UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2011
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to _____________.

Commission File Number 000-23357

BIOANALYTICAL SYSTEMS, INC.

(Exact name of the registrant as specified in its charter)

INDIANA
(State or other jurisdiction of incorporation or
organization)
 
35-1345024
(I.R.S. Employer Identification No.)
     
2701 KENT AVENUE
WEST LAFAYETTE, INDIANA
(Address of principal executive offices)
 
47906
(Zip code)
 
(765) 463-4527
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x         NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES ¨   NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer ¨   Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES ¨   NO x

As of August 9, 2011, 6,912,511 of the registrant's common shares were outstanding.

 
 
 
 
  TABLE OF CONTENTS

   
Page
     
PART I
FINANCIAL INFORMATION
 
     
Item 1
Condensed Consolidated Financial Statements (Unaudited):
 
     
 
Condensed Consolidated Balance Sheets as of June 30, 2011 and September 30, 2010
3
     
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2011 and 2010
4
     
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 4
Controls and Procedures
25
     
PART II
OTHER INFORMATION
 
     
Item 1A
Risk Factors
25
     
Item 6
Exhibits
26
     
 
Signatures
27
 
 
2
 

BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

   
June 30,
2011
   
September 30,
2010
 
   
(Unaudited)
       
Assets
 
 
       
Current assets:
           
Cash and cash equivalents
  $ 4,632     $ 1,422  
Accounts receivable
               
Trade
    3,712       3,670  
Unbilled revenues and other
    1,520       1,298  
Inventories
    1,647       1,673  
Refundable income taxes
    16       16  
Prepaid expenses
    652       555  
Total current assets
    12,179       8,634  
                 
Property and equipment, net
    20,517       19,439  
Goodwill
    1,383       1,383  
Intangible assets, net
    61       84  
Debt issue costs
    106       123  
Other assets
    64       80  
                 
Total assets
  $ 34,310     $ 29,743  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
                 
Accounts payable
  $ 1,696     $ 1,911  
Accrued expenses
    1,752       1,848  
Customer advances
    4,432       4,582  
Income tax accruals
    22       30  
Revolving line of credit
    1,501       1,195  
Fair value of interest rate swaps
    —       31  
Current portion of capital lease obligation
    608       524  
Current portion of long-term debt
    750       1,855  
Total current liabilities
    10,761       11,976  
                 
Capital lease obligation, less current portion
    1,286       623  
Long-term debt, less current portion
    6,010       6,477  
                 
Shareholders’ equity:
               
Preferred shares, authorized 1,000,000 shares, no par value:
               
2,135 Series A shares at $1,000 stated value issued and outstanding at June 30, 2011 and none at September 30, 2010
    2,135       —  
Common shares, no par value:
               
Authorized 19,000,000 shares; 6,912,511 issued and outstanding at June 30, 2011 and 4,915,318 at September 30, 2010
    1,690       1,191  
Additional paid-in capital
    19,370       13,357  
Accumulated deficit
    (7,038 )     (3,981 )
Accumulated other comprehensive income
    96       100  
Total shareholders’ equity
    16,253       10,667  
Total liabilities and shareholders’ equity
  $ 34,310     $ 29,743  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
3
 
 
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service revenue
  $ 6,737     $ 6,034     $ 19,326     $ 16,092  
Product revenue
    1,741       2,030       5,665       5,284  
Total revenue
    8,478       8,064       24,991       21,376  
                                 
Cost of service revenue
    5,043       4,538       14,544       13,863  
Cost of product revenue
    690       855       2,189       2,161  
Total cost of revenue
    5,733       5,393       16,733       16,024  
                                 
Gross profit
    2,745       2,671       8,258       5,352  
Operating expenses:
                               
Selling
    816       589       2,275       2,057  
Research and development
    127       124       350       434  
General and administrative
    1,321       1,400       3,964       4,830  
Total operating expenses
    2,264       2,113       6,589       7,321  
                                 
Operating income (loss)
    481       558       1,669       (1,969 )
                                 
Interest expense
    (70 )     (270 )     (473 )     (786 )
Other income
    7       —       15       —  
Income (loss) before income taxes
    418       288       1,211       (2,755 )
                                 
Income tax benefit
    —       —       —       (344 )
                                 
Net income (loss)
    418       288       1,211       (2,411 )
                                 
Less:  Deemed dividend on Series A preferred shares
    (3,277 )     —       (3,277 )     —  
                                 
Less:  Preferred stock dividends
    (991 )             (991 )        
                                 
Net income (loss) attributable to common shareholders
  $ (3,850 )   $ 288     $ (3,057 )   $ (2,411 )
                                 
Basic net income (loss) per share
  $ (0.65 )   $ 0.06     $ (0.58 )   $ (0.49 )
Diluted net income (loss) per share
  $ (0.65 )   $ 0.06     $ (0.58 )   $ (0.49 )
                                 
Weighted common shares outstanding:
                               
Basic
    5,911       4,915       5,247       4,915  
Diluted
    5,911       4,915       5,247       4,915  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
4
 

BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended June 30,
 
   
2011
   
2010
 
Operating activities:
           
Net income (loss)
  $ 1,211     $ (2,411 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    1,574       1,777  
Employee stock compensation expense
    123       174  
Provision for doubtful accounts
    11       50  
Liability incurred on settlement of lease
    —       216  
Gain on interest rate swaps
    (31 )     (54 )
Gain on sale of property and equipment
    (9 )     —  
Deferred income taxes
    (8 )     —  
Changes in operating assets and liabilities:
               
Accounts receivable
    (275 )     853  
Inventories
    26       133  
Refundable income taxes
    —       (4 )
Prepaid expenses and other assets
    (79 )     128  
Accounts payable
    (599 )     (179 )
Accrued expenses
    (96 )     (249 )
Customer advances
    (150 )     1,333  
Net cash provided by operating activities
    1,698       1,767  
                 
Investing activities:
               
Capital expenditures
    (635 )     (215 )
Net cash used by investing activities
    (635 )     (215 )
                 
Financing activities:
               
Net proceeds from registered direct offering
    4,639       —  
Payments of long-term debt
    (1,572 )     (398 )
Payments on revolving line of credit
    (23,293 )     (21,818 )
Borrowings on revolving line of credit
    23,598       21,399  
Proceeds from sale and leaseback
    —       431  
Payments on capital lease obligations
    (1,218 )     (554 )
Net cash provided (used) by financing activities
    2,154       (940 )
                 
Effect of exchange rate changes
    (7 )     17  
                 
Net increase in cash and cash equivalents
    3,210       629  
Cash and cash equivalents at beginning of period
    1,422       870  
Cash and cash equivalents at end of period
  $ 4,632     $ 1,499  
                 
Supplemental disclosure of non-cash financing activities:
               
Preferred stock dividends accrued, but not paid
  $ 991     $ —  
Preferred stock dividends paid in common shares
  $ (607 )   $ —  
Equipment financed under capital leases
  $ 1,966     $ —  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
5
 

BIOANALYTICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands unless otherwise indicated)
(Unaudited)

1.
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Bioanalytical Systems, Inc. and its subsidiaries (“We,” the “Company” or “BASi”) engage in contract laboratory research services and other services related to pharmaceutical development. We also manufacture scientific instruments for life sciences research, which we sell with related software for use in industrial, governmental and academic laboratories. Our customers are located throughout the world.

We have prepared the accompanying unaudited interim condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”), and therefore should be read in conjunction with our audited consolidated financial statements, and the notes thereto, for the year ended September 30, 2010.  In the opinion of management, the condensed consolidated financial statements for the three and nine months ended June 30, 2011 and 2010 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of our financial position at June 30, 2011. The results of operations for the three and nine months ended June 30, 2011 are not necessarily indicative of the results for the year ending September 30, 2011.

2.
STOCK-BASED COMPENSATION

The 2008 Stock Option Plan (“the Plan”) is used to promote our long-term interests by providing a means of attracting and retaining officers, directors and key employees and aligning their interests with those of our shareholders.  The Plan is described more fully in Note 8 in the Notes to the Consolidated Financial Statements in our Form 10-K for the year ended September 30, 2010.  All options granted under the plan had an exercise price equal to the market value of the underlying common shares on the date of grant.  We expense the estimated fair value of stock options over the vesting periods of the grants.  We recognize expense for awards subject to graded vesting using the straight-line attribution method, reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment is recognized at that time.  The assumptions used are detailed in Note 8 to the Consolidated Financial Statements in our Form 10-K for the year ended September 30, 2010.  Stock based compensation expense for the three and nine months ended June 30, 2011 was $48 and $123, respectively, with no tax benefits.  Stock based compensation expense for the three and nine months ended June 30, 2010 was $47 and $174, respectively, with no tax benefits.

A summary of our stock option activity for the nine months ended June 30, 2011 is as follows (in thousands except for share prices):

   
Options
(shares)
   
Weighted-
Average
Exercise Price
   
Weighted-
Average
Grant Date
Fair Value
 
                   
Outstanding - October 1, 2010
    705     $ 2.66     $ 1.82  
Exercised
    -       -       -  
Granted
    27       2.24       1.84  
Terminated
    (42 )     2.68       1.82  
Outstanding - June 30, 2011
    690       2.64       1.82  

 
6
 

3.
SALE OF PREFERRED SHARES AND WARRANTS
 
On May 11, 2011, we completed a registered public offering of 5,506 units at a price of $1,000 per unit.  Each unit consisted of one 6% Series A convertible preferred share which is convertible into 500 common shares, one Class A Warrant to purchase 250 common shares at an exercise price of $2.00 per share, and one Class B Warrant to purchase 250 common shares at an exercise price of $2.00 per share.

The designation, rights, preferences and other terms and provisions of the Series A preferred shares are set forth in the Certificate of Designation. Until May 11, 2014, the Series A preferred shares have a stated dividend rate of 6% per annum, payable quarterly in cash or, subject to certain conditions, in common shares or a combination of cash and common shares, at our election.  After May 11, 2014, the Series A preferred shares will participate in any dividends payable upon our common shares on an "as converted" basis. If the preferred shares are converted prior to May 11, 2014, we must also pay to the converting holder in cash, or subject to certain conditions, in common shares or a combination of cash and common shares, $180 per $1,000 of the stated value of the preferred shares less any dividends paid prior to conversion.  Class A Warrants are exercisable immediately and expire in May 2016. Class B Warrants are exercisable immediately and expire in May 2012. The net proceeds from the sale of the units, after deducting the fees and expenses of the placement agent and other expenses were $4.6 million.  We intend to use the proceeds for the purchase of laboratory equipment and for working capital and general corporate purposes.

The Series A preferred shares are entitled to participate in any dividends declared and paid on our common shares on an as-converted basis, and the holders of the preferred shares are not entitled to vote together with common shareholders unless converted to common shares. The Series A preferred shares are considered to be an equity instrument. The warrants have been accounted for as equity and valued using the Black Scholes pricing model. The weighted-average assumptions used to compute the fair value of the warrants at the time of issuance were as follows:

   
Warrant A
   
Warrant B
 
             
Risk-free interest rate
    1.87 %     0.18 %
Dividend yield
    0.00 %     0.00 %
Volatility of the Company's common stock
    106.91 %     116.01 %
Expected life of the options (years)
    5.0       1.0  
                 
Fair value per share
  $ 1.433     $ 0.779  

The Series A preferred shares were valued using the common shares available upon conversion of all preferred shares of 2,753,000 and the closing market price of our stock on May 11, 2011 of $1.86.  Adding in the total possible dividend for the preferred shares of 18% over three years, or $991, the total fair value of the preferred shares was calculated as $6.112 million.  We then allocated the total value of the offering of $5.506 million based on the fair values for the preferred shares and warrants described above.

We have also recognized a beneficial conversion feature related to the Series A preferred shares, to the extent that the conversion feature, based on the proceeds allocated to the Series A preferred shares, was in-the-money at the time they were issued. Such beneficial conversion feature amounted to approximately $1.446 million. Because the Series A preferred shares do not have a stated redemption date and may be converted by the holder at any time, the discount recognized by the allocation of proceeds to the beneficial conversion feature has been immediately charged through accumulated deficit as a deemed dividend to the holders of the Series A preferred shares in the amount of $3.277 million. This will be the only deemed distribution recorded for the Series A preferred shares included in this offering.  Further, because the preferred dividends are payable on the day of closing on May 11, 2011, we recognized the full value, $991, as a liability included in accounts payable and charged immediately through accumulated deficit.  There will be no other dividends recorded for the Series A preferred shares included in this offering.

As of June 30, 2011, 3,371 preferred shares have been converted into 1,997,193 common shares.  No warrants have been exercised as of June 30, 2011.  At June 30, 2011, 2,135 preferred shares and 2,753,000 warrants remained outstanding.  Also at June 30, 2011, $384 of the $991 in preferred dividends remains accrued in accounts payable for future preferred dividends.  The table below details the changes in shareholders’ equity due to this registered public offering.  Amounts in the table are not in thousands.

 
7
 
 
                             
Accumulated
       
                           
other
   
Total
 
   
Preferred
   
Common
   
Additional paid-
   
Accumulated
   
comprehensive
   
shareholders'
 
   
shares
   
shares
   
     in capital     
   
deficit
   
income
   
equity
 
                                     
Balance at September 30, 2010
  $ -     $ 1,190,572     $ 13,357,782     $ (3,981,220 )   $ 99,542     $ 10,666,676  
                                                 
Comprehensive Income:
                                               
Net income
    -       -       -       1,211,290       -       1,211,290  
Foreign Currency translation adjustments
    -       -       -       -       (3,659 )     (3,659 )
Total Comprehensive Income
                                            1,207,631  
                                                 
Stock based compensation expense
    -       -       123,353       -       -       123,353  
                                                 
Issuance of preferred shares, net of issuance costs of $866,855
    5,506,000       -       (866,855 )     -       -       4,639,145  
                                                 
Fair value attributed to warrants
    (1,831,182 )     -       1,831,182       -       -       -  
                                                 
Preferred stock - beneficial conversion feature
    (1,445,762 )     -       1,445,762       -       -       -  
                                                 
Preferred stock - deemed dividend
    3,276,944       -       -       (3,276,944 )     -       -  
                                                 
Preferred stock dividend
    -       -       -       (991,080 )     -       (991,080 )
                                                 
Conversion of preferred shares to common shares
    (3,371,000 )     499,298       3,478,482       -       -       606,780  
                                                 
Balance at June 30, 2011
  $ 2,135,000     $ 1,689,870     $ 19,369,706     $ (7,037,954 )   $ 95,883     $ 16,252,505  
 
4.
INCOME (LOSS) PER SHARE
 
We compute basic income (loss) per share using the weighted average number of common shares outstanding. The net income (loss) applicable to common shareholders for fiscal 2011 is the net of the net income (loss) for the period less the deemed dividend for the Series A preferred shares from the May 2011 registered direct offering described in Note 3 and less the dividends earned on the outstanding Series A preferred shares.
 
The Company has three categories of dilutive potential common shares: the Series A preferred shares issued in May 2011 in connection with the registered direct offering, the Warrants issued in connection with same offering in May 2011, and shares issuable upon exercise of options.  We compute diluted earnings per share using the if-converted method for preferred stock and the treasury stock method for stock options and warrants.  Shares issuable upon exercise of options were not considered in computing diluted earnings per share for the three and nine months ended June 30, 2011 and for the nine months ended June 30, 2010 because they were antidilutive.    Warrants for 2,753,000 common shares and preferred shares for 2,753,000 common shares were not considered in computing diluted earnings per share for the three and nine months ended June 30, 2011 because they were antidilutive.   For the three months ended June 30, 2010, shares issuable upon exercise of options were immaterial to the computation of net income (loss) per share.

(Rest of page intentionally left blank)

 
8
 
 
The following table reconciles our computation of basic income (loss) per share to diluted income (loss) per share:
 
   
Three Months Ended June 30,
   
Nine Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic net income (loss) per share:
                   
                         
Net income (loss)
  $ 418     $ 288     $ 1,211     $ (2,411 )
Less:  Deemed dividend for Series A Preferred Shares
    (3,277 )     —       (3,277 )     —  
Less:  Preferred dividend
    (991 )     —       (991 )     —  
                                 
Net income (loss) applicable to common shareholders
  $ (3,850 )   $ 288     $ (3,057 )   $ (2,411 )
                                 
Weighted average common shares outstanding
    5,911       4,915       5,247       4,915  
                                 
Basic net income (loss) per share
  $ (0.65 )   $ 0.06     $ (0.58 )   $ (0.49 )
                                 
Diluted net income (loss) per share:
                         
                                 
Net income (loss) applicable to common shareholders
  $ (3,850 )   $ 288     $ (3,057 )   $ (2,411 )
                                 
Weighted average common shares outstanding
    5,911       4,915       5,247       4,915  
                                 
Diluted net income (loss) per share
  $ (0.65 )   $ 0.06     $ (0.58 )   $ (0.49 )
 
5.
INVENTORIES

Inventories consisted of the following:

   
June 30, 2011
   
September 30,
2010
 
             
Raw materials
  $ 1,437     $ 1,534  
Work in progress
    317       283  
Finished goods
    285       218  
      2,039       2,035  
Obsolescence reserve
    (392 )     (362 )
    $ 1,647     $ 1,673  

6.
SEGMENT INFORMATION
 
We operate in two principal segments - research services and research products. Our Services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions.  Our accounting policies in these segments are the same as those described in the summary of significant accounting policies found in Note 2 to Consolidated Financial Statements in our annual report on Form 10-K for the year ended September 30, 2010.

 
9
 
 
   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue:
                   
Service
  $ 6,737     $ 6,034     $ 19,326     $ 16,092  
Product
    1,741       2,030       5,665       5,284  
    $ 8,478     $ 8,064     $ 24,991     $ 21,376  
                                 
Operating income (loss):
                 
Service
  $ 376     $ 227     $ 1,088     $ (2,320 )
Product
    105       331       581       351  
    $ 481     $ 558     $ 1,669     $ (1,969 )

7.
INCOME TAXES
 
We use the asset and liability method of accounting for income taxes.  We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.  We record valuation allowances based on a determination of the expected realization of tax assets.
 
We recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We measure the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.  At June 30, 2011 and September 30, 2010, we had a $30 liability for other uncertain income tax positions.
 
We record interest and penalties related to income tax matters as a component of income tax expense.  Over the next twelve months we do not expect the total amount of unrecognized tax benefits to change significantly.  Interest and penalties are included in the reserve.
 
We file income tax returns in the U.S., several U.S. States, and the United Kingdom.  We remain subject to examination by taxing authorities in the jurisdictions in which we have filed returns for years after 2006.
 
We have an accumulated net deficit in our UK subsidiary. Therefore, we continue to maintain a full valuation allowance on the UK subsidiary deferred income tax balance. Also, a valuation allowance was established in fiscal 2009 against the US deferred income tax balance.  Due to the utilization of operating loss carry forwards, we have a 0% effective tax rate for the three and nine months ended June 30, 2011.

 
10
 

8.
DEBT

Mortgages and note payable

We have notes payable to Regions Bank (“Regions”) aggregating approximately $6,600.
 
Regions notes payable currently include two outstanding mortgages on our facilities in West Lafayette and Evansville, Indiana, which total $5,362.  The mortgages mature in November 2012 with an interest rate fixed at 7.1% and monthly principal payments of approximately $38 plus interest.  Another mortgage matured in February 2011 with an interest rate of 6.1%.
 
In addition to the mortgages, we also had a note payable with Regions, which matured on December 18, 2010.  The annual interest rate on this term loan was equal to 6.1% with monthly payments of $9 plus interest. The note payable was collateralized by real estate at our West Lafayette and Evansville, Indiana locations. On November 29, 2010, we executed amendments on two loans with Regions.  Regions agreed to accept a $500 principal payment on the note payable maturing on December 18, 2010 and a $500 principal payment on one mortgage maturing on February 11, 2011.  The principal payments were made on December 17, 2010 and February 11, 2011, respectively.  Upon receipt of these two payments, Regions incorporated the two loans into a replacement note payable for $1,341 maturing on November 1, 2012. The replacement note payable bears interest at a per annum rate equal to the 30-day LIBOR plus 300 basis points (minimum of 4.5%) with monthly principal payments of approximately $14 plus interest.   The replacement note payable is secured by real estate at our West Lafayette and Evansville, Indiana locations.  At June 30, 2011, the note payable had a balance of $1,286.
 
As part of the amendment, Regions also agreed to amend the loan covenants for the related debt to be more favorable to us.  Provided we comply with the revised covenant ratios, the amendment removes limitations on the Company’s purchase of fixed assets.   The covenants, which are common to such agreements, include maintenance of certain financial ratios including a fixed charge coverage ratio of 1.25 to 1.0 and total liabilities to tangible net worth ratio of no greater than 2.1 to 1.0.  At June 30, 2011, we were in compliance with these ratios.

The Regions loans contain both cross-default provisions with each other and with the revolving line of credit with Entrepreneur Growth Capital described below.
 
Revolving Line of Credit
 
On January 13, 2010, we entered into a new $3,000 revolving line of credit agreement (“Credit Agreement”) with Entrepreneur Growth Capital LLC (“EGC”), which we use for working capital and other purposes, to replace the PNC Bank line of credit that expired on January 15, 2010.  The initial term of the Credit Agreement was set to expire on January 31, 2011.  If we prepay prior to the expiration of the initial term (or any renewal term), then we are subject to an early termination fee equal to the minimum interest charges of $15 for each of the months remaining until expiration.
 
Borrowings bear interest at an annual rate equal to the Prime Rate plus five percent (5%), or 8.25% as of June 30, 2011, with minimum monthly interest of $15.  Interest is paid monthly. The line of credit also carries an annual facilities fee of 2% and a 0.2% collateral monitoring fee.  Borrowings under the Credit Agreement are secured by a blanket lien on our personal property, including certain eligible accounts receivable, inventory, and intellectual property assets, a second mortgage on our West Lafayette and Evansville real estate and all common stock of our U.S. subsidiaries and 65% of the common stock of our non-United States subsidiary. Borrowings are calculated based on 75% of eligible accounts receivable.  Under the Credit Agreement, the Company has agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures and comply with certain financial covenants outlined in the Credit Agreement.
 
On December 23, 2010, we negotiated an amendment to this Credit Agreement.  As part of the amendment, the maturity date was extended to January 31, 2013.  The Amendment reduced the minimum tangible net worth covenant requirement from $9,000 to $8,500 and waived all non-compliances with this covenant through the date of the Amendment. The Credit Agreement also contains cross-default provisions with the Regions loans and any future EGC loans. At June 30, 2011, we were in compliance with the minimum tangible net worth covenant requirement.
 
At June 30, 2011, we had available borrowing capacity of $2,346 on this line, of which $1,501 was outstanding.

 
11
 
 
9.
FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, accounts receivable and other assets, accounts payable and other accruals approximate their fair values because of their nature and respective duration.  The fair value of the revolving credit facility and certain long-term debt is equal to their carrying values due to the variable nature of their interest rates.  Our long-term fixed rate debt was adjusted to market rate on June 30, 2010, which we believe approximates market rates for similar debt instruments at June 30, 2011 based on our analysis of debt instruments with similar terms and conditions.
 
10.
COMPREHENSIVE INCOME

Total comprehensive income is comprised of the total net income (loss) as well as the change in foreign currency translation. The table below presents comprehensive income (loss) for the three and nine months ended June 30, 2011 and 2010, respectively.
 
   
Three Months ended
June 30,
   
Nine Months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income (loss) as reported
  $ 418     $ 288     $ 1,211     $ (2,411 )
Foreign currency translation adjustments
    (17 )     33       (4 )     (16 )
                                 
Comprehensive income (loss)
  $ 401     $ 321     $ 1,207     $ (2,427 )

11.
SETTLEMENT OF CONTINGENT LIABILITY

In June of 2008, as part of selling our Baltimore Clinical Pharmacology Research Unit, we subleased the building space it occupied to the purchaser of the assets.  We remained contingently liable for the rent payments of $800 per year through 2015 in the event the sublessor did not perform.  In 2009, the purchaser ceased operations in Baltimore and sought to renegotiate the terms of its sublease.  In March of 2010, we reached a settlement with the landlord of the building which canceled the sublessor’s and our obligations under the lease in exchange for a cash payment from the sublessor.  We agreed to contribute $250 to the settlement, payable in twenty-five monthly installments of $10 without interest.  We recorded the discounted liability of $216 in March 2010, and recognized the related expense in general and administrative expenses.

12.
NEW ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued an Accounting Standards Update on the accounting for revenue recognition to specifically address how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  This guidance was effective for revenue arrangements entered into or materially modified beginning October 1, 2010. This update has not impacted revenue in the periods presented, and we do not expect a material change from the methods in which we have historically reported revenues.

 
12
 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Form 10-Q may contain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and/or Section 21E of the Securities Exchange Act of 1934, as amended.  Those statements may include, but  are  not  limited to, discussions regarding our intent, belief or current expectations with respect to, but not limited to (i) our strategic plans; (ii) trends in the demand for our products and services; (iii) trends in the industries that consume our products and services; (iv) our ability to develop new products and services; (v) our ability to make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact our markets; (vii) our cash position; (viii) our ability to comply with certain financial covenants in our credit agreement and notes payable; and (ix) our ability to integrate a new marketing team.  Investors  in  our common shares are cautioned that reliance on  any  forward-looking  statement  involves risks and uncertainties, including the risk factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2010.  Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond our control.

Although  we  believe  that  the assumptions  on  which  the  forward-looking  statements  contained  herein are based are reasonable,  any  of  those  assumptions  could prove to be different from events as they actually occur, and as a result, the forward-looking statements based upon those assumptions also could be different from actual results.  In light of the uncertainties inherent in any forward-looking statement,  the  inclusion  of  a forward-looking statement herein should not be regarded  as  a  representation  by  us  that our plans and objectives  will  be  achieved.  We do not undertake any obligation to update any forward-looking statement.  The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements as of and for the three and nine months ended June 30, 2011 and June 30, 2010, respectively, provided elsewhere in this report.

The following amounts are in thousands, unless otherwise indicated.
 
General
 
We provide contract drug development services and research equipment to many leading global pharmaceutical, medical research and biotechnology companies and institutions that advance the drug discovery and development process. We offer an efficient, variable-cost alternative to our clients' internal product development programs. Outsourcing development work to reduce overhead and speed drug approvals through the Food and Drug Administration ("FDA") is an established alternative to in-house development among pharmaceutical companies. We derive our revenues from sales of our research services and drug development tools, both of which are focused on determining drug safety and efficacy.  Since our formation in 1974, our products and services have been utilized in the research of drugs to treat numerous therapeutic areas.

We support the preclinical and clinical development needs of researchers and clinicians for small molecule and large biomolecule drug candidates. We believe our scientists have the skills in analytical instrumentation development, chemistry, computer software development, physiology, medicine, analytical chemistry and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are scientists engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic neuroscience research at many of the small start-up biotechnology companies and the largest global pharmaceutical companies.

Our services and products are marketed globally to pharmaceutical, medical research and biotech companies and institutions engaged in drug research and development. The research services industry is highly fragmented among many niche vendors led by a small number of larger companies; the latter offer an ever-growing portfolio of start-to-finish pharmaceutical development services. Our products are also marketed to academic and governmental institutions. Our services and products may have distinctly different clients (often separate divisions in a single large pharmaceutical company) and requirements. We believe that clients are facing increased pressure to outsource facets of their research and development activities.

Our business is largely dependent on the level of pharmaceutical and biotechnology companies' efforts in new drug discovery and approval. Our services segment is a direct beneficiary of these efforts, through outsourcing by these companies of research work. Our products segment is an indirect beneficiary of these efforts, as increased drug development leads to capital expansion, providing opportunities to sell the equipment we produce and the consumable supplies we provide that support our products.

 
13
 

Developments within the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies have major "block-buster" drugs that are nearing the end of their patent protections. This puts significant pressure on these companies both to develop new drugs with large market appeal, and to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations ("CRO's") have benefited from these developments, as the pharmaceutical industry has turned to out-sourcing to both reduce fixed costs and to increase the speed of research and data development necessary for new drug applications.  The number of significant drugs that have reached or are nearing the end of their patent protection has also benefited the generic drug industry. Generic drug companies provide a significant source of new business for CRO's as they develop, test and manufacture their generic compounds.

A significant portion of innovation in the pharmaceutical industry is now being driven by biotech and small, venture capital funded, drug development companies. Many of these companies are "single-molecule" entities, whose success depends on one innovative compound. While several of the biotech companies have reached the status of major pharmaceuticals, the industry is still characterized by smaller entities. These developmental companies generally do not have the resources to perform much of the research within their organizations, and are therefore dependent on the CRO industry for both their research and for guidance in preparing their FDA submissions. These companies have provided significant new opportunities for the CRO industry, including us. They do, however, also provide challenges in selling, as they frequently have only one product in development, which causes CRO's to be unable to develop a flow of projects from a single company. These companies may expend all their available funds and cease operations prior to fully developing a product. Additionally, the funding of these companies is subject to investment market fluctuations, which changes as the risk profiles and appetite of investors change.

Research services are capital intensive. The investment in equipment and facilities to serve our markets is substantial and continuing. While our physical facilities are adequate to meet market needs for the near term, rapid changes in automation, precision, speed and technologies necessitate a constant investment in equipment and software to meet market demands. We are also impacted by the heightened regulatory environment and the need to improve our business infrastructure to support our increasingly diverse operations, which will necessitate additional capital investment. Our ability to generate capital to reinvest in our capabilities, both through operations and financial transactions, is critical to our success.
 
With the closing of major mergers from fiscal 2009, the pharmaceutical industry can now return to focusing on driving drugs and therapies through the development pipeline.  We believe that such merger and consolidation activity reduced the demand and increased competition for CRO services and was a distraction for the research and development arms of these companies as they awaited finalization of new drug development portfolios.  W e believe that as larger pharmaceutical companies become leaner and more efficient, generally focusing on their core competencies of fundamental research and development and commercialization, they will also continue to be conservative in their staffing and further reduce their in-house expertise. This should lead to reinvigoration of outsourcing as they assess their key internal priorities.

Patient Protection and Affordable Care Act

In March 2010, the Patient Protection and Affordable Care Act (the “Act”) was enacted by the U.S. Congress and signed into law by the President.  The purpose of the legislation is to extend medical insurance coverage to a higher percentage of U.S. citizens.  Many of the provisions in the Act have delayed effective dates over the next decade, and will require extensive regulatory guidance.  Companies in our principal client industry, pharmaceuticals, will be required under the Act to provide additional discounts on medicines provided under Medicare and Medicaid to assist in the funding of the program; however, government estimates are that over 31 million additional citizens will eventually be covered by medical insurance as a result of the Act, which should expand the markets for their products.  It is premature to accurately predict the impacts these and other competing forces will have on our basic client market, drug development.  Additionally, the Act does not directly impact spiraling health care costs in the U.S., which could lead to additional legislation impacting our target markets in the future.

We maintain an optional health benefits package for all of our full-time employees, which is largely paid by our contributions with employees paying a portion of the cost, generally less than 20% of the total.  Based on our current understanding of the Act, we do not anticipate significant changes to our programs or of their costs to the Company or our employees as a result of the Act.

We have experienced increases in the costs of our health benefit programs in excess of inflation rates, and expect those trends to continue.  We are exploring options in plan funding, delivery of benefits and employee wellness in our continuing effort to obtain maximum benefit for our health care expenditures, while maintaining quality programs for our employees.  We do not expect these efforts to have a material financial impact on the Company.

 
14
 

Executive Overview

Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. In the first nine months of fiscal 2011, we experienced an increased demand for our products and services as compared to the first nine months of fiscal 2010. We believe in the fundamentals of the market and that it will continue to slowly rebound in future periods. For the remainder of fiscal 2011, we plan to continue our focus on sales execution, operational performance and building strategic partnerships with pharmaceutical and biotechnology companies.
 
We review various metrics to evaluate our financial performance, including period-to-period changes in new orders, revenue, margins and earnings. In the first nine months of fiscal 2011, we had an increase in the number of new authorizations of approximately 16% over the same period in fiscal 2010. Gross margin and earnings increased in the first nine months of the current fiscal year due to higher revenues of approximately 17%, cost containment initiatives and savings in operating expenses of approximately 10%.  For a detailed discussion of our revenue, margins, earnings and other financial results for the three and nine months ended June 30, 2011, see “Results of Operations” below.
 
As of June 30, 2011, we had $4,632 of cash and cash equivalents as compared to $1,422 of cash and cash equivalents at the end of fiscal 2010. In the first nine months of fiscal 2011, we generated $1,698 in cash from operations. Our accounts receivable and unbilled revenues balances increased $275 from the prior fiscal year primarily due to higher sales in the current year. We continue to monitor accounts receivable and the various factors that affect it, including contract terms, the mix of contracts performed and our success in collecting receivables. During fiscal 2011, we also paid down our long-term debt by an additional $1,000 and accounts payable by $599.  Likewise in the current fiscal year, we successfully closed our registered public equity offering, which netted cash of $4.6 million.

We believe that the development of innovative new drugs is going through an evolution, evidenced by the significant reduction of expenditures on research and development at several major international pharmaceutical companies, accompanied by increases in outsourcing and investments in smaller start-up companies that are performing the early development work on new compounds.  Many of these companies are funded by either venture capital or pharmaceutical investment, or both, and generally do not build internal staffs that possess the extensive scientific and regulatory capabilities to perform the various activities necessary to progress a drug candidate to the filing of an Investigative New Drug (“IND”) application with the FDA.

While continuing to maintain and develop our relationships with large pharmaceutical companies, we intend to aggressively promote our services to developing businesses, which will require us to expand our existing capabilities to provide services early in the drug development process, and to consult with clients on regulatory strategy and compliance leading to their FDA filings.  We have recently launched our Enhanced Drug Discovery services as part of this strategy, utilizing our proprietary Culex ® technology to provide early experiments in our laboratories that previously would have been conducted in the sponsor’s facilities.  As we move forward, we must balance the demands of the large pharmaceutical companies with the personal touch needed by smaller biotechnology companies to develop a competitive advantage.  We intend to accomplish this through the use of and expanding upon our existing project management skills, strategic partnerships and progressive relationship management.
 
Net Income (loss) attributable to common shareholders and net income (loss) per share:
 
Net income (loss) attributable to common shareholders was $(3,850) and $288 for the three months ended June 30, 2011 and 2010, respectively, and $(3,057) and $(2,411) for the nine months ended June 30, 2011 and 2010 respectively.  The   diluted net loss per share was $0.65 for the three months ended June 30, 2011 compared to diluted net income per share in the three months ended June 30, 2010 of $0.06. Diluted net loss per share was $0.58 and $0.49 for the nine months ended June 30, 2011 and 2010 respectively.   The net loss available to common shareholders and  diluted net loss per share in the three and nine months ended June 30, 2011 was impacted by a deemed dividend on the Series A preferred shares issued on May 11, 2011 of $3,277 as described in Note 3 to the condensed consolidated financial statements .   The income (loss) available to common shareholders would have been $(573) and $220 for the three and nine months ended  June 30, 2011, respectively, exclusive of the deemed dividend.   The diluted net income per share exclusive of the deemed dividend was $0.06 and $0.22 for the nine months ended June 30, 2011 and 2010 respectively.  We consider the income available to common shareholders and basic and diluted earnings per share exclusive of the deemed dividend to be a useful measure in comparing operating results of the Company because the deemed dividend is considered a nonrecurring item. The diluted weighted average common shares outstanding include the dilutive effects of the Series A preferred shares, warrants and stock options. We compute diluted earnings per share using the if-converted method for preferred stock and the treasury stock method for stock options and warrants.  The following table reconciles GAAP net income (loss) per share to the net income (loss) per share exclusive of the deemed dividend.

 
15
 

The following table reconciles GAAP net income (loss) per share to the adjusted net income (loss) per share.

   
Three
Months
Ended
June 30,
2011
   
Nine
Months
Ended
June 30,
2011
 
             
GAAP basic net income (loss):
           
             
Net income
  $ 418     $ 1,211  
Less:  Deemed dividend for Series A preferred shares
    (3,277 )     (3,277 )
Less:  Preferred dividends
    (991 )     (991 )
GAAP net loss applicable to common shareholders
  $ (3,850 )   $ (3,057 )
                 
Basic net income (loss) per share, exclusive of the deemed dividend:
 
   
GAAP net loss applicable to common shareholders
  $ (3,850 )   $ (3,057 )
Plus:  Deemed dividend for Series A preferred shares
    3,277       3,277  
Net income (loss) applicable to common shareholders
  $ (573 )   $ 220  
                 
GAAP weighted average common shares outstanding
    5,911       5,247  
                 
Basic net income (loss) per share, exclusive of the deemed dividend
  $ (0.10 )   $ 0.04  
                 
Diluted net income per share, exclusive of the deemed dividend:
         
Net income (loss) applicable to common shareholders, exclusive of deemed dividend
  $ (573 )   $ 220  
Plus:  Preferred dividend
    991       991  
     $ 418     $ 1,211  
                 
GAAP diluted weighted average common shares outstanding
    5,911       5,247  
Plus:  Incremental shares from assumed conversions
               
    Series A preferred shares
    841       280  
    Warrants
    124       —  
Stock options
    92       90  
Adjusted diluted weighted average common shares outstanding
    6,968       5,617  
                 
Diluted net income per share, exclusive of the deemed dividend
  $ 0.06     $ 0.22  

Critical Accounting Policies
 
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Liquidity and Capital Resources" discuss the unaudited condensed consolidated financial statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Certain significant accounting policies applied in the preparation of the financial statements require management to make difficult, subjective or complex judgments, and are considered critical accounting policies. We have identified the following areas as critical accounting policies.

 
16
 
 
Revenue Recognition

The majority of our service contracts involve the processing of bioanalytical samples for pharmaceutical companies. These contracts generally provide for a fixed fee for each assay method developed or sample processed and revenue is recognized under the specific performance method of accounting. Under the specific performance method, revenue and related direct costs are recognized when services are performed. Other service contracts generally consist of preclinical studies for pharmaceutical companies. Service revenue is recognized based on the ratio of direct costs incurred to total estimated direct costs under the proportional performance method of accounting. Losses on contracts are provided in the period in which the loss becomes determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which such revisions become known. The establishment of contract prices and total contract costs involves estimates made by the Company at the inception of the contract period. These estimates could change during the term of the contract which could impact the revenue and costs reported in the consolidated financial statements. Projected losses on contracts are provided for in their entirety when known. Revisions to estimates have not been material. Service contract fees received upon acceptance are deferred and classified within customer advances, until earned. Unbilled revenues represent revenues earned under contracts in advance of billings.

Product revenue from sales of equipment not requiring installation, testing or training is recognized upon shipment to customers. One product includes internally developed software and requires installation, testing and training, which occur concurrently. Revenue from these sales is recognized upon completion of the installation, testing and training when the services are bundled with the equipment sale.  In October 2009, the FASB issued an Accounting Standards Update on the accounting for revenue recognition to specifically address how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  This update has not impacted revenue in the periods presented, and we do not expect a material change from the methods in which we have historically reported revenues.

Long-Lived Assets, Including Goodwill

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Goodwill is tested annually for impairment, and more frequently if events and circumstances indicate that the asset might be impaired, using a two-step process.  In the first step, we compare the fair value of each reporting unit, as computed primarily by present value cash flow calculations, to its book carrying value, including goodwill. We do not believe that market value is indicative of the true fair value of the Company mainly due to average daily trading volumes of less than 1%.  If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired and we would then complete step 2 in order to measure the impairment loss. In step 2, the implied fair value is compared to the carrying amount of the goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, we would recognize an impairment loss equal to the difference. The implied fair value is calculated by allocating the fair value of the reporting unit (as determined in step 1) to all of its assets and liabilities (including unrecognized intangible assets) and any excess in fair value that is not assigned to the assets and liabilities is the implied fair value of goodwill.

The discount rate and sales growth rates are the two material assumptions utilized in our calculations of the present value cash flows used to estimate the fair value of the reporting units when performing the annual goodwill impairment test. Our reporting units with goodwill are Vetronics, Oregon and Evansville, Indiana, based on the discrete financial information available which is reviewed by management.  We utilize a cash flow approach in estimating the fair value of the reporting units, where the discount rate reflects a weighted average cost of capital rate. The cash flow model used to derive fair value is sensitive to the discount rate and sales growth assumptions used.

Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted sales growth rates and our cost of capital or discount rate, are based on the best available market information. Changes in these estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.  The assumptions used in our impairment testing could be adversely affected by certain of the risks discussed in “Risk Factors” in Item 1A of our Form 10-K for the fiscal year ended September 30, 2010.  There have been no significant events since the timing of our impairment tests that have triggered additional impairment testing.

 
17
 

At June 30, 2011, remaining recorded goodwill was $1,383, and the net balance of other intangible assets was $61.

Stock-Based Compensation
 
We recognize the cost resulting from all share-based payment transactions in our financial statements using a fair-value-based method.  We measure compensation cost for all share-based awards based on estimated fair values and recognize compensation over the vesting period for awards. We recognized stock-based compensation related to stock options of $48 and $123 and $47 and $174 during the three and nine months ended June 30, 2011 and 2010, respectively.
 
We use the binomial option valuation model to determine the grant date fair value. The determination of fair value is affected by our stock price as well as assumptions regarding subjective and complex variables such as expected employee exercise behavior and our expected stock price volatility over the term of the award. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimated the following key assumptions for the binomial valuation calculation:
  
 
·
Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.

 
·
Expected volatility. We use our historical stock price volatility on our common stock for our expected volatility assumption.

 
·
Expected term. The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

 
·
Expected dividends. We assumed that we will pay no dividends.
 
Employee stock-based compensation expense recognized in the first nine months of fiscal 2011 and 2010 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment will be recognized at that time.
      
Changes to our underlying stock price, our assumptions used in the binomial option valuation calculation and our forfeiture rate as well as future grants of equity could significantly impact compensation expense to be recognized in fiscal 2011 and future periods.

Income Taxes

As described in Note 7 to the condensed consolidated financial statements included in this report, we use the asset and liability method of accounting for income taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial reporting amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carry forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.  We record valuation allowances based on a determination of the expected realization of tax assets.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We measure the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.

 
18
 

 We record interest and penalties related to income tax matters as a component of income tax expense.  Over the next twelve months, we do not expect the total amount of unrecognized tax benefits to change significantly.  Interest and penalties are included in the reserve.

As of June 30, 2011 and September 30, 2010, we had a $30 liability for uncertain income tax positions.

We file income tax returns in the U.S., several U.S. states, and the United Kingdom.  We remain subject to examination by taxing authorities in the jurisdictions in which we have filed returns for years after 2006.

We have an accumulated net deficit in our UK subsidiary. Therefore, we continue to maintain a full valuation allowance on the UK subsidiary deferred income tax balance. Also, a valuation allowance was established in fiscal 2009 against the U.S. deferred income tax balance.

Results of Operations

The following table summarizes the condensed consolidated statement of operations as a percentage of total revenues:

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service revenue
    79.5 %     74.8 %     77.3 %     75.3 % 
Product revenue
    20.5       25.2       22.7       24.7  
Total revenue
    100.0       100.0       100.0       100.0  
                                 
Cost of service revenue (a)
    74.9       75.2       75.3       86.1  
Cost of product revenue (a)
    39.6       42.1       38.6       40.9  
Total cost of revenue
    67.6       66.9       67.0       75.0  
                                 
Gross profit
    32.4       33.1       33.0       25.0  
                                 
Total operating expenses
    26.7       26.2       26.4       34.2  
                                 
Operating income (loss)
    5.7       6.9       6.6       (9.2 )
                                 
Other expense
    0.7       3.3       1.8       3.7  
                                 
Income (loss) before income taxes
    5.0       3.6       4.8       (12.9 )
                                 
Income tax benefit
    —       —       —       (1.6 )
                                 
Net income (loss)
    5.0 %     3.6 %     4.8 %     (11.3 )%

 
(a)
Percentage of service and product revenues, respectively.
 
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Service and Product Revenues

Revenues for the third fiscal quarter ended June 30, 2011 increased 5.1% to $8,478 compared to $8,064 for the same period last year.

Our Service revenue increased 11.7% to $6,737 in the current quarter compared to $6,034 for the prior year period primarily as a result of higher toxicology and other laboratory services revenues.  Volumes of studies and number of samples to assay continue to increase though pricing still lags pre-recession levels.  An increase in proposal opportunities and in new orders accepted in the current fiscal year, especially in our pharmaceutical analysis group, has led to an increase in our revenues in the current quarter. We have also recently launched our Enhanced Drug Discovery services which have contributed to the revenue increase.  The following table shows more detail for our Service revenue.

 
19
 

   
Three Months Ended
             
   
June 30,
             
   
2011
   
2010
   
Change
   
%
 
Bioanalytical analysis
  $ 3,387     $ 3,635     $ (248 )     -6.8 %
Toxicology
    2,785       2,168       617       28.5 %
Other laboratory services
    565       231       334       144.6 %
 
Sales in our Products segment decreased 14.2% in the current quarter from $2,030 to $1,741 when compared to the same period in the prior year. The majority of the decrease stems from delayed sales of our Culex automated in vivo sampling systems.  Through the first half of our current fiscal year, customers began to release capital funds for larger projects, such as the Culex automated in vivo sampling systems.  However, in the current quarter, some large orders were delayed into future quarters. The following table shows more detail for our Product revenue.

   
Three Months Ended
June 30,
             
   
2011
   
2010
   
Change
   
%
 
Culex ® , in-vivo sampling systems
  $ 734     $ 1,129     $ (395 )     -35.0 %
Analytical instruments
    849       826       23       2.8 %
Other instruments
    158       75       83       110.7 %
 
Cost of Revenues

Cost of revenues for our third fiscal quarter of 2011 was $5,733 or 67.6% of revenue, compared to $5,393, or 66.9% of revenue for the prior year period.

Cost of Service revenue as a percentage of Service revenue decreased to 74.9% in the current quarter from 75.2% in the comparable period last year.  The principal cause of this decrease was the increase in revenues which led to higher absorption of the fixed costs in our Service segment.  A significant portion of our costs of productive capacity in the Service segment are fixed. Thus, increases in revenues lead to decreases in costs as a percentage of revenue.

Costs of Products revenue as a percentage of Product revenue in the current quarter decreased to 39.6% from 42.1% in the comparable prior year period.   This decrease is mainly due to the decline in revenues as well as a change in the mix of products sold in the current quarter.

Operating Expenses

Selling expenses for the three months ended June 30, 2011 increased 38.5% to $816 from $589 for the comparable period last year.  This increase was primarily driven by an increase in salaries and higher spending for marketing expenditures and consulting services as we implement our new sales and marketing strategy.

Research and development expenses for the third quarter of fiscal 2011 increased 2.4% over the comparable period last year to $127 from $124.

General and administrative expenses for the current quarter decreased 5.6% to $1,321 from $1,400 for the comparable prior year period.  Strict controls on variable spending contributed to the reduction in expenses in the current fiscal quarter.

 
20
 

Other Income (Expense)

Other expense for the third quarter of fiscal 2011 decreased to $63 from $270 for the same quarter of the prior year. The primary reasons for the decrease are costs incurred in fiscal 2010 for our new line of credit agreement, lower mortgage interest in fiscal 2011 as a result of the two separate $500 principal payments made in fiscal 2011, as well as lower lease interest resulting from maturing leases.

Income Taxes

Our effective tax rate for the three months ended June 30, 2011 and 2010 was 0.0% due to the utilization of operating loss carry forwards.  We continue to maintain a full valuation allowance on our U.S. and UK subsidiary deferred income tax balances.

Nine Months Ended June 30, 2011 Compared to Nine Months Ended June 30, 2010

Service and Product Revenues

Revenues for the nine months ended June 30, 2011 increased 16.9% to $24,991 compared to $21,376 for the same period last year.

Our Service revenue increased 20.1% to $19,326 in the first nine months of fiscal 2011 compared to $16,092 for the prior year period primarily as a result of increases in each of the revenue groups of bioanalytical analysis, toxicology, and other laboratory services.  Increases in these groups from the same period in fiscal 2010 are mainly due to increases in new bookings and volumes of studies as well as number of samples to assay.  We have also recently launched our Enhanced Drug Discovery services which have contributed to the revenue increase.  The following table shows more detail for our Service revenue.

   
Nine Months Ended
June 30,
             
   
2011
   
2010
   
Change
   
%
 
Bioanalytical analysis
  $ 10,683     $ 9,626     $ 1,057       11.0 %
Toxicology
    7,186       5,291       1,895       35.8 %
Other laboratory services
    1,457       1,175       282       24.0 %

Sales in our Products segment increased 7.2% in the first nine months of fiscal 2011 from $5,284 to $5,665 when compared to the same period in the prior year.  The majority of the increase stems from sales of our Culex automated in vivo sampling system over the same period of the prior fiscal year as customers began to release capital funds for larger projects.  The following table shows more detail for our Product revenue.

   
Nine Months Ended
June 30,
             
   
2011
   
2010
   
Change
   
%
 
Culex ® , in-vivo sampling systems
  $ 3,002     $ 2,482     $ 520       21.0 %
Analytical instruments
    2,297       2,211       86       3.9 %
Other instruments
    366       591       (225 )     -38.1 %

Cost of Revenues

Cost of revenues for the first nine months of fiscal 2011 was $16,733 or 67.0% of revenue, compared to $16,024, or 75.0% of revenue for the comparable period in the prior year.

Cost of Service revenue as a percentage of Service revenue decreased to 75.3% in the first nine months of fiscal 2011 from 86.1% in the comparable period last year.  The principal cause of this decrease was the increase in revenues which led to higher absorption of the fixed costs in our Service segment.  A significant portion of our costs of productive capacity in the Service segment are fixed.   Thus, increases in revenues lead to decreases in costs as a percentage of revenue.

 
21
 

Cost of Product revenue as a percentage of Product revenue in the nine months ending June 30, 2011 decreased to 38.6% from 40.9% in the comparable period in the prior year.   This decrease is mainly due to a change in the mix of products sold in fiscal 2011.

Operating Expenses

Selling expenses for the nine months ended June 30, 2011 increased 10.6% to $2,275 from $2,057 for the comparable period last year. This increase was primarily driven by an increase in salaries and higher spending for advertising and marketing expenditures as we implement our new sales and marketing strategy.

Research and development expenses for the first nine months of fiscal 2011 decreased 19.4% from the comparable period last year to $350 from $434. The decrease was partially due to reduced spending on temporary labor and operating supplies as we completed a project funded by an NIH grant in fiscal 2010.

General and administrative expenses for the first nine months of fiscal 2011 decreased 17.9% to $3,964 from $4,830 for the comparable period in the prior year.  The decrease is mainly due to the following:  1) severance expenses for former employees recorded in the first quarter of fiscal 2010 from the reduction in force, 2) a retirement payment accrual for our former CEO in the prior year; 3) lease settlement costs in fiscal 2010; and 4) company-wide efforts at cost controls.

Other Income (Expense)

Other expense for the first nine months of fiscal 2011 decreased to $458 from $786 for the same period of the prior year.  The primary reason for the decrease is lower mortgage interest in fiscal 2011 as a result of the two separate $500 principal payments made on our mortgages in fiscal 2011 as well as lower lease interest resulting from maturing leases.

Income Taxes

Our effective tax rate for the nine months ended June 30, 2011 was 0.0% due to the utilization of operating loss carry forwards.  We continue to maintain a full valuation allowance on our U.S. and UK subsidiary deferred income tax balances.  The benefit in the first nine months of fiscal 2010 is the result of resolving an uncertain state tax liability for less than the recorded amount.

Liquidity and Capital Resources

Comparative Cash Flow Analysis
 
Prior to our equity offering in the current year, our principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At June 30, 2011, we had cash and cash equivalents of $4,632, compared to $1,422 at September 30, 2010.

Net cash provided by operating activities was $1,698 for the nine months ended June 30, 2011 compared to $1,767 for the nine months ended June 30, 2010. The decrease in cash provided by operating activities in the current fiscal year mainly results from a decrease in customer advances from the prior fiscal year.  Other contributing factors to our cash from operations were $1,574 of depreciation and amortization and stock option expense of $123.  Included in operating activities for fiscal 2010 are non-cash charges of $1,777 for depreciation and amortization, net collections on accounts receivable of $853, an increase in customer advances of $1,333 as we booked new business and the recording of a $216 long-term liability in settlement of a contingent lease liability on our former Baltimore facility.  The impact on operating cash flow of other changes in working capital was not material.

In January 2010, we completed a reduction in work force, through both attrition and terminations, which impacted all areas of operations and reduced our annual compensation expense by approximately 10%.

 
22
 

We anticipate that this impact on our cash flow from operations will continue through fiscal 2011.  We have seen increased order activity in the calendar year 2010 as well as the first six months of calendar 2011, which we expect will translate into earned revenues in the fourth quarter of fiscal 2011 and into fiscal 2012.  Operating expenses declined approximately 10.0% in the first nine months of fiscal 2011 from the prior year period due to the reduction in work force in January 2010 and cost containment initiatives.  We expect the reduced spending levels to continue and that our efforts to reduce costs will positively impact the remainder of fiscal 2011 as well.

Investing activities used $635 in the first nine months of fiscal 2011 due to capital expenditures as compared to $215 in the first nine months of fiscal 2010. Our principal investments were a mandated waste-water treatment facility and building renovations for expanded animal capacity at one of our sites, with selected investments for laboratory equipment replacements and upgrades in all of our facilities, as well as general building and information technology infrastructure expenditures at all sites.  Additionally, we may consider strategic acquisition opportunities.

Financing activities provided $2,154 in the first nine months of fiscal 2011 as compared to $940 used for the first nine months of fiscal 2010.  The main source of cash in fiscal 2011 was the completion of our May 2011 equity offering, which netted $4,639, as well as net borrowings on our line of credit of $305, offset slightly by long-term debt and capital lease payments of $2,790, including the two $500 individual principal payments on one mortgage and one note payable.  In fiscal 2010, we had long-term debt and capital lease payments of $952, as well as net payments on our line of credit of $419.  Also in fiscal 2010, we conducted a sale and leaseback of some of our unencumbered laboratory equipment which netted us $431 of cash.

Capital Resources

We have notes payable to Regions aggregating approximately $6,600 and a $3,000 line of credit with Entrepreneur Growth Capital LLC (“EGC”).  The EGC line of credit is subject to availability limitations that may substantially reduce or eliminate our borrowing capacity at any time. Regions notes payable currently include two outstanding mortgages on our facilities in West Lafayette and Evansville, Indiana, which total $5,362.  The mortgages mature in November 2012 with an interest rate fixed at 7.1% and monthly principal payments of approximately $38 plus interest.  Another mortgage with an interest rate of 6.1% matured in February 2011.

In addition to the mortgages, we also had a note payable with Regions, which matured on December 18, 2010.  The annual interest rate on this term loan was equal to 6.1% with monthly payments of $9 plus interest. The note payable was collateralized by real estate at our West Lafayette and Evansville, Indiana locations. On November 29, 2010, we executed amendments on two loans with Regions.  Regions agreed to accept a $500 principal payment on the note payable maturing on December 18, 2010 and a $500 principal payment on one mortgage maturing on February 11, 2011.  The principal payments were made on December 17, 2010 and February 11, 2011, respectively.  Upon receipt of these two payments, Regions incorporated the two loans into a replacement note payable for $1,341 maturing on November 1, 2012.  The replacement note payable bears interest at a per annum rate equal to 30-day LIBOR plus 300 basis points (minimum of 4.5%) with monthly principal payments of approximately $14 plus interest.  The replacement note payable is secured by real estate at the Company’s West Lafayette and Evansville, Indiana locations. At June 30, 2011, the note payable had a balance of $1,286.
 
As part of the amendment, Regions also agreed to amend the loan covenants for the related debt to be more favorable to us.  Provided we comply with the revised covenant ratios, the amendment removes limitations on the Company’s purchase of fixed assets.   The covenants, which are common to such agreements, include maintenance of certain financial ratios including a fixed charge coverage ratio of 1.25 to 1.0 and total liabilities to tangible net worth ratio of no greater than 2.1 to 1.0.  At June 30, 2011 we were in compliance with these ratios.

The Regions loan agreements both contain cross-default provisions with each other and with the revolving line of credit with EGC described below.

Revolving Line of Credit

On January 13, 2010, we entered into a new $3,000 revolving line of credit agreement (“Credit Agreement”), with EGC, which we use for working capital and other purposes, to replace a line of credit with PNC Bank that expired on January 15, 2010.  The initial term of the Credit Agreement was set to expire on January 31, 2011.  If we prepay prior to the expiration of the initial term (or any renewal term), then we are subject to an early termination fee equal to the minimum interest charges of $15 for each of the months remaining until expiration.

 
23
 

Borrowings bear interest at an annual rate equal to the Prime Rate plus five percent (5%), or 8.25% as of June 30, 2011, with minimum monthly interest of $15.  Interest is paid monthly. The line of credit also carries an annual facilities fee of 2% and a 0.2% collateral monitoring fee.  Borrowings under the Credit Agreement are secured by a blanket lien on our personal property, including certain eligible accounts receivable, inventory, and intellectual property assets, a second mortgage on our West Lafayette and Evansville real estate and all common stock of our U.S. subsidiaries and 65% of the common stock of our non-United States subsidiary. Borrowings are calculated based on 75% of eligible accounts receivable.  Under the Credit Agreement, the Company has agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures and comply with certain financial covenants outlined in the Credit Agreement.

On December 23, 2010, we negotiated an amendment to this Credit Agreement (“Amendment”).  As part of the Amendment, the maturity date was extended to January 31, 2013.  The Amendment reduced the minimum tangible net worth covenant requirement from $9,000 to $8,500 and waived all non-compliances with this covenant through the date of the Amendment.  The Credit Agreement also contains cross-default provisions with the Regions loans and any future EGC loans.  At June 30, 2011, we were in compliance with the minimum tangible net worth covenant requirement.

Based on our current business activities and cash on hand, we expect to continue to borrow on our revolving credit facility in fiscal 2011 to finance working capital.  To conserve cash, we have continued a freeze on non-essential capital expenditures and limited unnecessary spending.  As of June 30, 2011, we had $2,346 of total borrowing capacity with the line of credit, of which $1,501 was outstanding, and $4,632 of cash on hand.

For the remaining three months in fiscal 2011, we expect to see slow but continued improvement in the volume of new bookings, but little improvement in pricing.  We also expect improved gross profit margins due to cost controls implemented.  Based on our expected increase in revenue, the availability on our line of credit, the impact of the cost reductions implemented and our successful equity offering in May 2011, we project that we will have the liquidity required to meet our fiscal 2011 operations and debt obligations.   Should operations materially fail to meet our expectations for the coming fiscal year, we may not be able to comply with all of our debt covenants, requiring that we obtain a waiver at that time.  If that situation arises, we will be required to negotiate with our lending bank again to obtain loan modifications or waivers as described above.  We cannot predict whether our lenders will provide those waivers, if required, what the terms of any such waivers might be or what impact any such waivers will have on our liquidity, financial condition or results of operations.

Equity Offering (amounts in this section not in thousands)

On May 11, 2011, we completed a registered public offering of 5,506 units at a price of $1,000 per unit.  Each unit consists of one 6% Series A convertible preferred share which is convertible into 500 common shares at a conversion price of $2.00 per share, one Class A Warrant to purchase 250 common shares at an exercise price of $2.00 per share, and one Class B Warrant to purchase 250 common shares at an exercise price of $2.00 per share.

The designation, rights, preferences and other terms and provisions of the Preferred Shares are set forth in the Certificate of Designation.  Until May 11, 2014, the Series A preferred shares have a stated dividend rate of 6% per annum, payable quarterly in cash or, subject to certain conditions, in common shares or a combination of cash and common shares, at our election.  After May 11, 2014, the Series A preferred shares will participate in any dividends payable upon our common shares on an "as converted" basis.  If the preferred shares are converted prior to May 11, 2014, we must also pay to the converting holder in cash, or subject to certain conditions, in common shares or a combination thereof, $180 per $1,000 of the stated value of the preferred shares less any dividends paid prior to conversion.  Class A Warrants are exercisable immediately and expire in May 2016.  Class B Warrants are exercisable immediately and expire in May 2012. The net proceeds from the sale of the units, after deducting the fees and expenses of the placement agent and other expenses are $4.6 million.  We intend to use the proceeds for the purchase of laboratory equipment and for working capital and general corporate purposes.

As of June 30, 2011, 3,371 preferred shares have been converted into 1,997,193 common shares, including the make-whole payments.  At June 30, 2011, 2,135 preferred shares remain outstanding.  No warrants have been exercised as of June 30, 2011.

 
24
 

ITEM 4 - CONTROLS AND PROCEDURES

Under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our management concluded that our disclosure controls and procedures were not effective as of June 30, 2011 due to the material weakness identified below. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

During the quarter ended June 30, 2011, we sold units of convertible preferred shares and warrants in a public offering which raised new capital for the Company.  The accounting for this transaction requires that we compute relative fair values for the components of the units, allocate the proceeds to the different equities, and then record a “deemed dividend” of the amount by which the allocated preferred share value is less than its market value (computed as the market value of the common stock into which it is convertible).  In our initial computation, we did not correctly compute the relative values of components, which resulted in an error in our deemed dividend, which could have resulted in a misstatement of loss per common share, and is therefore a material weakness in internal control.

As a corrective action, on future unusual and non-recurring transactions, we intend to seek the counsel of other experts in accounting before discussions with our auditors.

There were no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during fiscal 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.  
  
PART II
 
ITEM 1A - RISK FACTORS
 
You should carefully consider the risks described in our Annual Report on Form 10-K for the year ended September 30, 2010, including those under the heading “Risk Factors” appearing in Item 1A of Part I of the Form 10-K and other information contained in this Quarterly Report before investing in our securities. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.

 
25
 
 
ITEM 6 - EXHIBITS
 
(a) Exhibits:

Number
     
Description of Exhibits
         
(3)
 
3.1
 
Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. as amended through May 9, 2011 (filed herewith).
         
   
3.2
 
Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended (incorporated by reference to Exhibit 3.2 of Form 10-K for the fiscal year ended September 30, 2009).
         
(4)
 
4.1
 
Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429).
         
   
4.2
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-172508).
         
   
4.3
 
Certificate of Designation of Preferences, Rights, and Limitations of Convertible Preferred Shares (incorporated by reference to Exhibit 3.1 on Form 8-K, dated May 12, 2011).
         
   
4.4
 
Specimen Certificate for 6% Series A Convertible Preferred Shares (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-1, Registration No. 333-172508).
         
(10)
 
10.1
 
Form of Securities Purchase Agreement between Bioanalytical Systems, Inc. and certain purchasers, dated May 5, 2011 (incorporated by reference to Exhibit 10.27 to Registration Statement on Form S-1, Registration No. 333-172508).
         
   
10.2
 
Placement Agency Agreement between Bioanalytical Systems, Inc. and Ladenburg Thalmann & Co. Inc, dated May 5, 2011 (incorporated by reference to Exhibit 10.1 on Form 8-K, dated May 9, 2011).
         
(31)
 
31.1
 
Certification of Anthony S. Chilton (filed herewith).
 
   
31.2
 
Certification of Michael R. Cox (filed herewith).
 
(32)
 
32.1
 
Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). .
         
   
101
 
XBRL data file (filed herewith).
 
 
26
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

 
BIOANALYTICAL SYSTEMS, INC.
 
(Registrant)
   
Date:  August 15, 2011
By:
/s/  Anthony S. Chilton
 
Anthony S. Chilton
 
President and Chief Executive Officer
   
Date:  August 15, 2011
By:
/s/  Michael R. Cox
 
Michael R. Cox
 
Vice President, Finance and Administration, Chief Financial Officer and Treasurer
 
 
27
 

EXHIBIT INDEX

Number
     
Description of Exhibits
         
(3)
 
3.1
 
Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. as amended through May 9, 2011 (filed herewith).
         
   
3.2
 
Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended (incorporated by reference to Exhibit 3.2 of Form 10-K for the fiscal year ended September 30, 2009).
         
(4)
 
4.1
 
Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429).
         
   
4.2
 
Form of Warrant (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-172508).
         
   
4.3
 
Certificate of Designation of Preferences, Rights, and Limitations of Convertible Preferred Shares (incorporated by reference to Exhibit 3.1 on Form 8-K, dated May 12, 2011).
         
   
4.4
 
Specimen Certificate for 6% Series A Convertible Preferred Shares (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-1, Registration No. 333-172508).
         
(10)
 
10.1
 
Form of Securities Purchase Agreement between Bioanalytical Systems, Inc. and certain purchasers, dated May 5, 2011 (incorporated by reference to Exhibit 10.27 to Registration Statement on Form S-1, Registration No. 333-172508).
         
   
10.2
 
Placement Agency Agreement between Bioanalytical Systems, Inc. and Ladenburg Thalmann & Co. Inc, dated May 5, 2011 (incorporated by reference to Exhibit 10.1 on Form 8-K, dated May 9, 2011).
         
(31)
 
31.1
 
Certification of Anthony S. Chilton (filed herewith).
 
   
31.2
 
Certification of Michael R. Cox (filed herewith).
 
(32)
 
32.1
 
Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). .
         
   
101
 
XBRL data file (filed herewith).
 
 
28
 

EXHIBIT 3.1

SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BIOANALYTICAL SYSTEMS, INC.
(as amended through May 9, 2011)
 
This corporation (" Corporation ") is governed by the applicable provisions of the Indiana Business Corporation Law (" Act ").
 
ARTICLE I
NAME
 
The name of the Corporation is Bioanalytical Systems, Inc.
 
ARTICLE II
SHARES
 
Section 2.1.     Number .  The total number of shares which the Corporation is authorized to issue is 20 million shares.
 
Section 2.2 .      Classes .  There shall be two classes of shares of the Corporation. One class shall be designated as " Common Shares " and shall consist of 19 million of the authorized shares, and the other class shall be designated as " Preferred Shares ", and shall consist of one million of the authorized shares.
 
Section 2.3 .      Relative Rights, Preferences, Limitations and Restrictions of Shares .
 
(a)        Common Shares .  Except to the extent granted to the Preferred Shares, the Common Shares shall have all of the rights accorded to shares under the Act including but not limited to voting rights and all rights to distribution of the net assets of the Corporation upon dissolution.
 
(b)       Preferred Shares .  By amendment of these Second Restated Articles of Incorporation in the manner provided in the Act, the Preferred Shares shall have such preferences, limitations, restrictions and relative voting and other rights as may be determined, in whole or in part, by the Board of Directors prior to the issuance thereof.
 
Section 2.4 .      Voting Rights of Common Shares .  Each holder of Common Shares shall be entitled to one vote for each share owned of record on the books of the Corporation on each matter submitted to a vote of the holders of Common Shares.

 
 
 

ARTICLE II-A
PREFERENCES, RIGHTS AND LIMITATIONS OF 6% SERIES A C ONVERTIBLE PREFERRED SHARES
 
Section 2-A.1 .   Definitions .  For the purposes hereof, the following terms shall have the following meanings:
" Affiliate " means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 of the Securities Act.
 
" Alternate Consideration " shall have the meaning set forth in Section 2-A.7(e) .
 
" Beneficial Ownership Limitation " shall have the meaning set forth in Section 2-A.6(d) .
 
" Business Day " means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
 
" Buy-In " shall have the meaning set forth in Section 2-A.6(c)(iv) .
 
" Change of Control Transaction " means the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Corporation, by contract or otherwise) of in excess of 33% of the voting securities of the Corporation (other than by means of conversion or exercise of Preferred Stock and the Securities issued together with the Preferred Stock), (b) the Corporation merges into or consolidates with any other Person, or any Person merges into or consolidates with the Corporation and, after giving effect to such transaction, the stockholders of the Corporation immediately prior to such transaction own less than 66% of the aggregate voting power of the Corporation or the successor entity of such transaction, (c) the Corporation sells or transfers all or substantially all of its assets to another Person and the stockholders of the Corporation immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a one year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the Original Issue Date), or (e) the execution by the Corporation of an agreement to which the Corporation is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.
 
" Class A Warrants " means, collectively, the Common Stock purchase warrants delivered to the Holder at the Closing in accordance with Section 2.2(a) of the Purchase Agreement, which Class A Warrants shall be exercisable immediately and have a term of exercise equal to five years, in the form of Exhibit C attached to the Purchase Agreement.
 
" Class B Warrants " means, collectively, the Common Stock purchase warrants delivered to the Holder at the Closing in accordance with Section 2.2(a) of the Purchase Agreement, which Class B Warrants shall be exercisable immediately and have a term of exercise equal to one year, in the form of Exhibit C attached to the Purchase Agreement.

 
2
 

" Closing " means the closing of the purchase and sale of the Securities pursuant to Section 2.1 of the Purchase Agreement.
 
" Closing Date " means the Trading Day on which all of the Transaction Documents have been executed and delivered by the applicable parties thereto and all conditions precedent to (i) each Holder’s obligations to pay the Subscription Amount and (ii) the Corporation’s obligations to deliver the Securities have been satisfied or waived.
 
" Commission " means the United States Securities and Exchange Commission.
 
" Common Stock " means the Corporation’s common stock, no par value per share, and stock of any other class of securities into which such securities may hereafter be reclassified or changed.
 
" Common Stock Equivalents " means any securities of the Corporation or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
 
" Conversion Amount " means the sum of the Stated Value at issue.
 
" Conversion Date " shall have the meaning set forth in Section 2-A.6(a) .
 
" Conversion Price " shall have the meaning set forth in Section 2-A.6(b) .
 
" Conversion Shares " means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock in accordance with the terms hereof.
 
" Dividend Conversion Rate " means 90% of the average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Dividend Payment Date.
 
" Dividend Notice Period " shall have the meaning set forth in Section 2-A.3(a) .
 
" Dividend Payment Date " shall have the meaning set forth in Section 2-A.3(a) .
 
" Dividend Share Amount " shall have the meaning set forth in Section 2-A.3(a) .

 
3
 

" Equity Conditions " means, during the period in question, (a) the Corporation shall have duly honored all conversions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the applicable Holder on or prior to the dates so requested or required, if any, (b) the Corporation shall have paid all liquidated damages and other amounts owing to the applicable Holder in respect of the Preferred Stock, (c)(i) there is an effective registration statement pursuant to which the Corporation may issue Conversion Shares (and, as applicable, shares of Common Stock in satisfaction of the Make-Whole Payment and in lieu of cash payment of dividends) or (ii), with respect to conversions that occur after May 11, 2014, all of the Conversion Shares may be issued to the Holder pursuant to Section 3(a)(9) of the Securities Act and immediately resold without restriction, (d) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are listed or quoted for trading on such Trading Market (and the Corporation believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a sufficient number of authorized, but unissued and otherwise unreserved, shares of Common Stock for the issuance of all of the shares then issuable pursuant to the Transaction Documents, (f) the issuance of the shares in question to the applicable Holder would not violate the limitations set forth in Section 2-A.6(d) herein, (g) there has been no public announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction that has not been consummated, (h) the applicable Holder is not in possession of any information provided by the Corporation that constitutes, or may constitute, material non-public information, and (i) the average daily trading volume for a period of 20 consecutive Trading Days prior to the applicable date in question, exceeds 20,000 shares per Trading Day (subject to adjustment for forward and reverse stock splits, stock dividends and the like); provided, however, that paragraph (g) shall not apply after May 11, 2014.
 
" Exchange Act " means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
 
" Forced Conversion Amount " means the sum of (a) 100% of the aggregate Stated Value then outstanding, (b) accrued but unpaid dividends and (c) all liquidated damages and other amounts due in respect of the Preferred Stock.
 
" Forced Conversion Date " shall have the meaning set forth in Section 2-A.8(c) .
 
" Forced Conversion Notice " shall have the meaning set forth in Section 2-A.8(c) .
 
" Forced Conversion Notice Date " shall have the meaning set forth in Section 2-A.8(c) .
 
" Fundamental Transaction " shall have the meaning set forth in Section 2-A.7(e) .
 
" GAAP " means United States generally accepted accounting principles.
 
" Holder " means the Person in whose name a security is registered on the books of the Corporation.
 
" Junior Securities " means the Common Stock and all other Common Stock Equivalents of the Corporation other than those securities which are explicitly senior or pari passu to the Preferred Stock in dividend rights or liquidation preference.
 
" Liens " means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
 
" Liquidation " shall have the meaning set forth in Section 2-A.5 .

 
4
 

" Make-Whole Payment " shall have the meaning set forth in Section 2-A.3(a) .
 
" New York Courts " shall have the meaning set forth in Section 2-A.9(d) .
 
" Notice of Conversion " shall have the meaning set forth in Section 2-A.6(a) .
 
" Optional Redemption " shall have the meaning set forth in Section 2-A.8(a) .
 
" Optional Redemption Amount " means the sum of (a) 120% of the aggregate Stated Value then outstanding, (b) accrued but unpaid dividends and (c) all liquidated damages and other amounts due in respect of the Preferred Stock.
 
" Optional Redemption Date " shall have the meaning set forth in Section 2-A.8(a) .
 
" Optional Redemption Notice " shall have the meaning set forth in Section 2-A.8(a) .
 
" Optional Redemption Notice Date " shall have the meaning set forth in Section 2-A.8(a) .
 
" Original Issue Date " means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.
 
" Person " means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
 
" Preferred Stock " shall have the meaning set forth in Section 2-A.2 .
 
" Purchase Agreement " means the Securities Purchase Agreement, dated as of May 5, 2011, among the Corporation and the original Holders, as amended, modified or supplemented from time to time in accordance with its terms.
 
" Securities " means the Preferred Stock, the Warrants, the Warrant Shares and the Underlying Shares.
 
" Securities Act " means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
 
" Share Delivery Date " shall have the meaning set forth in Section 2-A.6(c) .
 
" Stated Value " shall have the meaning set forth in Section 2-A.2 .
 
" Subscription Amount " shall mean, as to each Holder, the aggregate amount to be paid for the Preferred Stock purchased pursuant to the Purchase Agreement as specified below such Holder’s name on the signature page of the Purchase Agreement and next to the heading "Subscription Amount," in United States dollars and in immediately available funds.

 
5
 

" Subsidiary " means any subsidiary of the Corporation as set forth on Schedule 3.1(a) of the Purchase Agreement and shall, where applicable, also include any direct or indirect subsidiary of the Corporation formed or acquired after the date of the Purchase Agreement.
 
" Successor Entity " shall have the meaning set forth in Section 2-A.7(e) .
 
" Threshold Period " shall have the meaning set forth in Section 2-A.8(c) .
 
" Trading Day " means a day on which the New York Stock Exchange is open for business.
 
" Trading Market " means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).
 
" Transaction Documents " shall have the meaning set forth in the Purchase Agreement.
 
" Transfer Agent " means Computershare, the current transfer agent of the Company, with a mailing address of 250 Royall Street, Canton, MA 02021 and a facsimile number of (781) 575-3602, and any successor transfer agent of the Company.
 
" Underlying Shares " means the shares of Common Stock issued and issuable upon conversion of the Preferred Stock, upon exercise of the Warrants.
 
" VWAP " means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the "Pink Sheets" published by Pink OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Securities then outstanding and reasonably acceptable to the Corporation, the fees and expenses of which shall be paid by the Corporation.
 
" Warrants " means, collectively, the Class A Warrants and the Class B Warrants.
 
" Warrant Shares " means the shares of Common Stock issuable upon exercise of the Warrants.

 
6
 

Section 2-A.2 .   Designation, Amount and Par Value .  The series of Preferred Shares shall be designated as its 6% Series A Convertible Preferred Shares (the " Preferred Stock ") and the number of shares so designated shall be up to 6,000 (which shall not be subject to increase without the written consent of the Holders of a majority of the outstanding shares of the Preferred Stock.  Each share of Preferred Stock shall have a stated value equal to $1,000 (the " Stated Value ").
 
Section 2-A.3 .   Dividends and Make-Whole Payment .
 
 
(a) 
Dividends in Cash or in Kind .
 
(A) From the Original Issue Date until May 11, 2014, the Holders shall be entitled to receive, and the Corporation shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) of 6% per annum , payable quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after the Original Issue Date and on each Conversion Date (with respect only to Preferred Stock being converted) (each such date, a " Dividend Payment Date ") (if any Dividend Payment Date is not a Trading Day, the applicable payment shall be due on the next succeeding Trading Day) in cash, or at the Corporation’s option, in duly authorized, validly issued, fully paid and non-assessable shares of Common Stock as set forth in this Section 2-A.3(a) , or a combination thereof (the dollar amount to be paid in shares of Common Stock, the " Dividend Share Amount ").  In addition, upon the conversion of Preferred Stock (voluntary or via a Forced Conversion) prior to May 11, 2014, the Corporation shall also pay to the Holders of the Preferred Stock so converted cash, or at the Corporation’s option, subject to Equity Conditions, in duly authorized, validly issued, fully paid and non-assessable shares of Common Stock as set forth in this Section 2-A.3(a) , or a combination thereof, with respect to the Preferred Stock so converted an amount equal to $180 per $1,000 of Stated Value of the Preferred Stock, less the amount of any quarterly dividend paid on such Preferred Stock on or before the relevant Conversion Date (the " Make-Whole Payment ").  The form of dividend payments and Make-Whole Payments to each Holder shall be determined in the following order of priority: (i) if the Equity Conditions have not been met during the 20 consecutive Trading Days immediately prior to the applicable Dividend Payment Date or Conversion Date (the " Dividend Notice Period "), in cash only, (ii) if the payment of dividends or the Make-Whole Payment, as applicable, is not limited by IC 23-1-28-3 and the Equity Conditions have been met during the Dividend Notice Period, at the election of the Corporation, in cash or shares of Common Stock which shall be valued solely for such purpose at 90% of the average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Dividend Payment Date or Conversion Date, (iii) if the payment of dividends or the Make-Whole Payment, as applicable, is limited by IC 23-1-28-3 and the Equity Conditions have been met during the Dividend Notice Period, in shares of Common Stock which shall be valued solely for such purpose at 90% of the average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Dividend Payment Date or Conversion Date, or (iv) if the payment of dividends or the Make-Whole Payment, as applicable, is limited by IC 23-1-28-3 and the Equity Conditions have not been met during the applicable Dividend Notice Period, then such dividends shall accrue to the next applicable Dividend Payment Date or Conversion Date, as applicable.  In addition, if requested by a Holder, as a condition to paying dividends in shares of Common Stock, as to such Dividend Payment Date, prior to such Dividend Notice Period (but not more than five (5) Trading Days prior to the commencement of such Dividend Notice Period), the Corporation shall have delivered to such Holder’s account with The Depository Trust Company a number of shares of Common Stock to be applied against such Dividend Share Amount equal to the quotient of (x) the applicable Holder’s Dividend Share Amount divided by (y) the Dividend Conversion Rate assuming for such purposes that the Dividend Payment Date is the Trading Day immediately prior to the commencement of the Dividend Notice Period (the " Dividend Conversion Shares ").  The Holders shall have the same rights and remedies with respect to the delivery of any such shares as if such shares were being issued pursuant to Section 2-A.6 .

 
7
 

(B) From and after May 11, 2014, Holders shall be entitled to receive, and the Corporation shall pay, dividends on shares of Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends (other than dividends in the form of Common Stock) actually paid on shares of the Common Stock when, as and if such dividends (other than dividends in the form of Common Stock) are paid on shares of the Common Stock.  Other than as set forth in the previous sentence, no other dividends shall be paid on shares of Preferred Stock; and the Corporation shall pay no dividends (other than dividends in the form of Common Stock) on shares of the Common Stock unless it simultaneously complies with the previous sentence.

(b)          Corporation’s Ability to Pay Dividends and Make-Whole Payments in Cash or Kind .  On the Closing Date, the Corporation shall have notified the Holders whether or not the payment of cash dividends on the Preferred Stock is limited by IC 23-1-28-3 as of the Closing Date.  The Corporation shall promptly notify the Holders at any time the Corporation shall become able or unable, as the case may be, to pay cash dividends or cash Make-Whole Payments.  If at any time the Corporation has the right to pay dividends in cash or shares of Common Stock, the Corporation must provide the Holders with at least 20 Trading Days’ notice of its election to pay a regularly scheduled dividend in shares of Common Stock (the Corporation may indicate in such notice that the election contained in such notice shall continue for later periods until revised by a subsequent notice), and with respect to a Make-Whole Payment, the Corporation shall notify a Holder on either (i) the date it receives the applicable Notice of Conversion, if such Notice of Conversion is received by 12:00 PM Eastern Time on such date, or (ii) on the Business Day immediately following the date it receives the applicable Notice of Conversion, if such Notice of Conversion is received after 12:00 PM Eastern Time on such date, whether it elects to make such payment in cash or through the issuance of shares of Common Stock (the Corporation may indicate in such notice that the election contained in such notice shall continue for later periods until revised by a subsequent notice).  The aggregate number of shares of Common Stock otherwise issuable to a Holder on a Dividend Payment Date shall be reduced by the number of shares of Common Stock previously issued to a Holder in connection with such Dividend Payment Date.  If any Dividend Conversion Shares are issued to a Holder in connection with a Dividend Payment Date and are not applied against a Dividend Share Amount, then such Holder shall promptly return such excess shares to the Corporation.

 
8
 

(c)          Dividend Calculations .  Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily commencing on the Original Issue Date, and shall be deemed to accrue from such date whether or not earned or declared.  Payment of dividends in shares of Common Stock shall otherwise occur pursuant to Section 2-A.6(c)(i) herein and, solely for purposes of the payment of dividends in shares, the Dividend Payment Date shall be deemed the Conversion Date.  Dividends shall cease to accrue with respect to any Preferred Stock converted, provided that, the Corporation actually delivers the Conversion Shares within the time period required by Section 2-A.6(c)(i) herein.  Except as otherwise provided herein, if at any time the Corporation pays dividends partially in cash and partially in shares, then such payment shall be distributed ratably among the Holders based upon the number of shares of Preferred Stock held by each Holder on such Dividend Payment Date.
 
(d)          Late Fees .  Unless the Corporation is required to defer such dividend payment as described in clause (iv) of Section 2-A.3(a)(A) above, any dividends or Make-Whole Payments, whether paid in cash or shares of Common Stock, that are not paid within three Trading Days following a Dividend Payment Date or Conversion Date, as applicable, shall continue to accrue and shall entail a late fee, which must be paid in cash, at the rate of 18% per annum or the lesser rate permitted by applicable law which shall accrue daily from the Dividend Payment Date or Conversion Date, as applicable through and including the date of actual payment in full.
 
(e)          Other Securities .  So long as any Preferred Stock shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities.  So long as any Preferred Stock shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall directly or indirectly pay or declare any dividend or make any distribution upon (other than a dividend or distribution described in Section 2-A.6 or dividends due and paid in the ordinary course on preferred stock of the Corporation at such times when the Corporation is in compliance with its payment and other obligations hereunder), nor shall any distribution be made in respect of, any Junior Securities as long as any dividends due on the Preferred Stock remain unpaid, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities or shares pari passu with the Preferred Stock.
 
Section 2-A.4 .   Voting Rights .  Except as otherwise provided herein or as otherwise required by law, the Preferred Stock shall have no voting rights.  However, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of 67% or more of the then outstanding shares of the Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock or alter or amend this Certificate of Designation, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined in Section 2-A.5 ) senior to, or otherwise pari passu with, the Preferred Stock, (c) amend its articles of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (d) increase the number of authorized shares of Preferred Stock, or (e) enter into any agreement with respect to any of the foregoing.  In addition, any matters requiring class voting by the shareholders of the Corporation under the Indiana Business Corporation Law shall require the affirmative vote of the Holders of 67% or more of the then outstanding shares of Preferred Stock.

 
9
 

Section 2-A.5 .   Liquidation .  Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a " Liquidation "), the Holders shall be entitled to receive out of the assets of the Corporation available for distribution to the shareholders of the Corporation an amount equal to the Stated Value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under this Certificate of Designation, for each share of Preferred Stock before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be ratably distributed among the Holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.  A Fundamental Transaction or Change of Control Transaction shall not be deemed a Liquidation.  The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each Holder.
 
Section 2-A.6 .   Conversion .
 
a)       Conversions at Option of Holder .  Each share of Preferred Stock shall be convertible, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof, into that number of shares of Common Stock (subject to the limitations set forth in Section 2-A.6(d) ) determined by dividing the Stated Value of such share of Preferred Stock by the Conversion Price.  Holders shall effect conversions by providing the Corporation with the form of conversion notice attached hereto as Annex A (a " Notice of Conversion ").  Each Notice of Conversion shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue and the date on which such conversion is to be effected, which date may not be prior to the date the applicable Holder delivers by facsimile such Notice of Conversion to the Corporation (such date, the " Conversion Date ").  If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion to the Corporation is deemed delivered hereunder.  The calculations and entries set forth in the Notice of Conversion shall control in the absence of manifest or mathematical error.  To effect conversions of shares of Preferred Stock, a Holder shall not be required to surrender the certificate(s) representing the shares of Preferred Stock to the Corporation unless all of the shares of Preferred Stock represented thereby are so converted, in which case such Holder shall deliver the certificate representing such shares of Preferred Stock promptly following the Conversion Date at issue.  Each such Holder and the Corporation shall maintain records showing the number of Conversion Shares issued upon conversion of the Preferred Stock held by it and the date of such conversions.  In the event of any dispute or discrepancy, with respect to such conversions, the records of the Corporation shall be controlling and determinative in the absence of manifest error.  The Corporation shall deliver any objection to any Notice of Conversion within one (1) Business Day of receipt of such notice.  Shares of Preferred Stock converted into Common Stock or redeemed in accordance with the terms hereof shall be canceled and shall not be reissued.

 
10
 

b)        Conversion Price .  The conversion price for the Preferred Stock shall equal $2.00, subject to adjustment as set forth herein (the " Conversion Price ").

c)    Mechanics of Conversion

i.           Delivery of Certificate Upon Conversion .  Not later than three (3) Trading Days after each Conversion Date (the " Share Delivery Date "), the Corporation shall deliver, or cause to be delivered, to the converting Holder (A) a certificate or certificates which shall be free of restrictive legends and trading restrictions, representing the number of Conversion Shares being acquired upon the conversion of the Preferred Stock (including, (x) if the Corporation has given continuous notice pursuant to Section 2-A.3(b) for payment of dividends in shares of Common Stock at least 20 Trading Days prior to the date on which the Notice of Conversion is delivered to the Corporation, shares of Common Stock representing the payment of accrued dividends otherwise determined pursuant to Section 2-A.3(a) but assuming that the Dividend Notice Period is the 20 Trading Days period immediately prior to the date on which the Notice of Conversion is delivered to the Corporation and excluding for such issuance the condition that the Corporation deliver the Dividend Share Amount as to such dividend payment prior to the commencement of the Dividend Notice Period and (y) shares of Common Stock in lieu of Make-Whole Payments, if applicable), and (B) a bank check in the amount of accrued and unpaid dividends and the Make-Whole Payment (if the Corporation has elected or is required to pay the Make-Whole Payment and accrued dividends in cash).  The Corporation shall use its best efforts to deliver any certificate or certificates representing the Conversion Shares required to be delivered by the Corporation under this Section 2-A.6 electronically through the Depository Trust Company or another established clearing corporation performing similar functions.

ii.          Failure to Deliver Certificates .  If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Corporation at any time on or before its receipt of such certificate or certificates, to rescind such Notice of Conversion, in which event the Corporation shall promptly return to the Holder any original Preferred Stock certificate delivered to the Corporation, and the Holder shall promptly return to the Corporation the Common Stock certificates and cash issued or paid to such Holder pursuant to the rescinded Notice of Conversion.

 
11
 

iii.         Obligation Absolute; Partial Liquidated Damages .  The Corporation’s obligation to issue and deliver the Conversion Shares upon conversion of Preferred Stock in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by a Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by such Holder or any other Person of any obligation to the Corporation or any violation or alleged violation of law by such Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to such Holder in connection with the issuance of such Conversion Shares; provided , however , that such delivery shall not operate as a waiver by the Corporation of any such action that the Corporation may have against such Holder.  In the event a Holder shall elect to convert any or all of the Stated Value of its Preferred Stock, the Corporation may not refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and/or enjoining conversion of all or part of the Preferred Stock of such Holder shall have been sought and obtained, and the Corporation posts a surety bond for the benefit of such Holder in the amount of 150% of the Stated Value of Preferred Stock which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment.  In the absence of such injunction, the Corporation shall issue Conversion Shares and, if applicable, cash, upon a properly noticed conversion.  If the Corporation fails to deliver to a Holder such certificate or certificates representing the Conversion Shares pursuant to Section 2-A.6(c)(i) on the second Trading Day after the Share Delivery Date applicable to such conversion, the Corporation shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of Stated Value of Preferred Stock being converted, $50 per Trading Day (increasing to $100 per Trading Day on the third Trading Day and increasing to $200 per Trading Day on the sixth Trading Day after such damages begin to accrue) for each Trading Day after such second Trading Day after the Share Delivery Date until such certificates are delivered or Holder rescinds such conversion.  Nothing herein shall limit a Holder’s right to pursue actual damages or declare a Triggering Event pursuant to Section 2-A.10 hereof for the Corporation’s failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.  The exercise of any such rights shall not prohibit a Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 
12
 

iv.         Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion .  In addition to any other rights available to the Holder, if the Corporation fails for any reason to deliver to a Holder the applicable certificate or certificates representing the Conversion Shares by the Share Delivery Date pursuant to Section 2-A.6(c)(i) , and if after such Share Delivery Date such Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which such Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a " Buy-In "), then the Corporation shall (A) pay in cash to such Holder (in addition to any other remedies available to or elected by such Holder) the amount, if any, by which (x) such Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of such Holder, either reissue (if surrendered) the shares of Preferred Stock equal to the number of shares of Preferred Stock submitted for conversion (in which case, such conversion shall be deemed rescinded) or deliver to such Holder the number of shares of Common Stock that would have been issued if the Corporation had timely complied with its delivery requirements under Section 2-A.6(c)(i) .  For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Preferred Stock with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Corporation shall be required to pay such Holder $1,000.  The Holder shall provide the Corporation written notice indicating the amounts payable to such Holder in respect of the Buy-In and, upon request of the Corporation, evidence of the amount of such loss.  Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Corporation’s failure to timely deliver certificates representing shares of Common Stock upon conversion of the shares of Preferred Stock as required pursuant to the terms hereof.
   
v.          Reservation of Shares Issuable Upon Conversion .  The Corporation covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Preferred Stock and payment of dividends on the Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Preferred Stock), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 2-A.7 ) upon the conversion of the then outstanding shares of Preferred Stock and payment of dividends hereunder.  The Corporation covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.

 
13
 

vi.         Fractional Shares .  No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Preferred Stock.  As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.

vii.        Transfer Taxes .  The issuance of certificates for shares of the Common Stock on conversion of this Preferred Stock shall be made without charge to any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holders of such shares of Preferred Stock and the Corporation shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.

d)        Beneficial Ownership Limitation .   The Corporation shall not effect any conversion of the Preferred Stock, and a Holder shall not have the right to convert any portion of the Preferred Stock, to the extent that, after giving effect to the conversion set forth on the applicable Notice of Conversion, such Holder (together with such Holder’s Affiliates, and any Persons acting as a group together with such Holder or any of such Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of the Preferred Stock with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted Stated Value of Preferred Stock beneficially owned by such Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Corporation subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, the Preferred Stock or the Warrants) beneficially owned by such Holder or any of its Affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 2-A.6(d) , beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  To the extent that the limitation contained in this Section 2-A.6(d) applies, the determination of whether the Preferred Stock is convertible (in relation to other securities owned by such Holder together with any Affiliates) and of how many shares of Preferred Stock are convertible shall be in the sole discretion of such Holder, and the submission of a Notice of Conversion shall be deemed to be such Holder’s determination of whether the shares of Preferred Stock may be converted (in relation to other securities owned by such Holder together with any Affiliates) and how many shares of the Preferred Stock are convertible, in each case subject to the Beneficial Ownership Limitation.  To ensure compliance with this restriction, each Holder will be deemed to represent to the Corporation each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Corporation shall have no obligation to verify or confirm the accuracy of such determination.  In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2-A.6(d) , in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Corporation’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by the Corporation or (iii) a more recent written notice by the Corporation or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Corporation shall within two Trading Days confirm orally and in writing to such Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Corporation, including the Preferred Stock, by such Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  The " Beneficial Ownership Limitation " shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Preferred Stock held by the applicable Holder.  A Holder, upon not less than 61 days’ prior notice to the Corporation, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2-A.6(d) applicable to its Preferred Stock provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Preferred Stock held by the Holder and the provisions of this Section 2-A.6(d) shall continue to apply.  Any such increase or decrease will not be effective until the 61 st day after such notice is delivered to the Corporation and shall only apply to such Holder and no other Holder.  The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2-A.6(d) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation.  The limitations contained in this paragraph shall apply to a successor holder of Preferred Stock.

 
14
 

Section 2-A.7 .   Certain Adjustments .
 
a)       Stock Dividends and Stock Splits .  If the Corporation, at any time while the Preferred Stock is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Corporation upon conversion of, or payment of a dividend or a Make-Whole Payment on, the Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Corporation) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.  Any adjustment made pursuant to this Section 2-A.7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
 
 
15
 
 
b)        [RESERVED]

c)       Subsequent Rights Offerings .  In addition to any adjustments pursuant to the other subsections of this Section 2-A.7 , if at any time the Corporation grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the " Purchase Rights "), then each Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of such Holder’s Preferred Stock (without regard to any limitations on exercise thereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that a Holder’s right to participate in any such Purchase Right would result in such Holder exceeding the Beneficial Ownership Limitation, then such Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for such Holder until the earlier of (i) the first date on which such Holder no longer holds any shares of Preferred Stock and (ii) such time, if ever, as its right thereto would not result in such Holder exceeding the Beneficial Ownership Limitation).
  
d)       Pro Rata Distributions .  If the Corporation, at any time while the Preferred Stock is outstanding, distributes to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security, then in each such case the Conversion Price shall be adjusted by multiplying such Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness or rights or warrants so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors of the Corporation in good faith.  In either case the adjustments shall be described in a statement delivered to the Holders describing the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

 
16
 

e)        Fundamental Transaction .  If, at any time while the Preferred Stock is outstanding, (i) the Corporation, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Corporation with or into another Person, (ii) the Corporation, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Corporation, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Corporation, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a " Fundamental Transaction "), then, upon any subsequent conversion of this Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 2-A.6(d) on the conversion of this Preferred Stock), the number of shares of Common Stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and any additional consideration (the " Alternate Consideration ") receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Preferred Stock is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2-A.6(d) on the conversion of this Preferred Stock).  For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Corporation shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Preferred Stock following such Fundamental Transaction.  To the extent necessary to effectuate the foregoing provisions, any successor to the Corporation or surviving entity in such Fundamental Transaction shall file a new Certificate of Designation with the same terms and conditions and issue to the Holders new preferred stock consistent with the foregoing provisions and evidencing the Holders’ right to convert such preferred stock into Alternate Consideration.  The Corporation shall cause any successor entity in a Fundamental Transaction in which the Corporation is not the survivor (the " Successor Entity ") to assume in writing all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 2-A.7(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the holder of this Preferred Stock, deliver to the Holder in exchange for this Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Preferred Stock which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Preferred Stock (without regard to any limitations on the conversion of this Preferred Stock) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of this Preferred Stock immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder.  Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designation and the other Transaction Documents referring to the "Corporation" shall refer instead to the Successor Entity), and may exercise every right and power of the Corporation and shall assume all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Corporation herein.

 
17
 

f)               Calculations .  All calculations under this Section 2-A.7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.  For purposes of this Section 2-A.7 , the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.

g)              Notice to the Holders .

i.        Adjustment to Conversion Price .  Whenever the Conversion Price is adjusted pursuant to any provision of this Section 2-A.7 , the Corporation shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

 
18
 

ii.      Notice to Allow Conversion by Holder .  If (A) the Corporation shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer of all or substantially all of the assets of the Corporation, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, then, in each case, the Corporation shall cause to be filed at each office or agency maintained for the purpose of conversion of the Preferred Stock, and shall cause to be delivered to each Holder at its last address as it shall appear upon the stock books of the Corporation, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice.  To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Corporation or any of the Subsidiaries, the Corporation shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.  The Holder shall remain entitled to convert the Conversion Amount of this Preferred Stock (or any part hereof) during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 
19
 

Section 2-A.8 .   Optional Redemption and Forced Conversion .
 
a)       Optional Redemption at Election of Corporation .  Notwithstanding anything herein to the contrary, subject to the provisions of this Section 2-A.8 , if after Original Issue Date the VWAP for each of any 20 consecutive Trading Day period, which 20 consecutive Trading Day period shall have commenced only after the Original Issue Date, exceeds 200% of the then effective Conversion Price, the Corporation may   deliver a notice to the Holders (an " Optional Redemption Notice " and the date such notice is deemed delivered hereunder, the " Optional Redemption Notice Date ") of its irrevocable election to redeem all of the then outstanding Preferred Stock, for cash in an amount equal to the Optional Redemption Amount on the 20 th Trading Day following the Optional Redemption Notice Date (such date, the " Optional Redemption Date " and such redemption, the " Optional Redemption ").  The Optional Redemption Amount is payable in full on the Optional Redemption Date.  Prior to the three-year anniversary of the Original Issue Date, the Corporation may only effect an Optional Redemption if each of the Equity Conditions shall have been met on each Trading Day occurring during the 20 Trading Day period commencing on the Optional Redemption Notice Date through to the Optional Redemption Date and through and including the date payment of the Optional Redemption Amount is actually made.  Prior to the three-year anniversary of the Original Issue Date, if any of the Equity Conditions shall cease to be satisfied at any time during the 20 Trading Day period commencing on the Optional Redemption Notice Date, then a Holder may elect to nullify the Optional Redemption Notice as to such Holder by notice to the Corporation within 3 Trading Days after the first day on which any such Equity Condition has not been met (provided that if, by a provision of the Transaction Documents, the Corporation is obligated to notify the Holders of the non-existence of an Equity Condition, such notice period shall be extended to the third Trading Day after proper notice from the Corporation) in which case the Optional Redemption Notice shall be null and void, ab initio.  From and after the three-year anniversary of the Original Issue Date, the Corporation may exercise an Optional Redemption regardless of whether or not it then satisfies the Equity Conditions, but otherwise in accordance with the terms hereof.  The Corporation covenants and agrees that it will honor all Notices of Conversion tendered from the time of delivery of the Optional Redemption Notice through the date the Optional Redemption Amount is paid in full.

b)       Redemption Procedure .  The payment of cash pursuant to an Optional Redemption shall be made on the Optional Redemption Date.  If any portion of the cash payment for an Optional Redemption has not been paid by the Corporation on the Optional Redemption Date, interest shall accrue thereon until such amount is paid in full at a rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law.

c)       Forced Conversion .  Notwithstanding anything herein to the contrary, if the VWAP for 20 Trading Days during any consecutive 30 Trading Day period (" Threshold Period "), which Threshold Period shall have commenced only after the Original Issue Date, exceeds 200% of the then effective Conversion Price, the Corporation may, within 1 Trading Day after the end of any such Threshold Period, deliver a written notice to all Holders (a " Forced Conversion Notice " and the date such notice is delivered to all Holders, the " Forced Conversion Notice Date ") to cause each Holder to convert all or part of such Holder’s Preferred Stock (as specified in such Forced Conversion Notice) plus all accrued but unpaid dividends thereon and all liquidated damages and other amounts due in respect of the Preferred Stock pursuant to Section 2-A.6 , it being agreed that the "Conversion Date" for purposes of Section 2-A.6 shall be deemed to occur on the third Trading Day following the Forced Conversion Notice Date (such third Trading Day, the " Forced Conversion Date ").  The Corporation may not deliver a Forced Conversion Notice, and any Forced Conversion Notice delivered by the Corporation shall not be effective, unless all of the Equity Conditions have been met on each of at least 20 Trading Days during the applicable Threshold Period and through the Trading Day after the date that the Conversion Shares issuable pursuant to such Forced Conversion are actually delivered to the Holders pursuant to the Forced Conversion Notice.  Any Forced Conversion Notices shall be applied ratably to all of the Holders based on each Holder’s initial purchases of Preferred Stock hereunder, provided that any voluntary conversions by a Holder shall be applied against such Holder’s pro rata allocation, thereby decreasing the aggregate amount forcibly converted hereunder if less than all shares of the Preferred Stock are forcibly converted.  For purposes of clarification, a Forced Conversion shall be subject to all of the provisions of Section 2-A.6 , including, without limitation, the provisions requiring payment of liquidated damages and limitations on conversions.

 
20
 

Section 2-A.9 .   Miscellaneous .
 
a)       Notices .  Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by electronic mail, facsimile, or sent by a nationally recognized overnight courier service, addressed to the Corporation, at 2701 Kent Avenue, West Lafayette, IN 47906, Attention:   Chief Financial Officer, email address: vp.finance@basinc.com, facsimile number (765) 497-1102, or such other facsimile number, e-mail address or address as the Corporation may specify for such purposes by notice to the Holders delivered in accordance with this Section 2-A.9 . Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile, e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, e-mail address or address of such Holder appearing on the books of the Corporation, or if no such facsimile number, email address or address appears on the books of the Corporation, at the principal place of business of such Holder, as set forth in the Purchase Agreement.  Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address, as applicable, set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address, as applicable, set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
   
b)       Absolute Obligation .  Except as expressly provided herein, no provision of this Certificate of Designation shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay liquidated damages, accrued dividends and accrued interest, as applicable, on the shares of Preferred Stock at the time, place, and rate, and in the coin or currency, herein prescribed.

 
21
 
 
c)        Lost or Mutilated Preferred Stock Certificate .  If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership thereof reasonably satisfactory to the Corporation.

d)        Governing Law .  All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation shall be governed by and construed and enforced in accordance with the internal laws of the State of Indiana, without regard to the principles of conflict of laws thereof.  Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the " New York Courts ").  Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Certificate of Designation and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of Designation or the transactions contemplated hereby.  If any party shall commence an action or proceeding to enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
   
e)        Waiver .  Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate of Designation or a waiver by any other Holders.  The failure of the Corporation or a Holder to insist upon strict adherence to any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party (or any other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation on any other occasion.  Any waiver by the Corporation or a Holder must be in writing.

 
22
 
 
f)        Severability .  If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances.  If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.

g)       Next Business Day .  Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

h)        Headings .  The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall not be deemed to limit or affect any of the provisions hereof.

i)        Status of Converted or Redeemed Preferred Stock .  Shares of Preferred Stock may only be issued pursuant to the Purchase Agreement.  If any shares of Preferred Stock shall be converted, redeemed or reacquired by the Corporation, such shares shall resume the status of authorized but unissued Preferred Shares and shall no longer be designated as 6% Series A Convertible Preferred Shares.

ARTICLE III
REGISTERED OFFICE AND REGISTERED AGENT
 
Section 3.1 .      Registered Office .  The street address of the Corporation's registered office is 2701 Kent Avenue, West Lafayette, Indiana 47906.
 
Section 3.2 .      Registered Agent .  The name of the Corporation's registered agent at such registered office is Peter T. Kissinger.
 
ARTICLE IV
BOARD OF DIRECTORS
 
Section 4.1 .      Number, Terms .  The total number of directors shall be that specified in or fixed in accordance with these Second Restated Articles of Incorporation or in the By-Laws.  In the absence of a provision in the By-Laws specifying the number of directors or setting forth the manner in which such number shall be fixed, the number of directors shall be nine.  The By-Laws may provide for staggering the terms of directors into two or three groups in the manner provided in the Act.

 
23
 

Section 4.2 .      Election by Voting Groups .  The terms of Preferred Shares may provide for the election of one or more directors by the holders of Common Shares and/or by the holders of one or more series of Preferred Shares.
 
Section 4.3 .      Removal of Directors .  One or more directors may be removed with or without cause by the vote of the holders of a majority of the outstanding Common Shares, subject to any limitation on the removal of directors contained in the terms of Preferred Shares.
 
ARTICLE V
INDEMNIFICATION
 
Section 5.1 .      General .  The Corporation shall, to the fullest extent to which it is empowered to do so by the Act, or any other applicable law, as from time to time in effect, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that he or she is or was a Director, Officer, employee or agent of the Corporation, or who, while serving as such Director, Officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, whether for profit or not, against expenses (including counsel fees), judgments, settlements, penalties and fines (including excise taxes assessed with respect to employee benefit plans) actually or reasonably incurred by him in accordance with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, in the case of conduct in his official capacity, was in the best interests of the Corporation, and in all other cases, was not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful.  The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the prescribed standard of conduct.
 
Section 5.2 .      Authorization of Indemnification .  To the extent that a Director, Officer, employee or agent of the Corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Section 5.1 of this Article V , or in the defense of any claim, issue or matter therein, the Corporation shall indemnify that person against expenses (including counsel fees) actually and reasonably incurred by that person in connection therewith. Any other indemnification under Section 5.1 of this Article V (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case, upon a determination that indemnification of the Director, Officer, employee or agent is permissible in the circumstances because he has met the applicable standard of conduct.  Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not at the time parties to such action, suit or proceeding; or (b) if a quorum cannot be obtained under subdivision (a), by a majority vote of a committee duly designated by the Board of Directors (in which designation Directors who are parties may participate), consisting solely of two (2) or more Directors not at the time parties to such action, suit or proceeding; or (c) by special legal counsel:  (i) selected by the Board of Directors or its committee in the manner prescribed in subdivision (a) or (b), or (ii) if a quorum of the Board of Directors cannot be obtained under subdivision (a) and a committee cannot be designated under subdivision (b), selected by a majority vote of the full Board of Directors (in which selection Directors who are parties may participate), or (iii) by the Shareholders, but shares owned by or voted under the control of Directors who are at the time parties to such action, suit or proceeding may not be voted on the determination.  Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subdivision (c) to select counsel.

 
24
 

Section 5.3 .      Good Faith Defined .  For purposes of any determination under Section 5.1 of this Article V , a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 5.1 if his action is based on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by (a) one or more Officers or employees of the Corporation or another enterprise whom he reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (c) a committee of the Board of Directors of the Corporation or another enterprise of which the person is not a member if he reasonably believes the committee merits confidence.  The term "another enterprise" as used in this Section 5.3 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which the person is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent.  The provisions of this Section 5.3 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in Section 5.1 of this Article V .
 
Section 5.4.      Payment of Expenses in Advance .  Expenses incurred in connection with any civil or criminal action, suit or proceeding may be paid for or reimbursed by the Corporation in advance of the final disposition of such action, suit or proceeding, as authorized in the specific case in the same manner described in Section 5.2 of this Article V , upon receipt of a written affirmation of the Director, Officer, employee or agent's good faith belief that he has met the standard of conduct described in Section 5.1 of this Article V and upon receipt of a written undertaking by or on behalf of the Director, Officer, employee or agent to repay such amount if it shall ultimately be determined that he did not meet the standard of conduct set forth in Section 5.1 of this Article V , and a determination is made that the facts then known to those making the determination would not preclude indemnification under this Article V .
 
Section 5.5.      Provisions Not Exclusive .  The indemnification provided by this Article V shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under these Articles, the Corporation's Amended and Restated Bylaws, any resolution of the Board of Directors or Shareholders, any other authorization, whenever adopted, after notice, by a majority vote of all voting stock then outstanding, or any contract, both as to action in his official capacity and as to action in another capacity while holding that office, and shall continue as to a person who has ceased to be a Director, Officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of that person.

 
25
 

Section 5.6.      Vested Right to Indemnification .  The right of any individual to indemnification under this Article V shall vest at the time of occurrence or performance of any event, act or omission giving rise to any action, suit or proceeding of the nature referred to in Section 5.1 of this Article V and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions.   Notwithstanding the foregoing, the indemnification afforded under this Article V shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of this Article V .  To the extent such prior acts or omissions cannot be deemed to be covered by this Article V , the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of the prior acts or omissions.
 
Section 5.7.     Insurance .  The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a Director, Officer, employee or agent, whether or not the Corporation would have power to indemnify the individual against the same liability under this Article V .
 
Section 5.8.      Additional Definitions .  For purposes of this Article V , references to the "Corporation" shall include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction.
 
For purposes of this Article V , "serving an employee benefit plan at the request of the Corporation" shall include any service as a Director, Officer, employee or agent of the Corporation which imposes duties on, or involves services by that Director, Officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" referred to in this Article V .
 
For purposes of this Article V , "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding, or who is threatened to be made a named defendant or respondent in any action, suit or proceeding.
 
For purposes of this Article V , "official capacity," when used with respect to a Director, shall mean the position of director of the Corporation; and when used with respect to an individual other than a Director, shall mean the office in the Corporation held by the Officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation.
 
"Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not.

 
26
 

Section 5.9.      Payments a Business Expense .  Any payments made to any indemnified party under this Article V under any other right to indemnification shall be deemed to be an ordinary and necessary business expense of the Corporation, and payment thereof shall not subject any person responsible for the payment, or the Board of Directors, to any action for corporate waste or to any similar action.

 
27
 

ANNEX A
 
NOTICE OF CONVERSION
 
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED STOCK)

The undersigned hereby elects to convert the number of shares of 6% Series A Convertible Preferred Shares (the " Preferred Stock ") indicated below into Common Shares (the " Common Stock "), of Bioanalytical Systems, Inc., an Indiana corporation (the " Corporation "), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as may be required by the Corporation in accordance with the Purchase Agreement. No fee will be charged to the Holders for any conversion, except for any such transfer taxes. Capitalized terms used in this Notice Conversion have the meanings specified in the Certificate of Designation for the Preferred Stock.

Conversion calculations:

Date to Effect Conversion: _____________________________________________
 
Number of shares of Preferred Stock owned prior to Conversion: _______________
 
Number of shares of Preferred Stock to be Converted: ________________________
 
Stated Value of shares of Preferred Stock to be Converted: ____________________
 
Applicable Conversion Price: ____________________________________________
 
Number of shares of Common Stock to be Issued: ___________________________
 
Number of shares of Preferred Stock subsequent to Conversion: ________________
 
Address for Delivery: ______________________
or
DWAC Instructions:
Broker no: _________
Account no: ___________

 
[HOLDER]
   
 
By:
 
   
Name:
   
Title:
 
 
28
 
 
CERTIFICATIONS
 
I, Anthony S. Chilton, Chief Executive Officer, certify that:
 
 
1.
I have reviewed this report on Form 10-Q of Bioanalytical Systems, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
 
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions);
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
 
 
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ Anthony S. Chilton
 
Anthony S. Chilton
Date:  August 15, 2011
President and Chief Executive Officer

 
 
 
 
CERTIFICATIONS
 
I, Michael R. Cox, Chief Financial Officer, certify that:
 
 
1.
I have reviewed this report on Form 10-Q of Bioanalytical Systems, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
 
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
 
 
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ Michael R. Cox
 
Michael R. Cox
Date:  August 15, 2011
Chief Financial Officer

 
 
 

 
Certifications of Chief Executive Officer and Chief Financial Officer
 
Pursuant to Section 906
 
Of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
 
The undersigned, the Chief Executive Officer and the Vice President, Finance and Administration and Chief Financial Officer of Bioanalytical Systems Inc. (the “Company”), each hereby certifies that, to the best of his knowledge:
 
 
(a)
the Form 10-Q Quarterly Report of the Company for the three and ninemonths ended June 30, 2011 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(b)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company..
 
 
By:
  /s/ Anthony S. Chilton
 
Anthony S. Chilton
 
President and Chief Executive Officer
 
Date:  August 15, 2011
 
 
By:
  /s/  Michael R. Cox
 
Michael R. Cox
 
Vice President, Finance and Administration
 
and Chief Financial Officer
 
Date:  August 15, 2011