contract research organisation, CRO service business is measured not only by revenue reported but by the committed signed business in a company’s pipeline.

The diversity of our services and the advanced timing of our clients' needs which are dependent on variables such as availability of products and additives, funding, patient recruitment and competitive developments make it very difficult to precisely predict revenue recognition.

As service providers we need to be available with the most qualified personnel and support staff to deliver excellence for our clients. We experienced slow periods is because we did not recruit enough business over prior period which in many cases span years.

We were not good at predicting the timing of the start of projects or we received notice of a delay too late to react by taking on more work. These are all variables which we have been working to stabilize. Committed signed service business is referred to as quotes accepted and becomes a part of backlog until it is fully recognized as revenue.

I will not be disclosing our levels of quotes accepted nor of backlog. However I can tell you that as of June 30 through the first nine months of each fiscal year since the restructuring in fiscal 2012 we have the highest level of quotes accepted in those four years. I am going to say that again.

We have the highest levels of quotes accepted in those four fiscal years and have had more quotes accepted in the first nine months of fiscal 2016 than were accepted in any given year since our fiscal 2012 restructuring.

Our services backlog representing quotes accepted for studies which have not yet been recognized as revenue, so this is work that we are waiting to do, we're waiting for the samples to come in, we’re waiting for the client to say the study is going to begin, we’re waiting for them to get their materials.

Our services backlog is also at the highest level that it has been since the fiscal 2012 restructuring. These two pieces of information quotes accepted and backlog indicate that our efforts to recruit new business are paying off.

We are going to continue our active pursuit of business and you will see growth in revenue as this project and more are delivered. In addition, we are investing in people and capital equipment where we see a high level of demand such as the non-human primate study and large molecule studies.

We will be able to constantly attract new business and to continue our consistent level of excellence in innovation in these high demand areas. With regard to the product business.

We have been seeking new business through partnering with complementary laboratory instrument providers by representing and distributing new innovative technologies such as the PalmSens electrochemical analyzers thus giving our clients a more comprehensive choice of instrumentation for their research needs, and by growing demand for the BSI Culex in-vivo sampling system by providing a risk free test drive of our automated system with the embrace automation campaign to potential clients who really don’t know what they are missing as they continue to dose and sample – draw samples manually.

Although it’s subject to a cyclical and often relatively long capital purchasing cycle, the BSI product business can deliver innovative solutions driven instruments, consumables, maintenance and service and is starting to see increased market adoption as we continue our outreach and focus on the customer.

As anyone who knows me can assure you patience is not one of my virtues. BSI is in an industry where progress is measured in years, not weeks and quarters. We are however not waiting years to make a difference and to increase our efforts to leverage our many excellent capabilities and to deliver a more competitive bottom line.

As you can read in the 10-Q report and with the earnings release, Huntington Bank is in a position to exercise certain of their contractual rights due to our failure to meet financial covenants. We take this right very seriously.

BSI has always paid our scheduled mortgage and line of credit payments on time and in full and realizes that missing the covenants requires immediate action on our part.

With forbearance from the bank through September 30, we are actively pursuing other financing options such as alternate debt financing and/or lease and leaseback of our West Lafayette facility. Our goal is to meet both the bank’s needs and BSI’s needs. We know that time is of the essence.

We at BSI will continue to pursue growth in our four key focused areas as previously mentioned and will continue to improve our recruitment of new clients as we deliver high quality innovative scientific regulatory excellence to our current clients. Operator, we're ready for the first question. .

[Operator Instructions] And our first question comes from Ethan Star, Private Investor..

Good morning.

So you mentioned the quotes accepted, is that a very firm commitment to do business with BASI?.

Yes, it is. .

Okay, but you just don’t know when it’s going to start?.

Right. Each one is different, each project starts at a different time and often a client will say I want to start November, December and then they’ll have some type of delay, and they might not start till January, February.

So we try – we try to predict when they're coming in and we try to make sure that we fill our pipeline but we have to be stand ready to deliver when the client needs it. But those are all signed accepted quotes..

Okay, you can't tell us what the quotes have been, totals. .

I don't want to start a precedent of giving that, the level because then people try to extrapolate and -- I'm a financial person, I tried to do that when I got here. It's really hard. You've got to test, we're doing that as a company, we’re watching it closely. .

The one other I have is that I prefer that BASI not sell the building but if the board decided that, that’s the best course of action, so be it. .

Well, if you can help us with other alternate source of financing, I am further looking for option. So if we sold it, we would lease it back but I understand -- I had modeled that years ago and we had this great bank loan at 3%. So we went for that. So we're continuing to talk to all various level of financing.

Bank of course has the lowest level of interest rate. Maybe they're a little more risk averse. Individual groups of lenders or potentially monetizing our assets. .

And our next question comes from Lenny Dunn of Freedom Investors..

Good morning. We sit here very patiently and it really sounds like you've got things pointed in the right direction but it's taken – what, it's almost four years now, four years to get there. And it sounds like the sales is starting to work the way we needed. So we got the pipeline going but that also took all however than expected.

Are you comfortable with the current sales personnel that you feel that this is going to continue to work in the right direction?.

Yeah, I'm not going to say that we won't add more but I'm comfortable that what we're doing as a team is what we need to do. We’re getting quite a few opportunities, identified and that haven't even become quotes accepted yet, they’re issuing quotes. Yeah I am comfortable with the approach that we are taking. .

Are we going to lease in the current quarter? See, some fruits come in, I don't expect it's going to be full blast but is it – are we going to see some improvement in the current quarter?.

I really was ready to tell you that and at the last minute we had somebody who had a problem with their additive, their API for their drugs and they are pushing us off. They call it indefinitely, but it’d probably be two, three more months. That would have been a substantial project in the fourth quarter.

So right now I can't tell you anything more for the fourth quarter than we have –.

What exactly do we owe on the building right now, 3.8 – 3.8 million and it’s being amortized with about $85,000 principal a month; is that accurate?.

I think it's around $65,000. .

$65,000, so that's roughly $200,000 a quarter. The size of the mortgage versus the value of the building, which seem to be highly financeable with a good interest rate.

Are you talking to other banks? Because it doesn't seem insurmountable and I do agree with the first caller selling the building, I don't think, is your best alternative if you're backed into it, that’s another story but getting a $3.5 million mortgage on their property does not seem –.

Right, right. No, I agree but the issue is what do you want to get the loan at? So the bank, I would classify, as the most risk averse. So we can make our payments all day long but what we’re worried about is covenants. Payments and covenants, right. And so it’s an issue to sell that to the bank right now and that's what we’re working on.

We do have a few banks pretty well interested. But then there is various levels of getting financing, like the financing we have when I came here, which was effectively in a double digit, I don't want to go there either.

Is it sale and leaseback of the building, if you can do that in a strong real estate market, still not disrupt our operations in any way, if the cost to us to do that is somewhere in between the banks who aren’t ready to write us and the more high level interest, then that what we're going to look at. .

The sale and leaseback is permanent where getting it refinanced at a reasonable rate with a bank, with that kind of collateral, will make your –.

I agree and I stand ready to tell anybody our story who can – who you guys can bring to me and I'm looking right now for -- I know there are people out there who can invest in a company our size and can understand, probably is it better than a bank because they're not and they are very – their hands are tied, regulatory wise as to what they can look into, when you talk about the future.

But I can tell you as I've told you on this call that we have quite a foundation built up. But is it showing up in current revenue? No, and that would care the banks.

So I need to find somebody who understands exactly what you're saying that there's a lot of equity in this company and there's a lot of ability to attract the business and the revenue will start picking up. .

Now the Evansville facility is also mortgaged with this, I assume and that has real value to it. .

Yes, it does. Right, there’s quite – we have quite a – we’re in a good position when it comes to having equity. .

Yes, I understand that. So it doesn't seem like it would be that difficult to find financing at a reasonable rate. So if you pay an extra quarter a point more than you’re paying now and you had to pay a small premium to get the loan it wouldn’t seem that difficult to find. I mean I'm out there shopping for you but -- and I'm sure you’re shopping. .

Yes, we are..

It doesn't seem that difficult in today's real estate market. I mean the building in the last time you were thinking of selling it, the real estate market wasn’t as strong as it is now and you've already leased out more than half of it to another company. So it is a far more valuable just based on that. .

Right, right.

So you're saying you like the sale and leaseback idea or you don’t like it?.

I don't like it because it's a permanent move. .

Well, it’s a permanent move but it’s a way to unlock the equity we have in an asset that is not critical to how we deliver our services and our products. So it does look better because we have 40% of the building leased out to a very strong – financially strong business. .

Well I guess if it was done at the right price but you need to see to give it away at 12 million or something because I think it's worth substantially more than that, and particularly with the lease you have. .

Well we're going to work on every option we can. .

And as far as getting sales into the current quarter to replace the one deal that you don't think is going to happen for during the quarter.

Are there other things that can be done?.

Sure. Yeah, we’re working on them all the time. .

I mean with somebody who's ready to be at least start doing business. .

Well, it depends what area we're in, in pre-clinical services or bioanalytical. The bioanalytical right now is soft, pre-clinical is going pretty strong. So even as we bring on more projects, we have to watch closely to see if we can fit them in in the most recent quarter.

So the area that we need to drop some more projects into the fourth quarter is bio which is a little longer of a decision stream although we've been working with clients for quite a while. So we might have something come in but I can't tell you exactly. .

You're not having trouble closing now because people are worried about tenuous financing. .

No, no. A lot of our clients are smaller bio-tech who have been -- I don't want to say at the mercy of banks but they've been up and down with fundings, so they understand what's going on. I mean the reality is we still have the cash and we are paying everybody. So we don't have a problem at this moment.

We haven't experienced any problems with clients, shying away. .

Okay. The number of sales people you have now may be the right amount for your current financial position. So kind of counsel you to stay away from hiring more people because you've got this long lead time, now you've got to start paying somebody in addition to the other people you have.

You’ve got to watch the cash flows or with your financial background, I'm sure you understand that. But I have some concerns, I don't want to see you take yourself into a corner. .

No, we understand there is a balance. .

Well we've been patient for these years I guess. We will continue to be but it’s sort of – it is disappointing that it has taken so long to get this turned around and I do hear you that you feel you have it finally turned around.

But it’d be nice if we got a little more guidance and you weren't as afraid to step out on the [nimble] little further and make us feel better. .

Okay..

And. I guess hats off. So if anybody who have question is up to them. End of Q&A.

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

Okay. Thank you everyone for joining us this morning and we look forward to speaking with you on our fiscal year end earnings conference call in December. .

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