UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended |
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
INOTIV, INC.
(Exact name of the registrant as specified in its charter)
| | |
| | |
INDIANA |
| 35-1345024 |
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2701 KENT AVENUE | | 47906 |
| | |
(765) 463-4527
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
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Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Shares | | NOTV | | The Nasdaq Stock Market LLC |
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 ⌧ NO ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES ⌧ NO ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check):
| | | | |
Large accelerated filer ◻ | Accelerated filer ◻ | Non-accelerated filer ⌧ | Smaller Reporting Company ☒ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of April 26, 2022, 25,515,239February 3, 2023, 25,631,236 of the registrant's common shares were outstanding.
TABLE OF CONTENTS
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PART I | FINANCIAL INFORMATION | |
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Item 1 | Condensed Consolidated Financial Statements: | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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3
INOTIV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | | | | | | | | | | | | |
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| March 31, |
| September 30, |
|
| | December 31, | | | September 30, | ||
| | 2022 | | 2021 | | | 2022 |
| 2022 | ||||
| | (Unaudited) | | | | | | (Unaudited) | | | | ||
Assets |
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Current assets: |
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Cash and cash equivalents | | $ | 47,042 | | $ | 138,924 | | | $ | 20,820 | | $ | 18,515 |
Restricted cash | |
| 427 | |
| 18,000 | | |
| — | |
| 465 |
Trade receivables and contract assets, net of allowances for doubtful accounts of $4,698 and $668, respectively | |
| 86,456 | |
| 28,364 | | ||||||
Trade receivables and contract assets, net of allowances for credit losses of $7,292 and $6,268, respectively | |
| 74,587 | |
| 100,073 | |||||||
Inventories, net | |
| 56,775 | |
| 602 | | |
| 75,639 | |
| 71,441 |
Prepaid expenses and other current assets | |
| 34,883 | |
| 3,129 | | |
| 33,922 | |
| 42,483 |
Assets held for sale | |
| 7,560 | | | — | |||||||
Total current assets | |
| 225,583 | |
| 189,019 | | |
| 212,528 | |
| 232,977 |
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Property and equipment, net | |
| 153,179 | |
| 47,978 | | |
| 187,952 | |
| 186,199 |
Operating lease right-of-use assets, net | | | 23,795 | | | 8,358 | | | | 34,152 | | | 32,489 |
Goodwill | |
| 456,631 | |
| 51,927 | | |
| 91,458 | |
| 157,825 |
Other intangible assets, net | |
| 274,387 | |
| 24,233 | | |
| 338,456 | |
| 345,886 |
Other assets | |
| 5,846 | |
| 341 | | |
| 6,513 | |
| 7,524 |
Total assets | | $ | 1,139,421 | | $ | 321,856 | | | $ | 871,059 | | $ | 962,900 |
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Liabilities, shareholders' equity and noncontrolling interest | | | | |
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Current liabilities: | | | | |
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Accounts payable | | $ | 30,805 | | $ | 6,163 | | | $ | 28,152 | | $ | 28,695 |
Accrued expenses and other liabilities | |
| 20,690 | |
| 8,968 | | |
| 28,582 | |
| 35,801 |
Capex line of credit | | | — | | | 1,749 | | ||||||
Revolving credit facility | | | — | | | 15,000 | |||||||
Fees invoiced in advance | | | 70,238 | | | 26,614 | | | | 60,655 | | | 68,642 |
Current portion on long-term operating lease | |
| 5,356 | |
| 1,959 | | ||||||
Current portion of long-term operating lease | |
| 8,475 | |
| 7,982 | |||||||
Current portion of long-term debt | | | 5,339 | | | 9,656 | | | | 7,553 | | | 7,979 |
Liabilities held for sale | | | 2,710 | |
| — | |||||||
Total current liabilities | |
| 132,428 | |
| 55,109 | | |
| 136,127 | |
| 164,099 |
Long-term operating leases, net | | | 18,613 | | | 6,554 | | | | 26,240 | | | 24,854 |
Long-term debt, less current portion, net of debt issuance costs | |
| 332,274 | |
| 154,209 | | |
| 365,643 | |
| 330,677 |
Other liabilities | | | 1,913 | | | 512 | | ||||||
Other long-term liabilities | | | 6,073 | | | 6,477 | |||||||
Deferred tax liabilities, net | | | 36,783 | | | 344 | | | | 57,169 | | | 77,027 |
Total liabilities | |
| 522,011 | |
| 216,728 | | |
| 591,252 | |
| 603,134 |
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Contingencies (Note 14) | | | | | | | | | | | | | |
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Shareholders’ equity and noncontrolling interest: | |
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Preferred shares, authorized 1,000,000 shares, 0 par value: | |
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Common shares, 0 par value: | |
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Authorized 74,000,000 shares; 25,495,701 issued and outstanding at March 31, 2022 and 15,931,485 at September 30, 2021 | |
| 6,336 | |
| 3,945 | | ||||||
Common shares, no par value: | | | | | | | |||||||
Authorized 74,000,000 shares at December 31, 2022 and at September 30, 2022; 25,606,636 issued and outstanding at December 31, 2022 and 25,598,289 at September 30, 2022 | |
| 6,363 | |
| 6,362 | |||||||
Additional paid-in capital | |
| 713,034 | |
| 112,198 | | |
| 709,856 | |
| 707,787 |
Accumulated deficit | |
| (101,090) | |
| (11,015) | | |
| (435,209) | |
| (348,277) |
Accumulated other comprehensive loss | | | (628) | | | — | | | | (206) | | | (5,500) |
Total equity attributable to common shareholders | | | 617,652 | | | 105,128 | | | | 280,804 | | | 360,372 |
Noncontrolling interest | | | (242) | | | — | | | | (997) | | | (606) |
Total shareholders’ equity and noncontrolling interest | |
| 617,410 | |
| 105,128 | | |
| 279,807 | |
| 359,766 |
Total liabilities and shareholders’ equity and noncontrolling interest | | $ | 1,139,421 | | $ | 321,856 | | | $ | 871,059 | | $ | 962,900 |
The accompanying notes are an integral part of the condensed consolidated financial statements
4
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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| | Three Months Ended | | Six Months Ended | | | Three Months Ended | ||||||||||||
| | March 31, | | March 31, | | | December 31, | ||||||||||||
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| 2022 |
| 2021 |
| 2022 |
| 2021 |
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| 2022 |
| 2021 | ||||||
Service revenue | | $ | 49,584 | | $ | 17,902 | | $ | 87,760 | | $ | 34,934 | | | $ | 50,048 | | $ | 38,176 |
Product revenue | |
| 90,729 | |
| 849 | |
| 136,764 | |
| 1,702 | | |
| 72,706 | |
| 46,035 |
Total revenue | | $ | 140,313 | |
| 18,751 | | $ | 224,524 | | $ | 36,636 | | | $ | 122,754 | |
| 84,211 |
Costs and expenses: | |
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Cost of services provided | | | 33,305 | | | 11,905 | | | 57,514 | | | 23,502 | | ||||||
Cost of products sold | | | 62,282 | | | 522 | | | 102,959 | | | 933 | | ||||||
Cost of services provided (excluding amortization of intangible assets) | | | 35,430 | | | 24,209 | |||||||||||||
Cost of products sold (excluding amortization of intangible assets) | | | 65,639 | | | 40,677 | |||||||||||||
Selling | |
| 4,647 | |
| 880 | |
| 7,385 | |
| 1,505 | | |
| 4,507 | |
| 2,738 |
General and administrative | | | 21,347 | | | 5,610 | | | 34,599 | | | 10,492 | | | | 28,969 | | | 13,252 |
Amortization of intangible assets | | | 6,414 | | | 152 | | | 9,810 | | | 312 | | | | 8,781 | | | 3,396 |
Other operating expense | | | 4,450 | | | 203 | | | 38,030 | | | 399 | | | | 3,639 | | | 33,580 |
Operating income (loss) | | $ | 7,868 | | $ | (521) | | $ | (25,773) | | $ | (507) | | ||||||
Other income (expense): | | | | | | | | | | | | | | ||||||
Goodwill impairment loss | | | 66,367 | | | — | |||||||||||||
Operating loss | | $ | (90,578) | | $ | (33,641) | |||||||||||||
Other (expense) income: | | | | | | | |||||||||||||
Interest expense | |
| (7,547) | |
| (366) | |
| (12,375) | |
| (713) | | |
| (10,450) | |
| (4,828) |
Other (expense) income | |
| (139) | |
| 179 | |
| (57,866) | |
| 179 | | ||||||
Income (loss) before income taxes | | $ | 182 | | $ | (708) | | $ | (96,014) | | $ | (1,041) | | ||||||
Income tax (expense) benefit | |
| (6,846) | |
| (15) | |
| 5,939 | |
| (48) | | ||||||
Consolidated net (loss) | | $ | (6,664) | | $ | (723) | | $ | (90,075) | | $ | (1,089) | | ||||||
Less: Net income (expense) attributable to noncontrolling interests | | | (577) | | | — | | | (941) | | | — | | ||||||
Net (loss) attributable to common shareholders | | $ | (6,087) | | $ | (723) | | $ | (89,134) | | $ | (1,089) | | ||||||
Other expense | |
| (1,878) | |
| (57,727) | |||||||||||||
Loss before income taxes | | $ | (102,906) | | $ | (96,196) | |||||||||||||
Income tax benefit | |
| 15,974 | |
| 12,785 | |||||||||||||
Consolidated net loss | | $ | (86,932) | | $ | (83,411) | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | | | 391 | | | (364) | |||||||||||||
Net loss attributable to common shareholders | | $ | (87,323) | | $ | (83,047) | |||||||||||||
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(Loss) per common share | | | | | | | | | | | | | | ||||||
Net (loss) attributable to common shareholders: | | | | | | | | | | | | | | ||||||
Loss per common share | | | | | | | |||||||||||||
Net loss attributable to common shareholders: | | | | | | | |||||||||||||
Basic and diluted | | $ | (0.24) | | $ | (0.06) | | $ | (3.84) | | $ | (0.10) | | | $ | (3.41) | | $ | (3.93) |
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Weighted-average number of common shares outstanding: | |
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Basic and diluted | |
| 25,315 | |
| 11,151 | |
| 23,197 | |
| 11,083 | | |
| 25,603 | |
| 21,124 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)LOSS
(In thousands)
(Unaudited)
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
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| 2022 |
| 2021 |
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Consolidated net loss | | $ | (86,932) | | $ | (83,411) | |
Foreign currency translation | |
| 5,107 | |
| 247 | |
Defined benefit plans: | | | | | | | |
Pension cost amortization | | | (54) | | | — | |
Actuarial gains (losses), net of tax | | | — | | | (110) | |
Foreign currency translation | |
| 241 | |
| — | |
Other comprehensive income, net of tax | | | 5,294 | | | 137 | |
Consolidated comprehensive loss | | | (81,638) | | | (83,274) | |
Less: Comprehensive income (loss) attributable to non-controlling interests | |
| 391 | |
| (364) | |
Comprehensive loss attributable to common stockholders | | $ | (82,029) | | $ | (83,638) | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(In thousands, except number of shares)
(Unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Consolidated net (loss) | | $ | (6,664) | | $ | (723) | | $ | (90,075) | | $ | (1,089) |
Foreign currency translation | |
| (1,114) | |
| — | |
| (867) | |
| — |
Defined benefit plans: | | | | | | | | | | | | |
Amortization of periodic benefit costs | | | 340 | | | — | | | 230 | | | — |
Other comprehensive (loss) income, net of tax | | | (774) | | | — | | | (637) | | | — |
Consolidated comprehensive (loss) | | | (7,438) | | | (723) | | | (90,712) | | | (1,089) |
Less: Comprehensive (loss) attributable to non-controlling interests | |
| (577) | |
| — | |
| (941) | | | — |
Comprehensive (loss) attributable to common stockholders | | $ | (6,861) | | $ | (723) | | $ | (89,771) | | $ | (1,089) |
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| | | | | | | | | | | | | Accumulated | | | | | | ||
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| Additional |
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| Other | | Non- | | Total | ||||
| | Common Shares | | paid-in | | Accumulated | | Comprehensive | | Controlling | | shareholders’ | ||||||||
|
| Number |
| Amount |
| capital |
| deficit |
| (Loss) Income | | Interests | | equity | ||||||
Balance at September 30, 2022 |
| 25,598,289 | | $ | 6,362 | | $ | 707,787 | | $ | (348,277) | | $ | (5,500) | | $ | (606) | | $ | 359,766 |
Consolidated net loss |
| — | |
| — | |
| — | |
| (86,932) | |
| — | |
| (391) | |
| (87,323) |
Issuance of stock under employee stock plans | | 8,347 | | | 1 | | | 23 | | | — | | | — | | | — | | | 24 |
Stock-based compensation | | — | | | — | | | 2,046 | | | — | | | — | | | — | | | 2,046 |
Pension cost amortization | | — | | | — | | | — | | | — | | | (54) | | | — | | | (54) |
Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | 5,348 | | | — | | | 5,348 |
Balance at December 31, 2022 | | 25,606,636 | | $ | 6,363 | | $ | 709,856 | | $ | (435,209) | | $ | (206) | | $ | (997) | | $ | 279,807 |
6
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(UNAUDITED)
(In thousands, except number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three and Six Month Periods Ended March 31, 2022 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | ||
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| Additional |
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| Other | | Non- | | Total | ||||
| | Preferred Shares | | Common Shares | | paid-in | | Accumulated | | Comprehensive | | Controlling | | shareholders’ | |||||||||||
|
| Number |
| Amount |
| Number |
| Amount |
| capital |
| deficit |
| Loss | | Interests | | equity | |||||||
Balance at September 30, 2021 |
| 0 | | $ | 0 |
| 15,931,485 | | $ | 3,945 | | $ | 112,198 | | $ | (11,015) | | $ | — | | $ | — | | $ | 105,128 |
Consolidated net (loss) income |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| (83,411) | |
| — | |
| 364 | |
| (83,047) |
Stock issued in acquisitions | | 0 | |
| 0 |
| 8,374,138 | |
| 2,094 | |
| 459,289 | |
| 0 | |
| — | |
| — | |
| 461,383 |
Non-controlling interest related to Envigo acquisition | | 0 | |
| 0 | | 0 | |
| 0 | | | 0 | |
| 0 | | | — | | | (983) | | | (983) |
Issuance of stock under employee stock plans | | 0 | | | 0 | | 42,971 | | | 11 | | | 38 | | | 0 | | | — | | | — | | | 49 |
Stock based compensation | | 0 | | | 0 | | 0 | | | 0 | | | 19,160 | | | 0 | | | — | | | — | | | 19,160 |
Pension cost amortization | | 0 | | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | (110) | | | — | | | (110) |
Foreign currency translation adjustment | | 0 | | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | 247 | | | — | | | 247 |
Reclassification of convertible note embedded derivative to equity (Note 7) | | 0 | | | 0 | | 0 | | | 0 | | | 88,576 | | | 0 | | | — | | | — | | | 88,576 |
Balance at December 31, 2021 | | 0 | | $ | 0 | | 24,348,594 | | $ | 6,050 | | $ | 679,261 | | $ | (94,426) | | $ | 137 | | $ | (619) | | $ | 590,403 |
Consolidated net (loss) income | | 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| (6,664) | | | — | | — | 577 | |
| (6,087) |
Stock issued in acquisitions | | 0 | |
| 0 |
| 1,106,457 | |
| 276 | |
| 32,599 | |
| 0 | |
| — | |
| — | |
| 32,875 |
Non-controlling interest related to Envigo acquisition | | 0 | |
| 0 | | 0 | |
| 0 | | | 0 | |
| 0 | | | — | | | (191) | | | (191) |
Issuance of stock under employee stock plans | | 0 | | | 0 | | 40,650 | | | 10 | | | 36 | | | 0 | | | — | | | — | | | 46 |
Stock based compensation | | 0 | | | 0 | | 0 | | | 0 | | | 1,138 | | | 0 | | | — | | | — | | | 1,138 |
Pension cost amortization | | 0 | | | 0 | | 0 | |
| 0 | | | 0 | | | 0 | | | 340 | | | — | | | 340 |
Foreign currency translation adjustment | | 0 | | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | (1,105) | | | (9) | | | (1,114) |
Balance March 31, 2022 | | 0 | | $ | 0 | | 25,495,701 | | $ | 6,336 | | $ | 713,034 | | | (101,090) | | $ | (628) | | $ | (242) | | $ | 617,410 |
7
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(UNAUDITED)
(In thousands, except number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three and Six Month Periods Ended March 31, 2021 | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | Accumulated | | | | | | ||||
| | | | | | | | | | |
| Additional |
|
| |
| Other | | Non- | | Total | | | | | |
| Additional |
|
| |
| Other | | Non- | | Total | ||||||||
| | Preferred Shares | | Common Shares | | paid-in | | Accumulated | | Comprehensive | | Controlling | | shareholders’ | | Common Shares | | paid-in | | Accumulated | | Comprehensive | | Controlling | | shareholders’ | |||||||||||||||||||
|
| Number |
| Amount |
| Number |
| Amount |
| capital |
| deficit |
| Loss | | Interests | | equity |
| Number |
| Amount |
| capital |
| deficit |
| (Loss) Income | | Interests | | equity | |||||||||||||
Balance at September 30, 2020 |
| 25 | | $ | 25 |
| 10,977,675 | | $ | 2,706 | | $ | 26,775 | | $ | (21,910) | | $ | — | | $ | — | | $ | 7,596 | ||||||||||||||||||||
Balance at September 30, 2021 |
| 15,931,485 | | $ | 3,945 | | $ | 112,198 | | $ | (11,015) | | $ | — | | $ | — | | $ | 105,128 | |||||||||||||||||||||||||
Consolidated net (loss) income | | 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| (366) | | | 0 | | | 0 | |
| (366) | | — | |
| — | |
| — | |
| (83,411) | | | — | | | 364 | |
| (83,047) |
Stock option exercises | | — | | | — | | 23,350 | | | 6 | | | 39 | | | 0 | | | — | | | — | | | 45 | ||||||||||||||||||||
Stock based compensation | | 0 | | | 0 | | 116,974 | | | 29 | | | 152 | | | 0 | | | 0 | | | 0 | | | 181 | ||||||||||||||||||||
Balance at December 31, 2020 | | 25 | | $ | 25 | | 11,117,999 | | $ | 2,741 | | $ | 26,966 | | $ | (22,276) | | $ | — | | $ | — | | $ | 7,456 | ||||||||||||||||||||
Consolidated net (loss) income | | — | |
| — |
| 0 | |
| 0 | |
| 0 | |
| (723) | | | — | | | — | |
| (723) | ||||||||||||||||||||
Stock based compensation | | — | | | — | | 12,502 | | | 3 | | | 275 | | | 0 | | | — | | | — | | | 278 | ||||||||||||||||||||
Stock option exercises | | — | | | — | | 36,040 | | | 9 | | | 56 | | | 0 | | | — | | | — | | | 65 | ||||||||||||||||||||
Preferred stock conversion | | (25) | | | (25) | | 12,500 | | | 3 | | | 22 | | | 0 | | | — | | | — | | | 0 | ||||||||||||||||||||
Balance at March 31, 2021 | | — | | $ | — | | 11,179,041 | | $ | 2,756 | | $ | 27,319 | | $ | (22,999) | | $ | — | | $ | — | | $ | 7,076 | ||||||||||||||||||||
Stock issued in acquisitions | | 8,374,138 | | | 2,094 | | | 459,289 | | | — | | | — | | | — | | | 461,383 | |||||||||||||||||||||||||
Noncontrolling interest related to Envigo acquisition | | | | | — | | | — | | | — | | | — | | | (983) | | | (983) | |||||||||||||||||||||||||
Issuance of stock under employee stock plans | | 42,971 | | | 11 | | | 38 | | | — | | | — | | | — | | | 49 | |||||||||||||||||||||||||
Stock-based compensation | | — | | | — | | | 19,160 | | | — | | | — | | | — | | | 19,160 | |||||||||||||||||||||||||
Pension cost amortization | | — | | | — | | | — | | | — | | | (110) | | | — | | | (110) | |||||||||||||||||||||||||
Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | 247 | | | — | | | 247 | |||||||||||||||||||||||||
Reclassification of convertible note embedded derivative to equity (Note 6) | | — | | | — | | | 88,576 | | | — | | | — | | | — | | | 88,576 | |||||||||||||||||||||||||
Balance at December 31, 2021 | | 24,348,594 | | $ | 6,050 | | $ | 679,261 | | $ | (94,426) | | $ | 137 | | $ | (619) | | $ | 590,403 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
87
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | |
| | Six Months Ended | | ||||
| | March 31, | | ||||
|
| 2022 |
| 2021 |
| ||
Operating activities: |
| |
|
| |
|
|
Consolidated net (loss) | | $ | (90,075) | | $ | (1,089) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of acquisitions: | |
| | |
| | |
Depreciation and amortization | |
| 15,866 | |
| 2,154 | |
Undistributed earnings of noncontrolling interest | | | 777 | | | — | |
Employee stock compensation expense | |
| 20,300 | |
| 460 | |
Changes in deferred taxes | | | (1,907) | | | — | |
Provision for doubtful accounts | | | 381 | | | 72 | |
Unrealized foreign currency loss | | | 60 | | | 9 | |
Amortization of debt issuance costs and original issue discount | | | 1,203 | | | — | |
Noncash interest and accretion expense | | | 2,512 | | | — | |
Loss on fair value remeasurement of embedded derivative | | | 56,714 | | | — | |
Other non-cash operating activities | | | — | | | 69 | |
Loss on debt extinguishment | | | 878 | | | — | |
Non-cash amortization of inventory fair value step-up | | | 6,277 | | | — | |
Gain on disposal of property and equipment | | | (235) | | | (1) | |
Financing lease interest expense | |
| 1 | |
| 137 | |
Changes in operating assets and liabilities: | |
| | |
| | |
Trade receivables and contract assets | |
| (8,926) | |
| (1,927) | |
Inventories | |
| (14,688) | |
| (172) | |
Prepaid expenses and other current assets | | | (10,149) | | | 178 | |
Operational lease right-of-use assets and liabilities, net | | | 1,457 | | | (31) | |
Accounts payable | |
| 5,222 | |
| 770 | |
Accrued expenses and other liabilities | |
| (11,510) | |
| 66 | |
Fees invoiced in advance | |
| 28,402 | |
| 3,831 | |
Other asset and liabilities, net | | | 1,467 | | | — | |
Net cash provided by operating activities | |
| 4,027 | |
| 4,526 | |
| |
|
| |
|
| |
Investing activities: | |
|
| |
|
| |
Capital expenditures | | | (15,202) | | | (2,427) | |
Proceeds from sale of equipment | | | 283 | | | 2 | |
Cash paid in acquisitions | |
| (288,702) | |
| — | |
Net cash used in investing activities | |
| (303,621) | |
| (2,425) | |
| |
|
| |
|
| |
Financing activities: | |
|
| |
|
| |
Payments on finance lease liability | | | — | | | (207) | |
Payments of long-term debt | | | (37,746) | | | (1,436) | |
Payments of debt issuance costs | | | (9,887) | | | (41) | |
Payments on promissory notes | |
| (763) | |
| — | |
Payments on capex lines of credit | | | (1,749) | | | (135) | |
Payments on revolving credit facility | |
| (10,000) | |
| | |
Payments on senior term notes | | | (513) | | | | |
Payments on delayed draw term loan | | | (88) | | | | |
Borrowings on revolving credit facility | |
| 10,000 | |
| | |
Borrowings on construction loans | | | 1,184 | | | — | |
Borrowings on capex lines of credit | | | — | | | 387 | |
Borrowings on delayed draw term loan | | | 35,000 | | | — | |
Proceeds from issuance of senior term notes | | | 205,000 | | | — | |
Proceeds from exercise of stock options | | | 93 | | | 111 | |
Net cash provided by (used in) financing activities | |
| 190,531 | |
| (1,321) | |
| |
| | |
|
| |
Effect of exchange rate changes on cash and cash equivalents | | | (392) | | | — | |
| | | | | | | |
Net (decrease) increase in cash and cash equivalents | |
| (109,455) | |
| 780 | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 156,924 | |
| 1,406 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 47,469 | | $ | 2,186 | |
| |
| | |
| | |
Noncash financing activity: | | | | | | | |
Seller financed acquisition | | $ | 6,325 | | | — | |
| | | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| | |
Cash paid for interest | | $ | 5,989 | | $ | 520 | |
Income taxes paid, net | | $ | 614 | | $ | — | |
| | | | | | | |
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
|
| 2022 |
| 2021 |
| ||
Operating activities: |
| |
|
| |
|
|
Consolidated net loss | | $ | (86,932) | | $ | (83,411) | |
Adjustments to reconcile net loss to net cash used in operating activities, net of acquisitions: | |
| | |
| | |
Depreciation and amortization | |
| 13,263 | |
| 6,035 | |
Employee stock compensation expense | |
| 2,046 | |
| 19,159 | |
Changes in deferred taxes | | | (20,123) | | | (14,281) | |
Provision for doubtful accounts | | | 1,078 | | | — | |
Amortization of debt issuance costs and original issue discount | | | 732 | | | — | |
Noncash interest and accretion expense | | | 1,446 | | | — | |
Loss on fair value remeasurement of embedded derivative | | | — | | | 56,714 | |
Other non-cash operating activities | | | 1,028 | | | 1,730 | |
Goodwill impairment loss | | | 66,367 | | | — | |
Loss on debt extinguishment | | | — | | | 877 | |
Non-cash amortization of inventory fair value step-up | | | 244 | | | 3,668 | |
Changes in operating assets and liabilities: | |
| | | | | |
Trade receivables and contract assets | |
| 21,999 | |
| 1,517 | |
Inventories | |
| (4,204) | |
| (3,393) | |
Prepaid expenses and other current assets | | | 7,810 | | | (1,432) | |
Operating lease right-of-use assets and liabilities, net | | | 266 | | | (229) | |
Accounts payable | |
| 1,169 | |
| 4,491 | |
Accrued expenses and other liabilities | |
| (5,548) | |
| (10,974) | |
Fees invoiced in advance | |
| (7,796) | |
| 10,806 | |
Other asset and liabilities, net | | | (255) | | | 7,580 | |
Net cash used in operating activities | |
| (7,410) | |
| (1,143) | |
| |
|
| |
|
| |
Investing activities: | |
|
| |
|
| |
Capital expenditures | | | (8,369) | | | (5,655) | |
Proceeds from sale of equipment | | | 211 | | | 284 | |
Cash paid in acquisitions | |
| — | |
| (227,022) | |
Net cash used in investing activities | |
| (8,158) | |
| (232,393) | |
| |
|
| |
|
| |
Financing activities: | |
|
| |
| | |
Payments of long-term debt | | | — | | | (37,747) | |
Payments of debt issuance costs | |
| — | |
| (7,102) | |
Payments on promissory notes | | | (952) | | | (167) | |
Payments on revolving credit facility | |
| (15,000) | |
| — | |
Payments on senior term notes and delayed draw term loans | | | (688) | | | — | |
Borrowings on construction loan | | | — | | | 1,184 | |
Borrowings on senior term notes and delayed draw term loans | | | 35,000 | | | — | |
Proceeds from exercise of stock options | | | 24 | | | 47 | |
Proceeds from issuance of senior term notes | | | — | | | 165,000 | |
Payments on capex line of credit | | | — | | | (1,749) | |
Net cash provided by financing activities | |
| 18,384 | |
| 119,466 | |
| |
| | |
|
| |
Effect of exchange rate changes on cash and cash equivalents | | | 593 | | | — | |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents | |
| 3,409 | |
| (114,070) | |
Less: cash, cash equivalents, and restricted cash held for sale | | | (1,569) | | | — | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 18,980 | |
| 156,924 | |
Cash, cash equivalents, and restricted cash at end of period, net of cash, cash equivalents and restricted cash held for sale | | $ | 20,820 | | $ | 42,854 | |
| |
| | |
| | |
Noncash financing activity: | | | | | | | |
Seller financed acquisition | | $ | — | | $ | 3,000 | |
| | | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| | |
Cash paid for interest | | $ | 8,491 | | $ | 1,351 | |
Income taxes paid, net | | $ | 2,268 | | $ | 163 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
98
INOTIV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share amounts, unless otherwise indicated)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
1. | DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION |
Inotiv, Inc. and its subsidiaries and a variable interest entity (“VIE”) (“we,” “our,” “us,” the “Company,” and “Inotiv”) comprise a leading contract research organization specializing in(“CRO”) dedicated to providing nonclinical and analytical drug discovery and development services. The Company also manufactures scientific instruments for life sciences research, which it sells with related software for use byservices to the pharmaceutical companies, universities, government research centers and medical device industries and selling a range of research-quality animals and diets to the same industries as well as academia and government clients. Our products and services focus on bringing new drugs and medical devices through the discovery and preclinical phases of development, all while increasing efficiency, improving data, and reducing the cost of discovering and taking new drugs and medical devices to market. Inotiv is committed to supporting discovery and development objectives as well as helping researchers realize the full potential of their critical research institutions.and development projects, all while working together to build a healthier and safer world. We are dedicated to practicing high standards of laboratory animal care and welfare.
On November 5, 2021, the Company completed theAs a result of our strategic acquisition of Envigo RMS Holding Corp. (“Envigo”) by mergerin November 2021, which added a complementary research model platform, our full spectrum solutions now span two segments: Discovery and Safety Assessment (“DSA”) and Research Models and Services (“RMS”).
Through our DSA segment, we support the discovery, nonclinical development and clinical development needs of a wholly owned subsidiaryresearchers and clinicians for primarily small molecule drug candidates, as well as biotherapeutics and biomedical devices. Our scientists have skills in analytical instrumentation development, chemistry, computer software development, histology, pathology, physiology, surgery, analytical chemistry, drug metabolism, pharmacokinetics, and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are companies whose scientists are engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research, from small start-up biotechnology companies to some of the largest global pharmaceutical companies.
Through our RMS segment, we offer access to a wide range of small and large research models for basic research and drug discovery and development, as well as specialized models for specific diseases and therapeutic areas. We combine deep animal husbandry expertise and expanded access to scientists across the discovery and preclinical continuum, which reduces nonclinical lead times and provides enhanced project delivery. In conjunction with our CRO business, we have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and provide access to innovative genetically engineered models and services solutions. Our principal clients include biopharmaceutical companies, CROs, and academic and government organizations.
Temporarily Suspended or Limited Operations
On November 16, 2022, the Company became aware that the U.S. Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) had criminally charged employees of the principal supplier of non-human primates (“NHPs”) to the Company, along with two Cambodian government officials, with conspiring to illegally import NHPs into the U.S. from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021 (the “November 16, 2022 event”). Also as previously disclosed, two of the Company’s subsidiaries, Orient BioResource Center, Inc. (“OBRC”) and Envigo Global Services, Inc. (“EGSI”), companies acquired by the Company on January 27, 2022 and November 5, 2021, respectively, had received grand jury subpoenas from USAO-SDFL requiring the production of documents and information related to their importation of NHPs into Envigo.the U.S. The Company has been fully cooperating, and will continue to cooperate, with USAO-SDFL.
The Company has not been directed to refrain from selling the Cambodian NHPs in its possession in the U.S. However, due to the allegations contained in the indictment involving the supplier and the Cambodian government officials, the Company believed that it was prudent, at the time and through the date of Form 10-K filed on January 13, 2023, to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts evaluated what additionally could be done to satisfy itself that the NHPs in inventory from Cambodia can be reasonably determined to be purpose-bred. Historically, the Company has relied on the Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”) documentation and related processes and procedures, including release of each import by U.S. Fish and Wildlife Service. The Company has continued to sell NHPs from other suppliers. Subsequent to January 13, 2023, and through the date of this report, and after an internal analysis and review, the Company has shipped a select number of its Cambodian NHP inventory; however, the Company is not currently shipping Cambodian NHPs at the same volumes that it was prior to the November 16, 2022 event. The Company expects to establish new procedures before it will resume Cambodian NHP imports. The Company expects that future imports of NHPs from Cambodia will be dependent on
9
working with third parties to establish additional procedures aiming at providing additional assurances that future NHP imports from Cambodia are purpose-bred.
Of the Company’s total revenue of $547,656 in the fiscal year ended September 30, 2022, approximately $140,000 was from NHPs that it had imported from Cambodia. Refer to the Liquidity section below and Note 5 – Goodwill and Intangible Assets for further discussion of impacts to the three months ended December 31, 2022, and expected future impacts.
Liquidity
As of December 31, 2022, the Company had cash and cash equivalents of approximately $20,820. The November 16, 2022 event and subsequent decision to refrain from selling or delivering Cambodian NHPs held in the U.S., triggered a material adverse event clause in our Credit Agreement resulting in, among other things, a limitation of the Company’s ability to draw on its revolving credit facility. The loss of access to the Company’s revolving credit facility and reduced liquidity resulting from the decision to refrain from selling Cambodian NHPs held in the U.S. resulted in reduced forecasted liquidity. As a result of these events, the Company took steps to improve its liquidity, which included negotiating an amendment to its Credit Agreement, which was executed on January 9, 2023, to reinstate its ability to borrow under its revolving credit facility. Without the amendment, the Company was at risk of not having the revolving credit facility available.
During the three months ended December 31, 2022, the Company announced the completion of the closure of the Cumberland and Dublin, Virginia facilities and announced further intended site optimizations plans for 2023 and 2024, including two U.S. facilities, which have been approved, and two non-U.S. facilities, Blackthorn, U.K. and Gannat, France, which were subject to a consultation and approval process in those countries. The site optimization for our Blackthorn, U.K. site remained subject to approval as of December 31, 2022 and through the date of this report. Subsequent to December 31, 2022, we completed the consultation and approval process in Gannat, France and will be relocating the operations of this facility to our recently updated Horst, Netherlands facility, which we expect to be completed by June 30, 2023. Further, the Company has communicated price increases that began in January 2023. The Company also took steps in reducing its 2023 budgeted capital expenditures and certain forecasted expenses, including a reduction of nonessential travel and employee-related expenses, among other efficiency-based reductions. As a result of the Envigo transaction,above measures, the Company believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and comply with minimum liquidity and financial covenant requirements under its debt covenants under its Credit Agreement, for at least the next twelve months. The forecasted operating cash flows include the shipping of the Company’s business now includes breeding, importingexisting Cambodian NHP inventory. See Note 6 – Debt and selling research-quality animal modelsNote 15 – Subsequent Events for use in laboratory tests, manufacturingfurther information about the Company’s existing credit facilities and distributing standardrequirements under its debt covenants. The Company’s liquidity needs and custom diets, distributing bedding and enrichment products, and providing other services associatedcompliance with these products. With over 130 different species and strains, the Company is a global leader in the production and sale of some of the most widely used rodent research model strains,covenants depend, among other species. The Company maintains productionthings, on the timing of NHP shipments and distribution facilities in the United States (“U.S.”), United Kingdom (“U.K.”), mainland Europe, and Israel.its ability to generate cash from operations.
Basis of Presentation
The Company has 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 the Company’s audited consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022. In the opinion of management, the condensed consolidated financial statements for the three and six months ended MarchDecember 31, 2022 and 2021 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of the Company’s financial position at MarchDecember 31, 2022. The results of operations for the three and six months ended MarchDecember 31, 2022 mayare not benecessarily indicative of the results for the fiscal year ending September 30, 2022.
The acquisition of Envigo was transformational to the Company’s underlying business. As a result, certain reclassifications2023. Certain prior year amounts have been made to prior periods inreclassified within the unaudited condensed consolidated financial statements and accompanying notes to conformstatement of cash flows for consistency with the current presentation, which more closely reflects management’s perspectiveyear presentation. These reclassifications had no effect on the reported results of the business as it currently exists.operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgements that may affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. These include, but are not limited to, management estimates in the calculation and timing of revenue recognition, pension liabilities, deferred tax assets and liabilities and the related valuation allowance. Although estimates are based upon management’s best estimate using historical experience, current events, and actions, actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
10
Consolidation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company, including all subsidiaries and a VIEvariable interest entity (“VIE”) it consolidates in accordance with GAAP. The Company consolidates a VIE as a result of the Envigo acquisition. The VIE does not materially impact our net assets or net income.loss.
The Company accounts for noncontrolling interests in accordance with Accounting StandardStandards Codification (“ASC”) 810, “Consolidation” (“ASC 810”). ASC 810 requires companies with noncontrolling interests to disclose such interests as a portion of equity but separate from the parent’s equity. The noncontrolling interests’ portion of net income (loss) is presented on the condensed consolidated statementstatements of operations.
10
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for fiscal year 2021. As a result of the Envigo acquisition, the following policies have been added or adjusted to reflect our combined business.twelve months ended September 30, 2022.
Pension Costs
As a result of the Envigo acquisition, the Company has a defined benefit pension plan for one of its U.K. subsidiaries.
The projected benefit obligation and funded position of the defined benefit plan is estimated by actuaries and the Company recognizes the funded status of its defined benefit plan on its condensed consolidated balance sheets and recognizes gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of accumulated other comprehensive income (loss), net of tax. The Company measures plan assets and obligations as of the date of the Company’s year-end consolidated balance sheet, using assumptions to anticipate future events. The valuation of assets acquired and liabilities assumed in the Envigo acquisition had not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subject to change, including the valuation of the unfunded defined benefit plan obligation, among other items.
Additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations are disclosed in the notes to the condensed consolidated financial statements (see Note 13 – Defined Benefit Plan).
Comprehensive Income (Loss)
Comprehensive income (loss) for the periods presented is comprised of consolidated net income (loss) plus the change in the cumulative translation adjustment equity account and the adjustments, net of tax, for the current period actuarial gains (losses) in connection with the Company’s defined benefit plan.
Foreign Currencies
Transactions in currencies other than the functional currency of each entity are recorded at the rates of exchange on the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange on the balance sheet date and the related transaction gains and losses are reported in the condensed consolidated statements of operations, in Operating income. The Company records gains and losses from re-measuring intercompany loans within Other (expense) income in the condensed consolidated statements of operations.
The results of operations of subsidiaries whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rate, assets and liabilities are translated at period-end exchange rates, capital accounts are translated at historical exchange rates, and retained earnings are translated at the weighted average of historical rates. Translation adjustments are excluded from the determination of net income (loss) and are recorded as a separate component of equity within accumulated other comprehensive income (loss) in the condensed consolidated financial statements.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables from customers in the biopharmaceutical, contract research, academic, and governmental sectors. The Company believes its exposure to credit risk is minimal, as the majority of the customers are predominantly well established and viable. Additionally, the Company maintains allowances for potential credit losses. The Company’s exposure to credit loss in the event that payment is not received for revenue recognized equals the outstanding trade receivables and contract assets less fees invoiced in advance.
During the three and six months ended MarchDecember 31, 2022 1and 2021, one customer accounted for 31.4%21.7% and 27.4%20.7% of sales, respectively. During the the three and six months ended MarchDecember 31, 2022 and 2021, no customervendors accounted for more than 10% of sales. During the the three and six months ended March 31, 2022 and 2021, no supplier accounted for more than 10%cost of purchases of goods and services.revenues.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
DSA
The DSA segment generates service revenue through drug discovery and development services. The DSA segment generates product revenue through internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company’s BASi product line.
RMS
The RMS segment generates products revenue through the commercial production and sale of research models, diets and bedding and bioproducts. The RMS segment generates service revenue through Genetically Engineered Models and Services (GEMS), client-owned animal colony care, and health monitoring and diagnostics services related to research models.
Contract Assets and Liabilities from Contracts with Customers
The timing of revenue recognition, billings and cash collections results in billed receivables (trade receivables), contract assets (unbilled revenue), and contract liabilities (customer deposits and deferred revenue) on the condensed consolidated balance sheets. The following table provides information about contract assets (trade receivables and unbilled revenue, excluding allowances for credit losses), and fees invoiced in advance (customer deposits and deferred revenue):
| | | | | | |
| | Balance at | | Balance at | ||
| | | December 31, | | September 30, | |
|
| 2022 | | 2022 | ||
Contract Assets: Trade receivables | | $ | 65,555 | | $ | 88,867 |
Contract Assets: Unbilled revenue | | | 16,324 | | | 17,474 |
Contract liabilities: Customer deposits | | | 30,509 | | | 39,222 |
Contract liabilities: Deferred revenue | | | 30,146 | | | 29,420 |
11
2. EQUITY
Common Stock Offering
On April 23, 2021, we closed an underwritten public offeringWhen the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaidadvanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $2,710 and $2,647 of 3,044,117 of our common shares, including 397,058 common shares sold pursuant to the full exercise by the underwriter of its option to purchase additional shares to cover over-allotments. All of the shares were sold at a price to the public of $17.00 per share. Net proceedsunpaid advanced client billings from the offering were approximately $49,000, after deducting the underwriting discountboth client receivables and estimated offering expenses.
Increase in Authorized Shares and Equity Plan Reserve
On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s Second Amended and Restated Articles of Incorporation to increase the number of authorized shares from 20,000,000 shares, consisting of 19,000,000 common shares and 1,000,000 preferred shares, to 75,000,000 shares, consisting of 74,000,000 common shares and 1,000,000 preferred shares. Approval of this matter by the Inotiv shareholders was a condition to the closing of the Envigo acquisition. The amendment was effective on November 4, 2021. On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s 2018 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares available for awards thereunder by 1,500,000 shares and to make certain corresponding changes to certain limitationsdeferred revenue in the Equity Plan. At March 31, 2022, 1,250,819 shares remained available for grants under the Equity Plan.
Stock Issued in Connection with Acquisitions
During the three and six months ended March 31, 2022, 1,106,457 and 9,480,595 common shares, respectively, were issued in relation to acquisitions. See Note 10 for further discussionaccompanying unaudited condensed consolidated balance sheets as of consideration for each acquisition.
Stock Based Compensation
The Company expenses the estimated fair value of stock options, restricted stock and restricted stock units over the vesting periods of the grants. The Company recognizes expense for awards subject to graded vesting using the straight-line attribution method. The Company adopted a change in accounting policy effective October 1, 2020 for forfeitures. Stock based compensation expense for the three and six months ended MarchDecember 31, 2022 and 2021, was $1,138 and $25,070 and $279 and $460,September 30, 2022, respectively. Of the $25,070 stock compensation expense
Changes in the six-monthscontract asset and the contract liability balances during the three months ended MarchDecember 31, 2022 $23,014 relates to post-combination expense recognized in connection withinclude the Envigo transaction (see Note 10 – Business Combinations), which is inclusive of $4,772 of stock based compensation settled in cash.following:
3. NET LOSS PER SHARE
The Company computes basic income (loss) per share using the weighted average number of common shares outstanding. The Company computes diluted earnings per share using the if-converted method for preferred shares and convertible debt, if any, and the treasury stock method for stock options and restricted stock units. Shares issuable upon exercise of 1,695,070 options and shares issuable upon vesting of 682,357 restricted stock units were not considered in computing diluted income (loss) per share for the three and six months ended March 31, 2022 because they were anti-dilutive. Additionally, there are 3,040,268 shares of common stock issuable upon conversion in connection with the convertible debt entered into on September 27, 2021. The Company computes diluted earnings per share using the if-converted method for the shares issuable in connection with the convertible debt. These shares were not considered in computing diluted (loss) per share for the three and six months ended March 31, 2022 because they were anti-dilutive. Shares issuable upon the exercise of 671 options and 7 common shares issuable upon conversion of preferred shares were not considered in computing diluted income (loss) per share for the three and six months ended March 31, 2021 because they were anti-dilutive.
12
● | Changes in the time frame for a right for consideration to become unconditional – approximately 45% of unbilled revenue as of September 30, 2022, was billed during the three months ended December, 31 2022 |
● | Changes in the time frame for a performance obligation to be satisfied – approximately 30% of deferred revenue as of September 30, 2022, was recognized as revenue during the three months ended December 31, 2022. |
The following table reconciles the computation of basic net loss per share to diluted net loss per share:
| | | | | | | | | | | | | |
|
| Three Months Ended |
| Six Months Ended | | ||||||||
| | March 31, | | March 31, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Basic and diluted net (loss) per share: |
| |
|
| |
|
| |
|
| |
| |
Net loss applicable to common shareholders | | $ | (6,087) | | $ | (723) | | $ | (89,134) | | $ | (1,089) | |
Weighted average common shares outstanding (in thousands) | | | | | | | | | | | | | |
Basic and diluted | | | 25,315 | | | 11,151 | | | 23,197 | | | 11,083 | |
| | | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.24) | | $ | (0.06) | | $ | (3.84) | | $ | (0.10) | |
4. OTHER OPERATING EXPENSE3.SEGMENT AND GEOGRAPHIC INFORMATION
Other operatingSegment Information
During the three months ended December 31, 2022 and 2021, the RMS segment reported intersegment revenue of $1,125 and $320 to the DSA segment, respectively. The following tables present revenue and other financial information by reportable segment:
| | | | | | |
| | Three Months Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Revenue | | | | | | |
DSA: | | | | | | |
Service revenue | | $ | 39,971 | | $ | 31,875 |
Product revenue | | | 1,122 | | | 950 |
RMS: | | | | | | |
Service revenue | | | 10,077 | | | 6,301 |
Product revenue | |
| 71,584 | |
| 45,085 |
| | $ | 122,754 | | $ | 84,211 |
| | | | | | |
Operating Income (Loss) | | | | | | |
DSA | | $ | 2,372 | | $ | 6,042 |
RMS | | | (71,272) | | | 80 |
Unallocated Corporate | |
| (21,678) | |
| (39,763) |
| | $ | (90,578) | | $ | (33,641) |
| | | | | | |
Interest expense | | | (10,450) | | | (4,828) |
Other expense | | | (1,878) | | | (57,727) |
Loss before income taxes | | $ | (102,906) | | $ | (96,196) |
| | | | | | |
| | Three Months Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Depreciation and amortization: | |
|
| |
|
|
DSA |
| $ | 3,980 |
| $ | 2,544 |
RMS | | | 9,283 | | | 3,491 |
|
| $ | 13,263 |
| $ | 6,035 |
| | | | | | |
Capital expenditures: | | | | | | |
DSA |
| $ | 3,294 |
| $ | 2,986 |
RMS | | | 5,075 | | | 2,669 |
|
| $ | 8,369 |
| $ | 5,655 |
12
Geographic Information
The following represents revenue originating in entities physically located in the identified geographic area:
| | | | | | |
| | Three Months Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
United States |
| $ | 99,009 |
| $ | 71,142 |
Netherlands | | | 15,222 | | | 6,536 |
Other | | | 8,523 | | | 6,533 |
|
| $ | 122,754 |
| $ | 84,211 |
Long-lived assets shown below include property and equipment, net. The following represents long-lived assets where they are physically located:
| | | | | | |
| | December 31, | | September 30, | ||
| | 2022 |
| 2022 | ||
United States | | $ | 174,011 | | $ | 173,417 |
Netherlands | | | 6,315 | | | 5,824 |
Other | | | 7,626 | | | 6,958 |
| | $ | 187,952 | | $ | 186,199 |
4.BUSINESS COMBINATIONS
The Company accounts for acquisitions in accordance with ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired, liabilities assumed and non-controlling interests to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense (benefit). ASC 805 requires that any excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.
Plato BioPharma Acquisition
Overview
On October 4, 2021, the Company completed the acquisition of Plato BioPharma, Inc. (“Plato”) to expand its market reach in early-stage drug discovery. Consideration for the Plato acquisition consisted of (i) $10,530 in cash, including working capital and subject to customary purchase price adjustments, (ii) 57,587 of the following:Company’s common shares valued at $1,776 using the closing price of the Company’s common shares on October 4, 2021 and (iii) seller notes to the former shareholder of Plato in an aggregate principal amount of $3,000. This business is reported as part of our DSA reportable segment.
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| | | | October 4, 2021 | |
Assets acquired and liabilities assumed: |
| | | |
|
Cash | | | | | 1,027 |
Trade receivables and contract assets | | | | | 853 |
Prepaid expenses and other assets | | | | | 133 |
Property and equipment | | | | | 1,127 |
Operating lease right-of-use assets, net | | | | | 2,272 |
Goodwill | | | | | 9,279 |
Intangible assets | | | | | 4,800 |
Accounts payable | | | | | (113) |
Accrued expenses and other liabilities | | | | | (343) |
Operating lease liabilities | | | | | (2,272) |
Deferred tax liabilities | | | | | (1,457) |
| | | | $ | 15,306 |
13
Property and equipment is mostly composed of lab equipment, furniture and fixtures, and computer equipment. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately eight years for customer relationships on a straight-line basis. The fair value of the customer relationships was determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Plato acquisition as a result of book-to-tax differences primarily related to the intangible assets.
Envigo RMS Holding Corp Acquisition
Overview
On November 5, 2021, the Company completed the acquisition of Envigo by merger of a wholly owned subsidiary of the Company with and into Envigo to expand its market reach in early-stage drug discovery. The aggregate consideration paid to the holders of outstanding capital stock in Envigo in the merger consisted of cash of $217,808, including adjustments for net working capital, and 8,245,918 of the Company’s common shares valued at $439,590 using the opening price of the Company’s common shares on November 5, 2021. In addition, the Company assumed certain outstanding Envigo stock options, including both vested and unvested options, that were converted to the right to purchase 790,620 Company common shares at an exercise price of $9.93 per share. The stock options were valued at $44.80 per option utilizing a Black-Scholes option valuation model with the inputs below. The total value of options issued was $35,418, of which $18,242 was excluded from the purchase price as those options were determined to be post-combination expense. The previously vested stock options are reflected as purchase consideration of approximately $17,176. This business is reported as part of the Company’s RMS reportable segment.
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Acquisition costs | | $ | 1,802 | | $ | — | | $ | 9,779 | | $ | — |
Startup costs | | | 1,474 | | | 202 | | | 2,431 | | | 362 |
Remediation costs | | | 507 | | | — | | | 946 | | | — |
Integration costs | | | 283 | | | — | | | 1,114 | | | — |
Other costs | | | 384 | | | 1 | | | 746 | | | 37 |
Acquisition-related stock compensation costs | | | — | | | — | | | 23,014 | | | — |
| | $ | 4,450 | | $ | 203 | | $ | 38,030 | | $ | 399 |
| | | | |
Stock price | | $ | 53.31 | |
Strike price | | $ | 9.93 | |
Volatility | | | 75.93 | % |
Expected term | | | 3.05 | |
Risk-free rate | | | 0.62 | % |
14
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | November 5, 2021 | |
Assets acquired and liabilities assumed: |
| |
|
Cash | | | 2,488 |
Restricted cash | | | 435 |
Trade receivables and contract assets | | | 43,566 |
Inventories | | | 40,000 |
Prepaid expenses and other current assets | | | 17,373 |
Property and equipment | | | 106,338 |
Operating lease right-of-use assets, net | | | 13,229 |
Goodwill | | | 282,768 |
Intangible assets - customer relationships | | | 251,000 |
Intangible assets - intellectual property | | | 49,000 |
Other assets | | | 7,676 |
Accounts payable | | | (25,832) |
Accrued expenses and other liabilities | | | (11,665) |
Fees invoiced in advance | | | (7,047) |
Current portion on long-term operating lease | |
| (4,371) |
Long-term operating leases, net | | | (8,634) |
Other liabilities | | | (5,339) |
Deferred tax liabilities | | | (77,291) |
Noncontrolling interest | | | 880 |
| | $ | 674,574 |
Inventory is comprised of small and large animal research models, including NHPs, and Teklad diet and bedding. The fair value was determined using a comparative sales methodology, in which the intent is to ensure that the acquirer only recognizes profits associated to value added subsequent to the acquisition date.
Property and equipment is mostly composed of land, buildings and equipment (including lab equipment, furniture and fixtures, caging and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired customer relationship intangible assets are being amortized over a weighted-average estimated useful life of approximately 12.5 years on a straight-line basis and the acquired intellectual property associated with the ability to produce and care for the research models is being amortized over a weighted-average estimated useful life of approximately 8.8 years. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, gross margin, EBITDA, customer survival rate and royalty rates), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Envigo acquisition as a result of book-to-tax differences primarily related to the intangible assets, step up on the fair value of inventory and property and equipment. Within the deferred tax liability, $2,222 of acquired foreign net operating losses are offset by an uncertain tax benefit of $1,861.
Goodwill, which is derived from the expanded client base, the ability to provide products and services for the entirety of discovery and nonclinical development within one organization, and to ensure supply for internal use, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and $50,428 is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
15
Robinson Services, Inc. Acquisition
Overview
On December 29, 2021, the Company completed the acquisition of the rabbit breeding and supply business of Robinson Services, Inc. (“RSI”). The acquisition was another step in Inotiv’s strategic plan for building its RMS business. The aggregate consideration paid in the transaction consisted of cash consideration of $3,250 and 70,633 of the Company’s common shares valued at $2,898 using the closing price of the Company’s common shares on December 29, 2021.
This business is reported as part of the Company’s RMS reportable segment.
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | December 29, 2021 | |
Assets acquired and liabilities assumed: |
| |
|
Customer relationship | | | 4,700 |
Non-compete agreement | | | 300 |
Supply agreement | | | 200 |
Goodwill | | | 948 |
| | $ | 6,148 |
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 7.5 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Integrated Laboratory Systems, LLC Acquisition
Overview
On January 10, 2022, the Company completed the acquisition of Integrated Laboratory Systems, LLC (“ILS”). ILS is a provider of services specializing in nonclinical and analytical drug discovery and development services. Consideration for the ILS acquisition consisted of (i) $38,993 in cash, including adjustments for net working capital, and inclusive of $3,800 being held in escrow for purposes of securing any amounts payable by the selling parties on account of indemnification obligations, purchase price adjustments, and other amounts payable under the merger agreement, (ii) 429,118 of the Company’s common shares valued at $14,466 using the opening price of the Company’s common shares on January 10, 2022 and (iii) the effective settlement of a preexisting relationship of $(15). This business is reported as part of our DSA reportable segment.
16
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | January 10, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Cash | | | 797 |
Trade receivables, contract assets and other current assets | | | 4,730 |
Property and equipment | | | 4,436 |
Operating lease right-of-use assets, net | | | 4,994 |
Goodwill | | | 25,283 |
Intangible assets | | | 22,300 |
Accounts payable | | | (1,165) |
Accrued expenses and other liabilities | | | (905) |
Fees invoiced in advance | | | (2,472) |
Operating lease liabilities | | | (4,554) |
| | $ | 53,444 |
Property and equipment is mostly composed of equipment (including lab equipment, furniture and fixtures, and computer equipment) and leasehold improvements. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately nine years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, EBITDA, and customer survival rate), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
Orient BioResource Center, Inc. Acquisition
Overview
On January 27, 2022, the Company completed the acquisition of OBRC from Orient Bio, Inc., a preclinical contract research organization and animal model supplier based in Seongnam, South Korea (“Seller”). OBRC is a primate quarantine and holding facility. Consideration for the OBRC acquisition consisted of (i) $26,522 in cash, including certain adjustments, (ii) 677,339 of the Company’s common shares valued at $18,410 using the closing price of the Company’s common shares on January 27, 2022, (iii) the effective settlement of a preexisting relationship of $1,017 and (iv) a payable owed by OBRC to the Seller in the amount of $3,325. The preexisting relationship represents the return of fees invoiced in advance and paid to OBRC by the Company prior to the acquisition offset by the payment of trade receivables by the Company to OBRC. As these were settled at the stated value, no gain or loss was recorded as a result of the settlement of this preexisting relationship. The payable will not bear interest and is required to be paid to the Seller on the date that is 18 months after the closing. The Company will have the right to set off against the payable any amounts that become payable by the Seller on account of indemnification obligations under the purchase agreement. This business is reported as part of our RMS reportable segment.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the OBRC acquisition as a result of book-to-tax differences primarily related to the intangible assets and property and equipment.
17
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | January 27, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Cash | | | 5,481 |
Trade receivables and contract assets | | | 2,025 |
Inventories | | | 9,400 |
Prepaid expenses and other current assets | | | 2,609 |
Property and equipment | | | 8,336 |
Goodwill | | | 18,624 |
Intangible assets | | | 13,400 |
Accounts payable | | | (552) |
Accrued expenses and other liabilities | | | (285) |
Fees invoiced in advance | | | (6,548) |
Deferred tax liabilities | | | (3,216) |
| | $ | 49,274 |
Inventory is comprised of NHP research models. The fair value was determined using a comparative sales methodology, in which the intent is to ensure that the acquirer only recognizes profits associated to value added subsequent to the acquisition date.
Property and equipment is mostly composed of land, building and equipment. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 10 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the OBRC acquisition as a result of book-to-tax differences primarily related to the intangible assets and step up on the fair value of inventory.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Histion Acquisition
On April 25, 2022, the Company completed the acquisition of Histion, LLC (“Histion”), which is a strategic element of the Company’s expansion of its specialized pathology services. Consideration for the Histion acquisition consisted of (i) $950 in cash, subject to working capital adjustments, (ii) 17,618 of the Company’s common shares valued at $364 using the closing price of the Company’s common shares on April 25, 2022 and (iii) unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433.
Protypia Acquisition
On July 7, 2022, the Company entered into a Stock Purchase Agreement with Protypia, Inc. (“Protypia”), which is a strategic element of the Company’s expansion of its mass spectrometry-based bioanalytical offerings providing for the acquisition by the Company of all of the outstanding stock of Protypia on that date. Consideration for the Protypia stock consisted of $9,460 in cash, subject to certain adjustments, $600 in seller notes and 74,997 common shares having a value of approximately $806 based on the opening stock price of the Company’s common shares as reported by Nasdaq on the closing date.
18
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | December 31, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Other assets, net | | | 50 |
Goodwill | | | 3,305 |
Intangible assets | | | 9,600 |
Deferred tax liabilities | |
| (2,089) |
| | $ | 10,866 |
The preliminary purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including intangible assets, goodwill and deferred tax liabilities. From the date of the acquisition through December 31, 2022, the Company recorded measurement-period adjustments related to the acquisition that resulted in changes to the purchase price allocation. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
Intangible assets primarily relate to customer relationships and technology associated with the ability to perform specialized protein and peptide mass spectrometry analysis. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 8.4 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets is based on preliminary assumptions which are subject to change as we complete our valuation procedures.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Protypia acquisition as a result of book-to-tax differences primarily related to the intangible assets.
Goodwill, which is derived from the enhanced scientific expertise and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
Pro Forma Results
The Company’s unaudited pro forma results of operations for the three months ended December 31, 2021 assume that the acquisitions had occurred as of October 1, 2021. Pro forma information for the three months ended December 31, 2022, is not presented here, as the statement of operations for the three months ended December 31, 2022, includes all business combinations. The following pro forma amounts are based on available information of the results of operations prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisitions been completed on October 1, 2021.
The unaudited pro forma information is as follows:
| | | |
| | Three Months Ended | |
| | December 31, 2021 | |
Total revenues | | $ | 125,694 |
| | | |
Net (loss) income | | $ | 26,744 |
5. SEGMENT INFORMATION
Due to the Envigo acquisition, the Company reports its results in 2 reportable segments – Discovery and Safety Assessment (DSA) and Research Models and Services (RMS).
The DSA segment provides preclinical research services on a contract basis directly to biopharma and pharmaceutical companies as well as certain research products. Preclinical research services include screening and pharmacological testing, nonclinical safety testing, formulation development, regulatory compliance and quality control testing, which are services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, and regulated and non-regulated (GLP and non-GLP) safety assessment services. This segment also provides research products, such as liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions.
The Company’s RMS reportable segment includes the research models, research model services and Teklad diet, bedding and enrichment businesses (“Teklad”). Research models include the commercial production and sale of small research models and large research models and the production and sale of certain biological products. Research model services include: Genetically Engineered Models and Services (“GEMS”), which performs contract breeding and other services associated with genetically engineered models; client-owned animal colony care; and health monitoring and diagnostics services related to research models. Teklad includes standard, custom and medicated diets as well as bedding and environmental enrichment products, which enhance the welfare of research animals.
1319
During5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following is a rollforward of the threeCompany’s goodwill:
| | | | | | | | | |
|
| September 30, 2022 |
| | Impairment | | December 31, 2022 | ||
DSA | | $ | 91,458 | | $ | — | | $ | 91,458 |
RMS | |
| 302,372 | |
| — | |
| 302,372 |
Gross Carrying Amount | | | 393,830 | | | — | | | 393,830 |
Accumulated impairment loss - RMS | | | (236,005) | |
| (66,367) | |
| (302,372) |
Goodwill | | $ | 157,825 | | $ | (66,367) | | $ | 91,458 |
The Company determined that as a result of the November 16, 2022 event, which led to the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S., the uncertainty related to the Company’s ability to import NHPs from Cambodia and six months ended Marchthe decrease in its stock price, the carrying value of goodwill as of December 31, 2022, was required to be quantitatively evaluated. The carrying value of the Company’s goodwill by reporting unit was determined utilizing the income approach. Based on the Company’s quantitative goodwill impairment test, the fair value of the DSA reporting unit exceeded the reporting unit’s carrying value and, therefore, goodwill was not impaired. However, the fair value of the RMS segment reported intersegment revenuereporting unit was less than the RMS reporting unit’s carrying value. As a result, a goodwill impairment loss of $1,997 and $2,317, respectively,$66,367 was recorded within the RMS segment. The remaining goodwill balance of $91,458 as of December 31, 2022 is attributed to the DSA segment.
Intangible Assets, Net
The following table presents revenue and other financial informationdisplays intangible assets, net by reportable segment:major class:
| | | | | | | | | |
| | December 31, 2022 | |||||||
| | Carrying | | Accumulated | | Carrying | |||
|
| Amount, Gross |
| Amortization |
| Amount, Net | |||
Customer relationships | | $ | 320,203 | | $ | (34,069) | | $ | 286,134 |
Intellectual property | |
| 57,159 | |
| (7,445) | |
| 49,714 |
Non-compete agreements | | | 2,410 | | | (986) | | | 1,424 |
Other | | | 2,396 | | | (1,212) | | | 1,184 |
| | $ | 382,168 | | $ | (43,712) | | $ | 338,456 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue | | | | | | | | | | | | |
DSA | | $ | 39,054 | | $ | 18,751 | | $ | 71,879 | | $ | 36,636 |
RMS | |
| 101,259 | |
| — | |
| 152,645 | |
| — |
| | $ | 140,313 | | $ | 18,751 | | $ | 224,524 | | $ | 36,636 |
| | | | | | | | | | | | |
Operating Income (Loss) | | | | | | | | | | | | |
DSA | | $ | 3,752 | | $ | 3,769 | | $ | 9,794 | | $ | 7,046 |
RMS | | | 22,562 | | | — | | | 22,642 | | | — |
Unallocated Corporate | |
| (18,446) | |
| (4,290) | |
| (58,209) | |
| (7,553) |
| | $ | 7,868 | | $ | (521) | | $ | (25,773) | | $ | (507) |
| | | | | | | | | | | | |
Interest expense | | | (7,547) | | | (366) | | | (12,375) | | | (713) |
Other (expense) income | | | (139) | | | 179 | | | (57,866) | | | 179 |
Income (loss) before income taxes | | $ | 182 | | $ | (708) | | $ | (96,014) | | $ | (1,041) |
| | | | | | | | | |
| | September 30, 2022 | |||||||
| | Carrying | | Accumulated | | Carrying | |||
|
| Amount, Gross |
| Amortization |
| Amount, Net | |||
Customer relationships | | $ | 318,896 | | $ | (26,990) | | $ | 291,906 |
Intellectual property | |
| 56,997 | |
| (5,767) | |
| 51,230 |
Non-compete agreements | | | 2,410 | | | (872) | | | 1,538 |
Other | | | 2,396 | | | (1,184) | | | 1,212 |
| | $ | 380,699 | | $ | (34,813) | | $ | 345,886 |
TotalThe decrease in intangible assets, by reporting segment is as follows:
| | | | | | |
| | | | | | |
| | March 31, | | September 30, | ||
|
| 2022 |
| 2021 | ||
DSA | | $ | 262,010 | | $ | 321,856 |
RMS | | | 877,411 | | | — |
| | $ | 1,139,421 | | $ | 321,856 |
Revenue by geographic area is as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
United States | | $ | 117,890 | | $ | 18,751 | | $ | 190,335 | | $ | 36,636 |
Netherlands | | | 12,119 | | | — | | | 18,655 | | | — |
Other | | | 10,304 | | | — | | | 15,534 | | | — |
| | $ | 140,313 | | $ | 18,751 | | $ | 224,524 | | $ | 36,636 |
6. INCOME TAXES
The Company usesnet during the asset and liability method of accounting for income taxes. The Company recognizes 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. The Company measures 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. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. The Company records valuation allowances based on a determination of the expected realization of tax assets.
The difference between the enacted federal statutory rate of 21% and the Company’s effective tax rate of 6.2% for the sixthree months ended MarchDecember 31, 2022 was primarily related to a release of valuation allowance due to deferred tax liabilities established as part ofamortization over the acquisition of Envigo, as well as,applicable useful lives, offset set by the impact on tax expense of certain book to tax differences on the deductibility of transaction costs, loss on fair value remeasurement of the embedded derivative component of the convertible notes and other permanent items.
The Company recognizes 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. The Company measures the amount of the accrual for which an exposure
14
exists as the largest amount of benefit determined on a cumulative probability basis that it believes is more likely than not to be realized upon settlement of the position.
As of March 31, 2022, the Company’s only uncertain tax position was derived from a business combination.
The Company would record interest and penalties accrued in relation to the uncertain income tax position as a component of income tax expense. Any changes in the liability for the uncertain tax position would impact the effective tax rate. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and foreign jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities. State and other income tax returns are generally subject to examination for a period of three to five years after the filing of the respective returns The Company has open tax years for state and foreign income tax filings generally starting in 2017.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferral of the employer portion of social security payments (“FICA deferral”), and expanded income tax net operating loss carryback provisions. As of March 31, 2022, the Company has a FICA deferral of approximately $916 related to the Envigo acquisition. Payment of the deferral is due on December 31, 2022.
On December 27, 2020, the U.S. enacted the Consolidated Appropriations Act of 2021 (“CAA”) which extended and expanded certain tax relief measures created by the CARES Act.
On March 11, 2021, the U.S. enacted the American Rescue Plan Act of 2021 (“ARPA”) which expands Section 162(m) to cover the next five most highly compensated employees for the taxable year, in addition to the “covered employees” effective for taxable years beginning after December 31, 2026. We continue to examine the elements of the CAA and ARPA and the impact they may have on our future business.
exchange rates.
7. 6.DEBT
Credit Facility
On November 5, 2021, the Company, certain of subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and Jefferies Finance LLC, as administrative agent (the “Agent”), entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in the original principal amount of $165,000, a delayed draw term loan facility in the original principal amount of $35,000 (available to be drawn up to 18 months from the date of the Credit Agreement), and a
20
revolving loancredit facility in the original principal amount of $15,000. In addition, the Credit Agreement provides for an aggregate combined increase of the revolving loan facility and the term loan facility of up to $35,000, which amount will be available to be drawn once the delayed draw term loan facility is no longer available. On November 5, 2021, the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the delayed draw term loan facility or the revolving loancredit facility.
The Company may elect to borrow on each of the loan facilities at either an adjusted LIBOR rate of interest or an adjusted prime rate of interest. Adjusted LIBOR rate loans shall accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The LIBOR rate must be a minimum of 1.00%. The initial adjusted LIBOR rate of interest is the LIBOR rate plus 6.25%. Adjusted prime rate loans shall accrue interest at an annual rate equal to the prime rate plus a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio. The initial adjusted prime rate of interest is the prime rate plus 5.25%. Actual interestInterest expense was accrued at 7.25% through Marchan effective rate of 9.84% for the three months ended December 31, 2022.
The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving loancredit facility and (ii) a fee based on a percentage per annum equal to 1.00% on the average daily undrawn portion of the commitments in respect of the delayed draw loan facility. In each case, such fee shall be paid quarterly in arrears.
Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to 1.0%1.00% of their respective original principal amounts. The Company shall also repay the term loan facility on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time with premium or penalty.
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The Company is required to maintain an initial Secured Leverage Ratio of not more than 4.25 to 1.00. The maximum permitted Secured Leverage Ratio shall reduce to 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023 and to 3.00 to 1.00 beginning with the Company’s fiscal quarter ending March 31, 2025. The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio shall be 1.00 to 1.00 during the first year of the Credit Agreement and shall be 1.10 to 1.00 from and after the Credit Agreement’s first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
Utilizing proceeds from the Credit Agreement on November 5, 2021, the Company repaid all indebtedness and terminated the credit agreement related to the First Internet Bank of Indiana (“FIB”) credit facility as described in Note 10 and recognized an $877 loss on debt extinguishment.extinguishment during the three months ended December 31, 2021.
On January 7, 2022, the Company drew $35,000 on the delayed draw term loan facility. The delayed draw term loan facility in the original principal amount of $35,000 is referred to herein as the “Initial DDTL”. Amounts outstanding under the Initial DDTL accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Interest expense was accrued at an effective rate of 9.91% for the three months ended December 31, 2022.
First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and Jefferies Finance LLC, as administrative agent,the Agent entered into a First Amendment (the “Amendment”“First Amendment”) to the existing Credit Agreement. The First Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $40,000 (the “Incremental Term Loans”) and a new delayed draw term loan facility in the original principal amount of $35,000, which amount is available to be drawn up to 24 months from the date of the Amendment (the “Additional DDTL” and together with the Initial DDTL, the “DDTL”). The Incremental Term Loans and any amounts borrowed under the Additional DDTL are referred to herein as the “Additional Term Loans”. On January 27, 2022, the Company borrowed the full amount of the Incremental Term Loans, but did not borrow any amountsand on October 12, 2022, the Company borrowed the full $35,000 under the Additional DDTL.
Amounts outstanding under the Additional Term Loans will accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Actual interestInterest expense was accrued at 7.25% through Marchan effective rate of 9.84% for the three months ended December 31, 2022.
The Additional Term Loans require annual principal payments in an amount equal to 1.0% of the original principal amount. Voluntary prepayments of the Additional Term Loans will be subject to a 2% prepayment premium if made on or prior to November 5,
21
2022 and a 1% prepayment premium if made on or prior to November 5, 2023. Voluntary prepayments made after November 5, 2023 are not subject to a prepayment premium.
Each of the Additional Term Loans require annual principal payments in an amount equal to 1.0% of theirits respective original principal amounts. The Company shall also repay the term loans on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio.
The Additional Term Loans are secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of the Additional Term Loans is guaranteed by each of the Subsidiary Guarantors.
The Additional Term Loans will mature on November 5, 2026.
Second Amendment to Credit Agreement
On December 29, 2022, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement.
The Second Amendment provides for, among other things, an extension of the deadline for the Company to provide to the lenders the audited financial statements for the Company’s fiscal year ended September 30, 2022 and an annual budget for 2023; the Company satisfied these requirements by the extended deadline. The Second Amendment adds a requirement that the Company provide, within 30 days after the end of each month, an unaudited consolidated balance sheet, statement of income and statement of cash flows as of the end of, and for, such month, as well as a “key performance indicator” report. The Second Amendment also requires that, within 10 business days after the end of each month, the Company will provide a rolling 13-week cash flow forecast prepared on a monthly basis. The Second Amendment further provides that, upon the request of the Required Lenders (as defined in the Credit Agreement), the Company will permit a financial advisor designated by the Required Lenders to meet with management of the Company to discuss the affairs, finances, accounts and condition of the Company during the six-month period following the effective date of the Second Amendment. In addition, the Second Amendment requires the Company to deliver an updated organization chart and certain supplemental information regarding the Company’s subsidiaries in connection with each quarterly report required pursuant to the Credit Agreement.
Under the Second Amendment, the Company may elect to borrow on each of the loan facilities at either an adjusted term secured overnight financing rate (“Term SOFR”) rate of interest or an alternate base rate of interest. Adjusted Term SOFR loans shall accrue interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448% and 0.42826%, depending on the term of the loan (“Adjusted Term SOFR”); provided that, Adjusted Term SOFR shall never be less than 1.00%, and (ii) a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). Alternate base rate loans shall accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.5%, (b) the Agent’s prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00% (the “Alternate Base Rate”); provided that, the Alternate Base Rate shall never be less than 2.00%, plus (ii) a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio.
The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement: (i) prior to delivery of the audited financial statements and related compliance certificate for the fiscal year ended September 30, 2022; and (ii) thereafter, if any of the conditions precedent set forth in Section 4.02 of the Credit Agreement cannot be satisfied, including, without limitation, the making of the representation and warranty that as of the date of the most recent audited financial statements delivered to the Agent, no event, change, circumstance, condition, development or occurrence has had, or would reasonably be expected to result in, either individually or in the aggregate, a Material Adverse Effect (as defined in the Credit Agreement).
In addition, the Second Amendment provides that, no later than January 13, 2023 (or such later date as the Required Lenders shall agree in their discretion), the Company shall (i) appoint a financial advisor on terms reasonably acceptable to the Required Lenders and the Company for a term of at least six months, (ii) provide a 13-week budget to the Agent, and (iii) deliver a perfection certificate supplement updating certain information previously provided with respect to each of the Company and the Subsidiary Guarantors, including information regarding certain collateral and other assets owned by such parties. The Company has timely satisfied each of these requirements.
1622
Long term debt as of MarchDecember 31, 2022 and September 30, 20212022 is detailed in the table below.
| | | | | | | | | | | | |
| | As of: |
| December 31, 2022 |
| September 30, 2022 | ||||||
|
| March 31, 2022 |
| September 30, 2021 | ||||||||
FIB Term Loans | | $ | — | | $ | 36,185 | ||||||
Seller Note – Bolder BioPath | |
| 940 | |
| 1,500 | |
| 752 | |
| 808 |
Seller Note – Smithers Avanza | |
| 70 | |
| 280 | ||||||
Seller Note – Preclinical Research Services | | | 650 | | | 685 | | | 590 | | | 615 |
Seller Note – Plato BioPharma | | | 2,571 | | | — | | | 643 | | | 1,470 |
Seller Payable - Orient BioResource Center | | | 3,325 | | | | | | 3,553 | | | 3,488 |
Seller Note – Histion | | | 325 | | | 369 | ||||||
Seller Note – Protypia | | | 600 | | | 600 | ||||||
Economic Injury Disaster Loan | | | 140 | | | — | | | 140 | | | 140 |
Convertible Senior Notes | | | 102,324 | | | 131,673 | | | 106,346 | | | 104,965 |
Term Loan Facility and Incremental Term Loans | | | 239,400 | | | — | ||||||
Term Loan Facility, DDTL and Incremental Term Loans | | | 272,513 | | | 238,200 | ||||||
| |
| 349,420 | |
| 170,323 | |
| 385,462 | |
| 350,655 |
Less: Current portion | |
| (5,339) | |
| (9,656) | |
| (7,553) | |
| (7,979) |
Less: Debt issue costs not amortized | |
| (11,807) | |
| (6,458) | ||||||
Total Long-term debt | | $ | 332,274 | | $ | 154,209 | ||||||
Less: Debt issuance costs not amortized | |
| (12,266) | |
| (11,999) | ||||||
Total long-term debt | | $ | 365,643 | | $ | 330,677 |
As of December 31, 2022, the Company did not have an outstanding balance on the revolving credit facility.
Acquisition-related Debt
In addition to the indebtedness under the Credit Agreement, certain of the Company’s subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.
As part of the acquisition of Plato, BioPharma, Inc. (“Plato”) which is a part of the Company’s Inotiv Boulder subsidiary, Inotiv Boulder, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Plato in an aggregate principal amount of $3,000. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023.
As part of the acquisition of Orient BioResource Center (“OBRC”),OBRC, the Company agreed to leave in place a payable owed by OBRC to the seller in the amount of $3,700, which the Company determined to have a fair value of $3,325 as of January 27, 2022. The payable does not bear interest and is required to be paid to seller on the date that is 18 months after the closing date of January 27, 2022. The Company has the right to set off against the payable any amounts that become payable by the seller on account of indemnification obligations under the purchase agreement.
As part of the acquisition of Histion, which is a part of the Company’s subsidiary, Bronco Research Services, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of April 1, 2025.
As part of the acquisition of Protypia, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Protypia in an aggregate principal amount of $600. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of January 7, 2024.
Convertible Senior Notes
On September 27, 2021, the Company issued $140,000 principal amount of its 3.25% Convertible Senior Notes due 2027 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 27, 2021, among the Company, the Company’s wholly-owned subsidiary, BAS Evansville, Inc., as guarantor (the “Guarantor”), and U.S. Bank National Association, as trustee (the “Indenture”). Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $15,000 principal amount of the Notes. The Notes issued on September 27, 2021 includeincluded $15,000 principal amount of the Notes issued pursuant to the full exercise by the initial purchaser of such option. The Company used the net proceeds from the offering of the Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of the Envigo acquisition and related fees and expenses.
23
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by the Guarantor.
17
The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2022. The Notes will mature on October 15, 2027, unless earlier repurchased, redeemed or converted. Before April 15, 2027, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 15, 2027, noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company’s election. The initial conversion rate is 1.716221.7162 common shares per $1,000$1 principal amount of Notes, which represents an initial conversion price of approximately $46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
As of December 31, 2022 and September 30, 2022, there were $4,839 and $5,060, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended December 31, 2022, the total interest expense was $2,765, including coupon interest expense of $1,163, accretion expense of $1,381, and the amortization of debt discount and issuance costs of $221. For the three months ended December 31, 2021, the total interest expense was $2,628, including coupon interest expense of $1,163, accretion expense of $1,255, and the amortization of debt discount and issuance costs of $210.
The Notes are redeemable, in whole and not in part, at the Company’s option at any time on or after October 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental changeFundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common shares.
The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least $20,000; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes.
If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company or the Guarantor (and not solely with respect to a significant subsidiary of the Company or the Guarantor) occurs, then the principal amount of, and all
24
accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then the trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
In accordance with ASC 815, at issuance, the Company evaluated the convertible feature of the Notes and determined it was required to be bifurcated as an embedded derivative and did not qualify for equity classification. The convertible feature of the Notes is subject to fair value remeasurement as of each balance sheet date or until it meets equity classification requirements and is valued
18
utilizing Level 3 inputs as described below. The discount resulting from the initial fair value of the embedded derivative will be amortized to interest expense using the effective interest method. Non-cash interest expense during the period primarily related to this discount.
In the first quarter of 2022, the Company adopted Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). The update simplifies the accounting for convertible debt instruments and convertible preferred shares by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. As a result of the approval of the increase in authorized shares on November 4, 2021 (see Note 212 – Equity), the Note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as of November 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital.
Based upon the above, the Company remeasured the fair value of the embedded derivative as of November 4, 2021, which resulted in a fair value measurement of $88,576 and a loss on remeasurement included in other income (loss) for the sixthree months ended MarchDecember 31, 20222021 of $56,714. The embedded derivative liability of $88,576 was then reclassified to additional paid-in capital in accordance with ASC 815.
In connection with the evaluation at November 4, 2021, the Company rechallenged its analysis of the initial allocation of value between the embedded derivative and debt component of the convertible debt included in long-term liabilities at September 30, 2021. This resulted in a change in the allocation of the underlying long-term debt from $76,716 to $99,776 and the allocation of the conversion feature from $54,922 to $31,862. These changes did not result in any change to long-term liabilities or any material changes to net income (loss) as of September 30, 2021.
Fair Value
The provisions of the fair value measurements and disclosure topic define fair value, establish a consistent framework for measuring fair value and provide the disclosure requirements about fair value measurements. This topic also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
Up until November 4, 2021, the embedded derivative conversion feature of the Notes was subject to fair value measurement on a recurring basis as they included unobservable and significant inputs in determining the fair value. The Company utilized a single factor trinomial lattice model to determine the related fair value of the embedded derivative convertible feature of the Notes at November 4, 2021, and the inputs used included a volatility of 40.0%, a bond yield assumption of 10.44% and a remaining maturity period of 5.95 years.
Former Credit Agreement
On October 4, 2021, the Company entered into a Third Amendment to Amended and Restated Credit Agreement (the “FIB Amendment”), which amended the Amended and Restated Credit Agreement between the Company and FIB, as amended (the “FIB Credit Agreement”). Pursuant to the FIB Amendment, FIB consented to the acquisition by the Company of Plato by merger of Plato with a wholly owned subsidiary of the Company and the subsequent merger of the surviving corporation of that merger with another wholly owned subsidiary of the Company. In addition, the FIB Amendment amended the FIB Credit Agreement to (i) add the promissory notes to be issued to former Plato shareholders in the Plato acquisition as permitted indebtedness, which notes were issued by the surviving company, guaranteed by the Company and subordinated in favor of FIB, and (ii) add references to the Plato acquisition to
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certain provisions of the FIB Credit Agreement relating to subordination agreements, representations and warranties, and certain covenants to permit the Plato acquisition to occur. The FIB Amendment included agreements by the Company to obtain certain landlord waivers within 30 days of the closing of the Plato acquisition and to deliver to FIB signed subordination agreements.
The Company consummated the Envigo acquisition and repaid all of its obligations under the FIB Credit Agreement in November 2021, as described in Note 10.
8. 7.SUPPLEMENTAL BALANCE SHEET INFORMATION
Trade receivables and contract assets, net consisted of the following:
| | | | | | | | | | | | |
| | March 31, | | September 30, | | December 31, | | September 30, | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2022 | ||||
Trade receivables | | $ | 78,461 | | $ | 22,838 | | $ | 65,555 | | $ | 88,867 |
Unbilled revenue | |
| 12,693 | |
| 6,194 | |
| 16,324 | |
| 17,474 |
Total | | | 91,154 | | | 29,032 | | | 81,879 | | | 106,341 |
Less: Allowance for doubtful accounts | |
| (4,698) | |
| (668) | ||||||
Trade receivables and contract assets, net of allowances for doubtful accounts | | $ | 86,456 | | $ | 28,364 | ||||||
Less: Allowance for credit losses | |
| (7,292) | |
| (6,268) | ||||||
Trade receivables and contract assets, net of allowances for credit losses | | $ | 74,587 | | $ | 100,073 |
Inventories, net consisted of the following:
| | | | | | |
| | March 31, | | September 30, | ||
|
| 2022 |
| 2021 | ||
Raw materials | | $ | 1,896 | | $ | 513 |
Work in progress | |
| 156 | |
| 37 |
Finished goods | |
| 4,976 | |
| 192 |
Research Model Inventory | | | 53,366 | | | — |
Total | | | 60,394 | | | 742 |
Less: Obsolescence reserve | |
| (3,619) | |
| (140) |
Inventories, net | | $ | 56,775 | | $ | 602 |
Prepaid expenses and other current assets consisted of the following:
| | | | | | |
| | March 31, | | September 30, | ||
|
| 2022 |
| 2021 | ||
Advances to suppliers | | $ | 22,107 | | $ | — |
Income tax receivable | |
| 2,639 | |
| — |
Prepaid research models | | | 396 | | | 1,931 |
Other | | | 9,741 | | | 1,198 |
Prepaid expenses and other current assets | | $ | 34,883 | | $ | 3,129 |
The composition of other assets is as follows:
| | | | | | |
| | March 31, | | September 30, | ||
|
| 2022 |
| 2021 | ||
Long-term advances to suppliers | | $ | 1,644 | | $ | — |
Security deposits and guarantees | | | 860 | | | 51 |
Finance lease right-of-use assets, net | | | 57 | | | 60 |
Debt issuance costs | | | 2,660 | | | — |
Other | |
| 625 | |
| 230 |
Other assets | | $ | 5,846 | | $ | 341 |
| | | | | | |
| | December 31, | | September 30, | ||
|
| 2022 |
| 2022 | ||
Raw materials | | $ | 2,392 | | $ | 1,757 |
Work in progress | |
| 72 | |
| 186 |
Finished goods | |
| 4,762 | |
| 4,933 |
Research Model Inventory | | | 72,631 | | | 68,055 |
Total | | | 79,857 | | | 74,931 |
Less: Obsolescence reserve | |
| (4,218) | |
| (3,490) |
Inventories, net | | $ | 75,639 | | $ | 71,441 |
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Prepaid expenses and other current assets consisted of the following:
| | | | | | |
| | December 31, | | September 30, | ||
|
| 2022 |
| 2022 | ||
Advances to suppliers | | $ | 23,249 | | $ | 30,292 |
Income tax receivable | |
| 770 | |
| 366 |
Prepaid research models | | | 3,248 | | | 3,575 |
Other | | | 6,655 | | | 8,250 |
Prepaid expenses and other current assets | | $ | 33,922 | | $ | 42,483 |
The composition of other assets is as follows:
| | | | | | |
| | December 31, | | September 30, | ||
|
| 2022 |
| 2022 | ||
Long-term advances to suppliers | | $ | 2,250 | | $ | 2,894 |
Finance lease right-of-use assets, net | | | 68 | | | 79 |
Debt issuance costs - revolving credit facility | | | 410 | | | 1,411 |
Funded status of defined benefit plan | | | 2,099 | | | 1,573 |
Other | |
| 1,686 | |
| 1,567 |
Other assets | | $ | 6,513 | | $ | 7,524 |
Accrued expenses consisted of the following:
| | | | | | | | | | | | |
| | March 31, | | September 30, | | December 31, | | September 30, | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2022 | ||||
Accrued compensation | | $ | 13,428 | | $ | 3,528 | | $ | 10,425 | | $ | 17,460 |
Non-income taxes | | | 2,227 | | | 18 | | | 1,663 | | | 1,200 |
Accrued interest | | | 3,095 | | | 169 | | | 4,959 | | | 5,228 |
Current portion of long-term finance lease | | | 23 | | | 24 | ||||||
Other | |
| 160 | |
| 167 | |
| 11,535 | |
| 11,913 |
Current portion of contingent liability | | | — | | | 175 | ||||||
Consideration payable | | | 1,757 | | | 4,887 | ||||||
Accrued expenses and other liabilities | | $ | 20,690 | | $ | 8,968 | | $ | 28,582 | | $ | 35,801 |
The composition of fees invoiced in advance is as follows:
| | | | | | |
| | March 31, | | September 30, | ||
|
| 2022 |
| 2021 | ||
Customer deposits | | $ | 31,726 | | $ | — |
Deferred revenue | | | 38,512 | | | 26,614 |
Fees invoiced in advance | | $ | 70,238 | | $ | 26,614 |
Other liabilities consisted of the following:
| | | | | | |
| | March 31, | | September 30, | ||
|
| 2022 |
| 2021 | ||
Long-term customer deposits | | $ | 871 | | $ | — |
Accrued pension liability | | | 286 | | | — |
Long-term finance leases | | | 37 | | | 39 |
Long-term portion of contingent liability | | | 473 | | | 473 |
Other | | | 246 | | | — |
Other liabilities | | $ | 1,913 | | $ | 512 |
| | | | | | |
| | December 31, | | September 30, | ||
|
| 2022 |
| 2022 | ||
Customer deposits | | $ | 30,509 | | $ | 39,222 |
Deferred revenue | | | 30,146 | | | 29,420 |
Fees invoiced in advance | | $ | 60,655 | | $ | 68,642 |
9. NEW ACCOUNTING PRONOUNCEMENTS8.DEFINED BENEFIT PLAN
InThe Company has a defined benefit plan in the first quarterU.K., the Harlan Laboratories UK Limited Occupational Pension Scheme (the "Pension Plan"), which operated through April 2012. As of April 30, 2012, the accumulation of plan benefits of employees in the Pension Plan was permanently suspended and therefore the Pension Plan was curtailed. During the year ending September 30, 2023, the Company expects to contribute $1,209 to the Pension Plan. As of December 31, 2022, the Company early adopted ASU 2020-06. The update simplifies the accounting for convertible debt instruments and convertible preferred shares by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. See Note 7 for discussionfunded status of the impact ondefined benefit plan obligation of $2,099 is included in other assets (non-current) in the Company’s condensed consolidated financial statements.balance sheets.
10. BUSINESS COMBINATIONS
The Company accounts for acquisitions in accordance with ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired, liabilities assumed and non-controlling interests to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.
HistoTox Labs Acquisition
Overview
On April 30, 2021, the Company completed the acquisition of substantially all of the assets of HistoTox Labs, Inc. (“HistoTox Labs”). HistoTox Labs is a provider of services in connection with non-clinical consulting, laboratory and strategic support services and
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products related to routine and specialized histology, immunohistology, histopathology and image analysis/digital pathology. Consideration for the HistoTox Labs acquisition consisted of $22,389 in cash, including $68 payable in net working capital adjustments.
HistoTox Labs, Bolder BioPATH and Plato (discussed below) were combined into 1 business unit and recorded combined revenues of $8,150 and $17,483 for the three and six month periods ended March 31, 2022, respectively, and recorded combined net loss of $11 and combined net income of $1,565 for the three and six month periods ended March 31, 2022, respectively.
The HistoTox Labs business is reported as part of our DSA reportable segment. The following table summarizesprovides the fair valuecomponents of assets acquirednet periodic benefit costs for the Pension Plan, which is included in general and liabilities assumed asadministrative expenses in the condensed consolidated statements of the acquisition date:operations.
| | | |
| | | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
| | |
Accounts receivable | | | 977 |
Unbilled revenues | | | 337 |
Operating lease ROU asset | | | 2,239 |
Property and equipment | |
| 3,929 |
Intangible assets | | | 8,300 |
Goodwill | | | 9,339 |
Accounts payable | | | (150) |
Accrued expenses | | | (136) |
Customer advances | | | (207) |
Operating lease liability | |
| (2,239) |
| | $ | 22,389 |
| | | | | | |
| | Three Months Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Components of net periodic (benefit) expense: | | | | | | |
Interest cost | | $ | 182 | | $ | 58 |
Expected return on assets | | | (198) | | | (109) |
Amortization of prior (gain) loss | | | (38) | | | 161 |
Net periodic (benefit) expense | | $ | (54) | | $ | 110 |
Property and equipment is mostly composed of equipment (including lab equipment, furniture and fixtures, and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets relate to customer relationships and a non-compete agreement. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately eight years for customer relationships and five years for the non-compete agreement on a straight-line basis. The fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
Bolder BioPATH Acquisition
Overview
On May 3, 2021, the Company completed the acquisition of Bolder BioPATH in a merger of Bolder BioPATH with a wholly owned subsidiary of the Company. Bolder BioPATH is a provider of services specializing in in vivo models of rheumatoid arthritis, osteoarthritis, and inflammatory bowel disease as well as other autoimmune and inflammation models. Consideration for the Bolder BioPATH acquisition consisted of (i) $17,530 in cash, including a net working capital adjustment of $970, which was settled through a reduction of the seller note of $470 and receipt of $500 cash, and inclusive of $1,250 being held in escrow for purposes of securing any amounts payable by the selling parties on account of indemnification obligations, purchase price adjustments, and other amounts payable under the merger agreement, (ii) 1,588,235 of the Company’s common shares valued at $34,452 using the closing price of the Company’s common shares on May 3, 2021 and (iii) unsecured subordinated promissory notes payable to the former shareholders of Bolder
22
BioPATH in an aggregate principal amount of $1,500. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of May 1, 2026.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Bolder BioPATH acquisition as a result of book-to-tax differences primarily related to the customer relationship intangible and property and equipment. This business is reported as part of our DSA reportable segment.
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Accounts receivable | | | 2,146 |
Unbilled revenues | | | 1,798 |
Operating lease ROU asset | | | 2,750 |
Property and equipment | |
| 6,523 |
Intangible asset | | | 12,700 |
Other assets | | | 34 |
Goodwill | | | 36,206 |
Accounts payable | | | (153) |
Accrued expenses | |
| (243) |
Deferred revenue | | | (662) |
Deferred tax liability | | | (4,867) |
Operating lease liability | |
| (2,750) |
| | $ | 53,482 |
Property and equipment is mostly composed of equipment (including lab equipment, furniture and fixtures, and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately eight years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and NaN is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
Gateway Acquisition
Overview
On August 2, 2021, the Company completed the acquisition of Gateway Pharmacology Laboratories LLC (“Gateway Laboratories”) to further expand its drug metabolism and pharmacokinetics technology and capability as well as expand service offerings to include in vitro solutions in pharmacology and toxicology early in drug discovery. Consideration for the Gateway Laboratories acquisition consisted of (i) $1,671 in cash, including working capital and subject to customary purchase price adjustments, and (ii) 45,323 of the Company’s common shares valued at $1,182 using the closing price of the Company’s common shares on August 2, 2021. This business is reported as part of our DSA reportable segment.
23
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Gateway Laboratories acquisition as a result of book-to-tax differences primarily related to the customer relationship intangible and property and equipment.
The valuation of assets acquired and liabilities assumed had not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment, intangible assets, income taxes, and goodwill, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and the Company’s ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and NaN is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Accounts receivable | | | 422 |
Operating lease ROU asset | | | 120 |
Property and equipment | |
| 359 |
Intangible asset | | | 100 |
Other assets | | | 9 |
Goodwill | |
| 2,207 |
Accounts payable | | | (54) |
Accrued expenses | | | (72) |
Deferred tax liability | | | (118) |
Operating lease liability | |
| (120) |
| | $ | 2,853 |
BioReliance Acquisition
Overview
On July 9, 2021, the Company completed the acquisition of certain assets of BioReliance Corporation (“BioReliance”) to further expand its service offerings to include genetic toxicology services. The assets acquired consisted of fixed assets and an intangible asset related to customer relationships. The Company accounted for the transaction as a business combination as it was determined that the transaction included inputs and substantive processes capable of producing outputs which constitute a business. Consideration for the BioReliance acquisition consisted of (i) $175 in cash and (ii) 10% of net sales through December 2023 derived from the provision by the Company of services comprising the business to existing customers related to the intangible asset acquired. The Company estimated the fair value of 10% of net sales and recorded a contingent consideration liability of $640 in the consolidated balance sheets for the year ended September 30, 2021. The $175 consideration payable was included in accrued expenses in the consolidated balance sheets for the year ended September 30, 2021 and subsequently paid in the first quarter of fiscal 2022.
The valuation of assets acquired and liabilities assumed had not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment and intangible assets. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value. This business is reported as part of our DSA reportable segment.
24
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as9.OTHER OPERATING EXPENSE
Other operating expense consisted of the acquisition date:following:
| | | | | | | | | |
| | Preliminary | | Three Months Ended | |||||
| | Allocation as of | | December 31, | |||||
| | March 31, 2022 |
| 2022 |
| 2021 | |||
Assets acquired and liabilities assumed: |
| |
| ||||||
Property and equipment | | | 175 | ||||||
Intangible asset | |
| 640 | ||||||
Acquisition and integration costs | | $ | 983 | | $ | 8,808 | |||
Restructuring costs1 | | | 266 | | | — | |||
Startup costs | | | 1,505 | | | 957 | |||
Remediation costs | | | 585 | | | 439 | |||
Other costs | | | 300 | | | 362 | |||
Acquisition-related stock compensation costs2 | | | — | | | 23,014 | |||
| | $ | 815 | | $ | 3,639 | | $ | 33,580 |
1 Restructuring costs represent costs incurred in connection with the exit of our Dublin and Cumberland facilities. See Note 10 – Restructuring and Assets Held for Sale for additional information. | 1 Restructuring costs represent costs incurred in connection with the exit of our Dublin and Cumberland facilities. See Note 10 – Restructuring and Assets Held for Sale for additional information. | ||||||||
2 Refer to Note 4 - Business Combinations for further discussions around acquisition-related stock compensation costs related to the acquisition of Envigo. | 2 Refer to Note 4 - Business Combinations for further discussions around acquisition-related stock compensation costs related to the acquisition of Envigo. |
As
10.RESTRUCTURING AND ASSETS HELD FOR SALE
Restructuring
During June 2022, the Company approved and announced a plan to close its facility in Cumberland, Virginia (“Cumberland facility”) and to close and relocate its operations in Dublin, Virginia (“Dublin facility”) into its other existing facilities, as a part of Marchthe Company’s ongoing restructuring and site optimization plan. The Cumberland facility exit was also a part of the transfer plan settlement, as further described in Note 14 – Contingencies. The operations at both the Cumberland facility and the Dublin facility were within the RMS segment. The Cumberland facility exit was complete by September 2022. The Dublin facility transition was completed in November 2022.
For the three months ended December 31, 2022, the Company had approximately $632 of contingent consideration related to the BioReliance acquisitionincurred immaterial expenses that is subject to fair value measurement on a recurring basisqualify as it includes unobservableexit and significant inputs in the determination of fair value. The fair value of the contingent consideration related to BioReliance was estimated using a discounted cash flow analysisdisposal costs under GAAP, and Level 3 inputs including projections representative of a market participant view for net sales through December 2023 and an estimated discount rate. The amount to be paid is calculated as a percentage of net sales as described above.
Plato BioPharma Acquisition
Overview
On October 4, 2021, the Company completed the acquisition of Plato to expand its market reach in early-stage drug discovery. Consideration for the Plato acquisition consisted of (i) $10,462 in cash, including working capital and subject to customary purchase price adjustments, (ii) 57,587 of the Company’s common shares valued at $1,776 using the closing price of the Company’s common shares on October 4, 2021 and (iii) a $3,000 seller note.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Plato acquisitiondoes not expect further material charges as a result of book-to-tax differences primarily relatedthe closures of the Cumberland facility and Dublin facility. Exit and disposal costs were charged to other operating expense.
As of December 31, 2022, the liability balance for exit and disposal costs that qualify as employee-related exit and disposal costs is $571.
Assets Held for Sale
Prior to the customer relationship intangibleEnvigo acquisition, Envigo management signed a Stock Purchase Agreement dated October 6, 2021, to sell its ownership interest in its Israel RMS and property and equipment.
The valuation of assets acquired and liabilities assumed had not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subjectIsrael CRS businesses (the “Israeli Businesses”) to change, including the valuation of property and equipment, intangible assets, income taxes, goodwill and net working capital among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalizationmanagement team of the valuation duringIsrael Businesses for $6,650. The sale includes the measurement period could resultCompany’s 100% ownership in a changeIsrael RMS and Israel RMS’s 62.5% ownership interest in Israel CRS. The management team currently owns the amounts recorded for37.5% non-controlling ownership position in Israel CRS. In October 2022, the acquisition date fair value. This business is reported as partCompany’s Board of our DSA reportable segment.
The following table summarizesDirectors approved the preliminary fair value of assets acquired and liabilities assumed assale of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Cash | | | 1,027 |
Accounts receivable | | | 860 |
Property and equipment | | | 1,148 |
Operating lease ROU asset | | | 2,582 |
Intangible asset | | | 5,100 |
Goodwill | | | 8,880 |
Operating lease liability | | | (2,566) |
Other liabilities, net | | | (242) |
Deferred tax liability | |
| (1,551) |
| | $ | 15,238 |
Israeli Businesses. As a result of this approval, and in consideration of the remaining assets held for sale criteria under ASC 360 – Property, Plant and equipment is mostly composed of lab equipment, furniture and fixtures, and computer equipment. The fair value of property and equipmentEquipment, it was determined to approximate net book value at the time of the acquisition based on the information
25
currently available and pending finalization of our fair value assessment, which is subject to change as we complete our valuation procedures.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately eight years for customer relationships on a straight-line basis. The fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheetliabilities of the Plato acquisition as a result of book-to-tax differences primarily related toIsraeli Businesses met the intangible assets.
Envigo RMS Holding Corp Acquisition
Overview
On November 5, 2021, the Company completed the acquisition of Envigo by merger of a wholly owned subsidiary of the Company with and into Envigo to expand its market reach in early-stage drug discovery. The aggregate consideration paid to the holders of outstanding capital stock in Envigo in the merger consisted of cash of $217,808, including adjustmentscriteria for net working capital, and 8,245,918 of the Company’s common shares valued at $439,590 using the opening price of the Company’s common shares on November 5, 2021. In addition, the Company assumed certain outstanding Envigo stock options, including both vested and unvested options, that were converted to the right to purchase 790,620 Company common shares at an exercise price of $9.93 per share. The stock options were valued at $44.80 per option utilizing a Black-Scholes option valuation model with the inputs below. The total value of options issued of $35,418, of which $18,242 was excluded from the purchase price as those options were determined to be post-combination expense. The previously vested stock options are reflected as purchase consideration of approximately $17,176.
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The Company recognized transaction costs related to the acquisition of Envigo of $454 and $8,945assets held for the three and six months ended March 31, 2022. These costs were associated with legal and professional services related to the acquisition and are reflected within other operating expenses in the Company’s condensed consolidated statements of operations.
The valuation of assets acquired and liabilities assumed had not yet been finalizedsale as of MarchDecember 31, 2022. The purchase price allocationThis sale is preliminary and subjectexpected to change, includingclose by the valuationend of property and equipment, inventory, intangible assets, income taxes, goodwill, and the finalization of net working capital, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value. This business is reported as part of the Company’s RMS reportable segment.
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the fiscal year ended September 30, 2023 and will be reflected in the RMS reportable segment. The following table summarizes the preliminary fair value of assets acquired and liabilities assumed ascombined loss before taxes of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
| |
|
Cash | | | 3,091 |
Restricted cash | | | 435 |
Trade receivables and contract assets | | | 44,240 |
Inventory | | | 39,138 |
Prepaid expenses and other current assets | | | 18,960 |
Operating lease ROU assets, net | | | 7,570 |
Property and equipment | | | 83,608 |
Other assets | | | 7,676 |
Intangible asset | | | 201,000 |
Goodwill | | | 356,947 |
Accounts payable | | | (17,298) |
Fees invoiced in advance | | | (7,040) |
Current portion of long-term operating lease | | | (2,729) |
Accrued expenses and other liabilities | |
| (22,382) |
Long-term operating leases, net | | | (4,631) |
Other liabilities | | | (3,834) |
Long-term debt | | | (140) |
Long-term deferred tax liabilities | | | (31,148) |
Noncontrolling interest | | | 1,111 |
| | $ | 674,574 |
Property and equipment is mostly composed of land, buildings and equipment (including lab equipment, furniture and fixtures, and computer equipment). The fair value of property and equipment was determined to approximate net book value at the time of the acquisition based on the information currently available and pending finalization of our fair value assessment, which is subject to change as we complete our valuation procedures.
Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 12.5 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets as of March 31, 2022 is based on preliminary assumptions which are subject to change as we complete our valuation procedures.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Envigo acquisition as a result of book-to-tax differences primarily related to the intangible assets, step up on the fair value of inventory and property and equipment. Within the deferred tax liability, $8,949 of acquired foreign net operating losses are offset by an uncertain tax benefit of $8,304.
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Goodwill, which is derived from the expanded client base, the ability to provide products and services for the entirety of discovery and nonclinical development within one organization, and to ensure supply for internal use, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and NaN is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Robinson Services, Inc. Acquisition
Overview
On December 29, 2021, the Company completed the acquisition of the rabbit breeding and supply business of Robinson Services, Inc. (“RSI”). The acquisition was another step in Inotiv’s strategic plan for building its RMS business and is reported as part of the Company’s RMS reporting segment. The aggregate consideration paid in the transaction consisted of cash consideration of $3,250 and 70,633 of the Company’s common shares valued at $2,898 using the closing price of the Company’s common shares on December 29, 2021.
The valuation of assets acquired and liabilities assumed had not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subject to change, including the valuation of intangible assets, non-compete agreement, supply agreement and goodwill. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value. This business is reported as part of the Company’s RMS reportable segment.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
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Customer relationship | | | 4,700 |
Non-compete agreement | | | 300 |
Supply agreement | | | 200 |
Goodwill | | | 948 |
| | $ | 6,148 |
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 7.5 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets as of March 31, 2022 is based on preliminary assumptions which are subject to change as we complete our valuation procedures.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Integrated Laboratory Systems, LLC acquisition
Overview
On January 10, 2022, the Company completed the acquisition of Integrated Laboratory Systems, LLC (“ILS”). ILS is a provider of services specializing in nonclinical and analytical drug discovery and development services and research models and related products
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and services. Consideration for the ILS acquisition consisted of $38,805 in cash, including adjustments for net working capital, and inclusive of $3,800 being held in escrow for purposes of securing any amounts payable by the selling parties on account of indemnification obligations, purchase price adjustments, and other amounts payable under the merger agreement and 429,118 of the Company’s common shares valued at $14,466 using the opening price of the Company’s common shares on January 10, 2022.
The valuation of assets acquired and liabilities assumed had not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment, inventory, intangible assets, income taxes, goodwill, and the finalization of net working capital, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value. This business is reported as part of our DSA reportable segment.
ILS recorded revenue and net income of $4,866 and $109, respectively, for the three month period ended March 31, 2022.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
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Cash | | | 797 |
Trade receivables and contract assets | | | 3,841 |
Prepaid expenses and other current assets | | | 61 |
Property and equipment | | | 2,237 |
Intangible asset | | | 27,000 |
Goodwill | | | 23,206 |
Accounts payable | | | (1,039) |
Fees invoiced in advance | | | (1,696) |
Accrued expenses and other liabilities | |
| (1,136) |
| | $ | 53,271 |
Property and equipment is mostly composed of equipment (including lab equipment, furniture and fixtures, and computer equipment) and leasehold improvements. The fair value of property and equipment was determined using a combination of cost and market-based methodologies. The fair value of property and equipment as of March 31, 2022 is based on preliminary assumptions which are subject to change as we complete our valuation procedures.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately nine years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets as of March 31, 2022 is based on preliminary assumptions which are subject to change as we complete our valuation procedures.
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Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and NaN is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
Orient BioResource Center, Inc. acquisition
Overview
On January 27, 2022, the Company completed the acquisition of OBRC from Orient Bio, Inc., a preclinical contract research organization and animal model supplier based in Seongnam, South Korea (“Seller”). OBRC is a primate quarantine and holding facility. Consideration for the OBRC acquisition consisted of (i) $28,156 in cash, including certain adjustments, (ii) 677,339 of the Company’s common shares valued at $18,410 using the closing price of the Company’s common shares on January 27, 2022, (iii) the effective settlement of a preexisting relationship of $1,017 and (iv) a payable owed by OBRC to the Seller in the amount of $3,325. The preexisting relationship represents the return of fees invoiced in advance and paid to OBRC by the Company prior to the acquisition offset by the payment of trade receivables by the Company to OBRC. As these were settled at the stated value, 0 gain or loss was recorded as a result of the settlement of this preexisting relationship. The payable will not bear interest and is required to be paid to the Seller on the date that is 18 months after the closing. The Company will have the right to set off against the payable any amounts that become payable by the Seller on account of indemnification obligations under the purchase agreement.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the OBRC acquisition as a result of book-to-tax differences primarily related to the intangible assets and property and equipment.
The valuation of assets acquired and liabilities assumed has not yet been finalized as of March 31, 2022. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment, intangible assets, income taxes, goodwill, and the finalization of net working capital, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but 0 later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value. This business is reported as part of our RMS reportable segment.
OBRC recorded revenue and net income of $7,309 and $2,393, respectively,Israeli Businesses for the three months ended MarchDecember 31, 2022.2022 was $1,904.
The following table summarizes the preliminary fair value of assets acquired and liabilities, assumed asand the resulting net assets held for sale, of the acquisition date:
| | | |
| | Preliminary | |
| | Allocation as of | |
| | March 31, 2022 | |
Assets acquired and liabilities assumed: |
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Cash | | | 5,481 |
Trade receivables and contract assets | | | 2,025 |
Inventory | | | 8,800 |
Prepaid expenses and other current assets | | | 2,609 |
Property and equipment | | | 8,790 |
Intangible asset | | | 21,700 |
Goodwill | | | 14,530 |
Accounts payable | | | (476) |
Fees invoiced in advance | | | (6,548) |
Accrued expenses and other liabilities | |
| (354) |
Long-term deferred tax liabilities | | | (5,649) |
| | $ | 50,908 |
Property and equipment is mostly composed of land, building and equipment (including lab equipment, furniture and fixtures, and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies. The fair value of property and equipment as of March 31, 2022 is based on preliminary assumptions whichIsraeli Businesses are subject to change as we complete our valuation procedures.
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Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately six years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets as of March 31, 2022 is based on preliminary assumptions which are subject to change as we complete our valuation procedures.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and NaN is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Pro Forma Results
The Company’s unaudited pro forma results of operations for the three and six months ended March 31, 2022 and March 31, 2021, assuming the acquisitions had occurred as of October 1, 2020 are presented for comparative purposes below. These amounts are based on available information of the results of operations prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisitions been completed on October 1, 2020.
The unaudited pro forma information is as follows:
| | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended | | Six Months Ended | | Six Months Ended | | December 31, | |||||
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| 2022 | |||||
Total revenues | $ | 143,023 | | $ | 109,088 | | $ | 268,337 | | $ | 217,125 | |||
Assets | | | | |||||||||||
Current assets: | | | | |||||||||||
Cash and cash equivalents | | $ | 1,097 | |||||||||||
Restricted cash | | | 472 | |||||||||||
Trade receivables and contract assets, net of allowances for credit losses | | | 3,095 | |||||||||||
Inventories, net | |
| 760 | |||||||||||
Prepaid expenses and other current assets | |
| 1,065 | |||||||||||
Total current assets | | $ | 6,489 | |||||||||||
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Net income (loss) |
| (72,023) | |
| (24) | |
| (98,548) | |
| (23,242) | |||
Property and equipment, net | | | 1,071 | |||||||||||
Total assets | | $ | 7,560 | |||||||||||
| | | | |||||||||||
Liabilities | | | | |||||||||||
Current liabilities: | | | | |||||||||||
Accounts payable | | $ | 317 | |||||||||||
Accrued expenses and other liabilities | |
| 1,902 | |||||||||||
Fees invoiced in advance | |
| 491 | |||||||||||
Total liabilities | | $ | 2,710 | |||||||||||
| | | | |||||||||||
Net assets held for sale | | $ | 4,850 |
11.
11. REVENUE RECOGNITION
In accordance with ASC 606, the Company disaggregates its revenue from clients into two revenue streams, service revenue and product revenue. At contract inception the Company assesses the services promised in the contract with the clients to identify performance obligations in the arrangements.
Service revenue
DSA
The Company enters into contracts with clients to provide drug discovery and development services with payments based on mainly fixed-fee arrangements. The Company also offers archive storage services to its clients.
The Company’s fixed fee arrangements may involve nonclinical research services (toxicology, pathology, pharmacology), bioanalytical, and pharmaceutical method development and validation, nonclinical research services and the analysis of bioanalytical and pharmaceutical samples. For bioanalytical and pharmaceutical method validation services and nonclinical research services, revenue is recognized over time using the input method based on the ratio of direct costs incurred to total estimated direct costs. For contracts that involve in-life study conduct, method development or the analysis of bioanalytical and pharmaceutical samples, revenue is recognized over time when samples are analyzed or when services are performed. The Company generally bills for services on a milestone basis. These contracts represent a single performance obligation and due to the Company’s right to payment for work performed, revenue is recognized over time. Research services contract fees received upon acceptance are deferred until earned and classified within customer advances on the condensed consolidated balance sheets. Unbilled revenues represent revenues earned under contracts in advance of billings.
Archive services provide climate controlled archiving for client’s data and samples. The archive revenue is recognized over time, generally when the service is provided. These arrangements include one performance obligation. Amounts related to future
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archiving or prepaid archiving contracts for clients where archiving fees are billed in advance are accounted for as deferred revenue and recognized ratably over the period the applicable archive service is performed.
RMS
The Company provides GEMS, which includes the performance of contract breeding and other services associated with genetically engineered models, client-owned animal colony care, and health monitoring and diagnostics services related to research models. For contracts that involve creation of a specific type of animal, revenue is recognized over time with each milestone as a separate performance obligation. The Company is due payment for work performed even if subsequent milestones are unable to be met. Contract breeding revenue and client-owned animal colony care revenue are recognized over time and are billed as per diems. Health monitoring revenue and diagnostic services revenue are recognized once the service is performed.
Product revenue
DSA
DSA product revenue includes internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company’s BASi product line. These products can be sold to multiple clients and have alternative use. Both the transaction sales price and shipping terms are agreed upon in the client order. For these products, all revenue is recognized at a point in time, generally when title of the product and control is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation.
RMS
RMS product revenue includes research models, diets and bedding, bioproducts and GEMS. Research models revenue represents the commercial production and sale of research models, principally purpose-bred rats and mice for use by researchers, and large-animal models. Diets and bedding revenue represents laboratory animal diets, bedding, and enrichment products under the Company’s Teklad product line. Bioproducts revenue represents the sale of serum and plasma, whole blood, tissues, organs and glands, embryo culture serum and growth factors. Research models and diets and bedding include freight costs associated with the delivery of the product to customers. For these products, all revenue is recognized at a point in time, generally when title and control of the product is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation.
The following table presents changes in the Company’s contract assets and contract liabilities for the six months ended March 31, 2022.
| | | | | | | | | | | | |
| | Balance at | | | | | | | | Balance at | ||
| | September 30, | | | | | | | | March 31, | ||
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| 2021 |
| Additions |
| Deductions |
| 2022 | ||||
Contract Assets: Unbilled revenue | | $ | 6,194 | | $ | 17,009 | | $ | (10,510) | | $ | 12,693 |
Contract liabilities: Fees invoiced in advance | | $ | 26,614 | | $ | 249,972 | | $ | (206,348) | | $ | 70,238 |
12. LEASES
The Company records an ROUa right-of-use (“ROU”) asset and lease liability for substantially all leases for which it is a lessee, in accordance with ASU 842. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet.sheets. The Company recognizes lease expense for the leases on a straight-line basis over the lease term. At inception of a contract, the Company considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration.
The Company has various operating and finance leases for facilities and equipment. Facilities leases provide office, laboratory, warehouse, or land that the Company uses to conduct its operations. Facilities leases range in duration from two to ten years, with either renewal options for additional terms as the initial lease term expires, or purchase options. Facilities leases are considered as either operating or financing leases.
Equipment leases provide for office equipment, laboratory equipment or services the Company uses to conduct its operations. Equipment leases range in duration from 30 to 60 months, with either subsequent annual renewals, additional terms as the initial lease term expires, or purchase options.
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ROU lease assets and lease liabilities that are reported in the Company’s condensed consolidated balance sheets are as follows:
| | | | | | | | | | | | |
| | As of | | As of |
| December 31, 2022 |
| September 30, 2022 | ||||
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| March 31, 2022 |
| September 30, 2021 | | | | | | | ||
Operating ROU assets, net | | $ | 23,795 | | $ | 8,358 | | $ | 34,152 | | $ | 32,489 |
| | | | | | | | | | | | |
Current portion of operating lease liabilities | | | 5,356 | |
| 1,959 | | | 8,475 | |
| 7,982 |
Long-term operating lease liabilities | | | 18,613 | |
| 6,554 | | | 26,240 | |
| 24,854 |
Total operating lease liabilities | | $ | 23,969 | | $ | 8,513 | | $ | 34,715 | | $ | 32,836 |
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Finance ROU assets, net | | $ | 57 | | $ | 60 | | $ | 68 | | $ | 79 |
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Current portion of finance lease liabilities | | | 23 | |
| 24 | | | 39 | |
| 43 |
Long-term finance lease liabilities | | | 37 | |
| 39 | | | 35 | |
| 41 |
Total finance lease liabilities | | $ | 60 | | $ | 63 | | $ | 74 | | $ | 84 |
During the three and six months ended MarchDecember 31, 2022 and 2021, the Company had operating lease amortization of $1,486$1,936 and $2,568, respectively, and had finance lease amortization of $6 and $12, respectively. Finance lease interest recorded in the three and six months ended March 31, 2022 was $0 and $1,$1,083, respectively.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s leases for the three and six months ended MarchDecember 31, 2022 and MarchDecember 31, 2021 were:
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| Three Months Ended |
| Six Months Ended |
| Three Months Ended | ||||||||||||
| | March 31, | | March 31, | | December 31, | ||||||||||||
| | 2022 | | 2021 |
| 2022 | | 2021 | | 2022 | | 2021 | ||||||
Operating lease costs: |
| | | | |
| | |
| | | |
| | | | |
|
Fixed operating lease costs | | $ | 1,120 | | $ | 242 | | $ | 2,203 | | $ | 474 | | $ | 2,592 | | $ | 1,083 |
Short-term lease costs | | | 19 | |
| 42 | |
| 44 | | | 52 | | | 12 | |
| 25 |
Variable lease costs | | | — | | | — | | | — | | | | ||||||
Lease income | | | (988) | |
| (159) | |
| (1,165) | | | (318) | | | (674) | |
| (177) |
Finance lease costs: | | | | |
| | |
| | | | | | | | |
| |
Amortization of ROU asset expense | | | 6 | |
| 35 | |
| 12 | | | 72 | | | 11 | |
| 6 |
Interest on finance lease liability | | | — | |
| 68 | |
| 1 | | | 137 | | | 1 | |
| 1 |
Total lease cost | | $ | 157 | | $ | 228 | | $ | 1,095 | | $ | 417 | | $ | 1,942 | | $ | 938 |
The Company serves as lessor to a lessee in 5five facilities. The gross rental income and underlying lease expense are presented net in the Company’s condensed consolidated statementstatements of operations. The gross rent receivables and underlying lease liabilities are presented gross in the Company’s condensed consolidated balance sheets.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | ||||||
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| March 31, |
| March 31, |
| December 31, | ||||||
| | 2022 | | 2022 | | 2022 | | 2021 | ||||
Cash flows included in the measurement of lease liabilities: |
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| | | | |
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Operating cash flows from operating leases | | $ | 1,626 | | $ | 2,722 | | $ | 2,351 | | $ | 1,096 |
Operating cash flows from finance leases | | | — | |
| 1 | | | 11 | |
| 1 |
Finance cash flows from finance leases | | | 7 | |
| 13 | | | 1 | |
| 6 |
| | | | | | | | | | | | |
Non-cash lease activity: | | | | |
| | | | | |
| |
ROU assets obtained in exchange for new operating lease liabilities | | $ | 1,055 | | $ | 18,091 | | $ | 3,567 | | $ | 17,036 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | 10 | | | 10 | ||||||
ROU assets obtained in exchange for new finance lease liabilities | | | — | | | — |
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The weighted average remaining lease term and discount rate for the Company’s operating and finance leases as of MarchDecember 31, 2022 and March 31, 2021 were:
| | | | | | ||||||
| | As of | | As of | | | | | | | |
| | March 31, 2022 | | March 31, 2021 | | | December 31, 2022 | | December 31, 2021 | ||
Weighted-average remaining lease term (in years) |
| |
| |
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| |
| | |
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Operating lease |
| 6.11 |
| 4.49 |
|
| 5.97 |
| | 6.18 |
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Finance lease |
| 2.96 |
| 0.37 |
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| 2.35 |
| | 2.90 |
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Weighted-average discount rate (in percentages) |
| |
| |
|
| |
| | |
|
Operating lease |
| 5.01 | % | 5.24 | % |
| 6.97 | % | | 5.10 | % |
Finance lease |
| 4.86 | % | 5.82 | % |
| 4.86 | % | | 4.86 | % |
Lease duration was determined utilizing renewal options that the Company is reasonably certain to execute.
As of MarchDecember 31, 2022, maturities of operating and finance lease liabilities for each of the following five fiscal years and a total thereafter were as follows:
| | | | | | | | | | | | |
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| Operating Leases |
| Finance Leases |
| Operating Leases |
| Finance Leases | ||||
2022 (remainder of fiscal year) | | $ | 3,230 | | $ | 13 | ||||||
2023 | |
| 5,519 | |
| 21 | ||||||
2023 (remainder of fiscal year) | | $ | 8,351 | | $ | 40 | ||||||
2024 | |
| 4,658 | |
| 21 | |
| 8,263 | |
| 31 |
2025 | |
| 3,863 | |
| 8 | |
| 6,975 | |
| 5 |
2026 | |
| 3,207 | |
| 1 | |
| 5,667 | |
| 1 |
2027 | |
| 3,803 | |
| — | ||||||
Thereafter | |
| 7,144 | |
| — | |
| 10,597 | |
| — |
Total minimum future lease payments | |
| 27,621 | |
| 64 | |
| 43,656 | |
| 77 |
Less interest | |
| (3,652) | |
| (4) | |
| (8,941) | |
| (3) |
Total lease liability | |
| 23,969 | |
| 60 | |
| 34,715 | |
| 74 |
12.EQUITY, STOCK-BASED COMPENSATION AND LOSS PER SHARE
Increase in Authorized Shares and Equity Plan Reserve
On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s Second Amended and Restated Articles of Incorporation to increase the number of authorized shares from 20,000,000 shares, consisting of 19,000,000 common shares and 1,000,000 preferred shares, to 75,000,000 shares, consisting of 74,000,000 common shares and 1,000,000 preferred shares. Approval of this matter by the Inotiv shareholders was a condition to the closing of the Envigo acquisition. The amendment was effective on November 4, 2021. On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s 2018 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares available for awards thereunder by 1,500,000 shares and to make certain corresponding changes to certain limitations in the Equity Plan. At December 31, 2022, 951,535 shares remained available for grants under the Equity Plan.
Stock Issued in Connection with Acquisitions
During the three months ended December 31, 2022 and 2021, 0 and 8,374,138 common shares, respectively, were issued in relation to acquisitions. See Note 4 – Business Combinations for further discussion of consideration for each acquisition.
Stock-Based Compensation
The Company expenses the estimated fair value of stock options, restricted stock and restricted stock units over the vesting periods of the grants. The Company recognizes expense for awards subject to graded vesting using the straight-line attribution method and forfeitures, as they are incurred. Stock based compensation expense for the three months ended December 31, 2022 and 2021, was $2,046 and $23,932, respectively. Of the $23,932 stock based compensation expense in the three months ended December 31, 2021, $23,014 related to post-combination expense recognized in connection with the Envigo transaction (see Note 4 – Business Combinations), which was inclusive of $4,772 of stock based compensation settled in cash.
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13. DEFINED BENEFIT PLANNet Loss per Share
The Company has a defined benefit plancomputes basic loss per share using the weighted average number of common shares outstanding. The Company computes diluted loss per share using the if-converted method for preferred shares and convertible debt, if any, and the treasury stock method for stock options and restricted stock units. Shares issuable upon exercise of 1,779,406 options and shares issuable upon vesting of 549,833 restricted stock units were not considered in computing diluted loss per share for the U.K., the Harlan Laboratories UK Limited Occupational Pension Scheme (the "Pension Plan"), which operated through April 2012. As of April 30, 2012, the accumulation of plan benefits of employees in the Pension Plan was permanently suspended and therefore the Pension Plan was curtailed. During the year ending September 30, 2022, the Company expects to contribute $1,078 to the Pension Plan. As of Marchthree months ended December 31, 2022 because they were anti-dilutive. Shares issuable upon exercise of 1,654,270 options were not considered in computing diluted loss per share for the unfunded defined benefit plan obligationthree months ended December 31, 2021 because they were anti-dilutive. Additionally, there are 3,040,268 shares of $286 is includedcommon stock issuable upon conversion in other liabilities (non-current)connection with the convertible debt entered into on September 27, 2021, which were not considered in computing diluted loss per share for the condensed consolidated balance sheets.
three months ended December 31, 2022 and 2021 because they were anti-dilutive.
The following table providesreconciles the componentscomputation of basic net periodic benefit costs for the Pension Plan, which is included in general and administrative in the condensed consolidated statement of operations.loss per share to diluted net loss per share:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Components of net periodic benefit expense: | | | | | | | | | | | | |
Interest cost | | $ | 79 | | $ | - | | $ | 137 | | $ | - |
Expected return on assets | | | (220) | | | - | | | (329) | | | - |
Amortization of prior loss | | | 116 | | | - | | | 277 | | | - |
Net periodic benefit cost | | $ | (25) | | $ | - | | $ | 85 | | $ | - |
| | | | | | |
|
| Three Months Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Basic and diluted net loss per share: |
| |
|
| |
|
Net loss applicable to common shareholders | | $ | (87,323) | | $ | (83,047) |
Weighted average common shares outstanding (in thousands) | | | | | | |
Basic and diluted: | | | 25,603 | | | 21,124 |
| | | | | | |
Basic and diluted net loss per share | | $ | (3.41) | | $ | (3.93) |
13.INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. The Company recognizes 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 carryforwards. The Company measures 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. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. The Company records valuation allowances based on a determination of the expected realization of tax assets.
The difference between the enacted federal statutory rate of 21% and the Company’s effective tax rate of 15.5% for the three months ended December 31, 2022 was primarily related to the impact on tax expense of certain book to tax differences on the deductibility of goodwill impairment and other permanent items.
The Company recognizes 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. The Company measures the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability basis that it believes is more likely than not to be realized upon settlement of the position. As of December 31, 2022, the Company’s only uncertain tax position was derived from a business combination in fiscal year 2022.
The Company records interest and penalties accrued in relation to the uncertain income tax position as a component of income tax expense (benefit). Any changes in the liability for the uncertain tax position would impact the effective tax rate. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and foreign jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by federal, state, local and foreign taxing authorities. State and other income tax returns are generally subject to examination for a period of three to five years after the filing of the respective returns. The Company is no longer subject to U.S. federal tax examinations for years before 2018 or state and local tax examinations for years before 2017, with limited exceptions. For federal purposes, the tax attributes carried forward could be adjusted through the examination process and are subject to examination three years from the date of utilization.
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14.CONTINGENCIES
Litigation
Envigo RMS, LLC (“Envigo RMS”) is a defendant in a purported class action and a related action under California’s Private Attorney General Act of 2004 (“PAGA”) brought by Jacob Greenwell, a former employee of Envigo RMS, on June 25, 2021 in the Superior Court of California, Alameda County. The complaints allege that Envigo RMS violated certain wage and hour requirements under the California Labor Code. PAGA authorizes private attorneys to bring claims on behalf of the State of California and aggrieved employees for violations of California’s wage and hour laws. The class action complaint seeks certification of a class of similarly situated employees and the award of actual,
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consequential and incidental losses and damages for the alleged violations. The PAGA complaint seeks civil penalties pursuant to the California Labor Code and attorney’s fees. The Company intends to continue to vigorously defend these claims.
On June 23, 2022, a putative securities class action lawsuit was filed in the United States District Court for the Northern District of Indiana, naming the Company and Robert W. Leasure and Beth A. Taylor as defendants, captioned Grobler v. Inotiv, Inc., et al., Case No. 4:22-cv-00045 (N.D. Ind.). The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Act”), as amended, and Rule 10b-5 promulgated thereunder, based on alleged false and misleading statements and material omissions regarding the Company’s acquisition of Envigo RMS and its regulatory compliance. On September 12, 2022, Oklahoma Police Pension and Retirement System was appointed by the Court as lead plaintiff. Thereafter, on November 14, 2022, the lead plaintiff filed an amended complaint against the same defendants, in addition to John E. Sagartz and Carmen Wilbourn, that asserted the same claims along with a claim under Section 14(a) of the Act. On November 23, 2022, the lead plaintiff filed a further amended complaint against the aforementioned defendants asserting the same claims as the amended complaint and further alleging that false and misleading statements and material omissions were made concerning the Company’s non-human primate business. The purported class in the operative complaint includes all persons who purchased or otherwise acquired the Company’s common stock between September 21, 2021 and November 16, 2022, and the complaint seeks an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief. While the Company cannot predict the outcome of this matter, the Company believes the class action to be without merit and plans to vigorously defend itself.
On September 9, 2022, a purported shareholder derivative lawsuit was filed in the United States District Court for the Northern District of Indiana, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Grobler v. Robert W. Leasure, et al., Case No. 4:22-cv-00064 (N.D. Ind.). The derivative action asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of Section 14(a) of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance. On November 15, 2022, the Court entered an order staying the derivative action pending a resolution of a motion to dismiss in the securities class action.
On January 4, 2023, an additional shareholder derivative lawsuit was filed in the United States District Court for the Northern District of Indiana, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Burkhart v. Robert W. Leasure, et al., Case No 4:23-cv-00003 (N.D. Ind.). The derivative action asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of Section 10(b), 21D and 14(a) of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance.
While the Company cannot predict the outcome of these matters, the Company believes the derivative actions to be without merit and plans to vigorously defend itself.
The Company is party to certain other legal actions arising out of the normal course of its business. In management's opinion, none of these actions will have a material effect on the Company's operations, financial condition or liquidity.
Government Investigations and Actions
During the period from July 2021 through March 2022, one of Envigo’s U.S. facilitiesEnvigo RMS’s Cumberland facility was inspected on several occasions by the U.S. Department of Agriculture (“USDA”). USDA issued inspection reports with findings of non-compliance with certain USDA laws and regulations. Envigo RMS formally appealed certain of the findings, and has made multiple remediations and improvements at the Cumberland facility, of which it has kept USDA apprised. USDA has indicated it intends
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On May 18, 2022, the U.S. Department of Justice ("DOJ"), together with federal and state law enforcement agents, executed a search and seizure warrant on the Cumberland facility. The warrant was issued by the U.S. District Court for the Western District of Virginia on May 13, 2022. Certain employees and former employees also received a grand jury subpoena requested by the U.S. Attorney’s Office for the Western District of Virginia (“USAO-VA”). On December 8, 2022, EGSI and Inotiv received additional subpoenas from the USAO-VA, on documents, records or materials required to conductbe maintained to comply with the Clean Water Act (the “CWA”), the Virginia State Water Control Law or local pretreatment requirements, from January 2017 to present. Certain employees and former employees also received a formal investigation.grand jury subpoena requested by the USAO-VA regarding the Cumberland facility’s compliance with the CWA, the Virginia State Water Control Law or local pretreatment requirements. Consistent with Company policy, the Company is cooperating with DOJ and USAO-VA and other involved authorities.
On May 19, 2022, a civil complaint was filed against Envigo RMS in the U.S. District Court for the Western District of Virginia. The inspections and/orcomplaint was a civil action by DOJ alleging violations of the investigation could lead to enforcement action resulting in penalties that could include aAnimal Welfare Act at the Cumberland facility. The complaint sought declaratory and injunctive relief and costs. A temporary restraining order was issued on May 21, 2022 and, following Envigo RMS’s announcement on June 13, 2022 of its plans to permanently decommission the Cumberland facility, a preliminary injunction was issued on June 17, 2022. On July 15, 2022, the court approved a settlement entered into by Envigo RMS, the DOJ and the USDA on the civil case, which also comprises USDA’s administrative claims against Envigo RMS for the Cumberland facility. The settlement did not require that Envigo RMS pay any fines or injunction, civil and/penalties to any governmental agencies. In addition, it is expressly stated that the settlement was not an admission of liability or criminal penalties, and/or license suspension or revocation. Aswrongdoing by Envigo RMS with regard to its past operation of the 10-Q filing date, no investigation had been initiated.Cumberland facility. The settlement incorporated the transfer plan that was mutually agreed to by the DOJ and Envigo RMS on July 1, 2022 (the “Transfer Plan”), and it concluded all related civil and administrative complaints related to the Cumberland facility. The Transfer Plan execution was finalized by the parties on September 1, 2022. As per required in settlement, the DOJ and USDA moved to dismiss the civil and administrative complaints with prejudice on September 14, 2022, and such dismissal was granted by the court on September 14, 2022. In accordance with the settlement, Envigo RMS is refraining from any operations requiring a USDA license at the Cumberland facility. In addition, as priorly disclosed by the Company, the Company vacated the Cumberland facility, and it is currently available for sale.
On June 15, 2021, Envigo Global Services, Inc. (“EGSI”),EGSI, a subsidiary of the Company acquired in the Envigo acquisition, received a grand jury subpoena requested by the U.S. Attorney’s Office for the Southern District of Florida (“USAO”USAO-FL”) for the production of documents related to the procurement of non-human primates (“NHPs”)NHPs from foreign suppliers for the period January 1, 2018 through June 1, 2021. The subpoena relates to an earlier grand jury subpoena requested by the USAOUSAO-FL and received by EGSI’s predecessor entity, , Covance Research Products, in April 2019. Envigo acquired EGSI from Covance, Inc. (“Covance”), a subsidiary of Laboratory Corporation of America Holdings, in June 2019. The EGSI transaction agreement provides for indemnification of Envigo and its officers, directors and affiliates by Covance for any liabilities arising out of or related to the USAO’s investigation in connection with the subpoena to Covance Research Products, as well as certain other matters, subject to an overall indemnification limit for the investigation and certain other matters of $5,500.
On January 27, 2022, EGSI acquired OBRC, which owns and operates a primate quarantine and holding facility located near Alice, Texas. In 2019, OBRC received grand jury subpoenas requested by the USAOUSAO-FL requiring the production of documents and information related to its importation of NHPs into the United States. On June 16, 2021, , OBRC received a grand jury subpoena requested by the USAOUSAO-FL requiring the production of documents related to the procurement of NHPs from foreign suppliers for the period January 1, 2018 through June 1, 2021. The OBRC purchase agreement provides for indemnification of EGSI and its officers, directors and affiliates by the seller, Orient Bio, Inc., for liabilities resulting from actions, inactions, errors or omissions of Orient Bio, Inc. or OBRC related to any period prior to the closing date.
The Consistent with Company policy, the Company is cooperating with the USAO.USAO-FL.
No form of proceedings has been brought, instigated or is known to be contemplated against the Company by any government agency.
15.ACCUMULATED OTHER COMPREHENSIVE LOSS
| | | | | | | | | |
| | | | | Cumulative | | | | |
| |
| | | translation | |
| | |
| | Pension |
| adjustment | | Total | |||
Balance as of September 30, 2021 | | $ | — | | $ | — | | $ | — |
Amortization of periodic benefit costs | | | 230 | | | — | | | 230 |
Cumulative translation adjustment | | | — | | | (858) | | | (858) |
Balance as of March 31, 2022 | | $ | 230 | | $ | (858) | | $ | (628) |
16.SUBSEQUENT EVENTS
On April 25,November 16, 2022 the Company disclosed that employees of the principal supplier of NHPs to the Company, along with two Cambodian government officials, have been criminally charged by the USAO-FL with conspiring to illegally import NHPs into the United States from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021. As of the filing date of this Report, the Company has not received any additional subpoenas related to this matter.
15.SUBSEQUENT EVENTS
On January 9, 2023, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into an Interest Purchase Agreement with Histion, LLC, which is a strategic elementThird Amendment (“Third Amendment”) to the Credit Agreement. The Third Amendment provides that, among other things, during the period beginning on January 9, 2023 and, subject to the terms of the Company’s expansion of its specialized pathology services providing for the acquisition by the Company of all of the outstanding membership interests of Histion on that date. Consideration for the Histion membership interests consisted of $800 in cash (after giving effect to an adjustment for estimated net working capital), subject to certain adjustments, a $433 seller note and a number of the Company's common shares having a value of $433 based on the volume weighted average closing price of Company shares as reported by Nasdaq for the 20 trading-day periodCredit Agreement, ending on the third trading day priordate on which financial statements for the Company’s fiscal quarter ending March 31, 2024 are delivered or are required to the closing date.be delivered, as long as no event of default has occurred (the “Amendment Relief Period”):
● | the Cambodian NHP-related matters, to the extent existing and disclosed to the lenders prior to December 29, 2022, shall not constitute a material adverse effect under the Credit Agreement and will not restrict the Company’s ability to request credit extensions under the revolving credit facility; |
● | the use of borrowings under the revolving credit facility is limited to funding operational expenses of the Company in the ordinary course and cannot be used for the making or funding of investments, permitted acquisitions or restricted payments, |
3533
payments or purchases with respect to any indebtedness, bonuses or executive compensation, or judgments, fines or settlements; and |
● | additional limitations are imposed on the Company under the Credit Agreement, including restrictions on permitted asset sales, a prohibition on making permitted acquisitions, and significant limitations on the ability to incur additional debt, make investments and make restricted payments. |
The Third Amendment provides that from and after the date thereof, no incremental facilities under the Credit Agreement may be established or incurred. The Third Amendment also provides for additional mandatory prepayments of borrowed amounts following the receipt by the Company of certain cash receipts, including proceeds from certain equity issuances and cash received by the Company not in the ordinary course of business. Under the Third Amendment, after any draw on the revolving credit facility, the Company’s cash and cash equivalents held on hand domestically within the U.S. cannot exceed $10 million.
The fee consideration payable by the Company for each consenting lender party to the Third Amendment is: (i) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender; (ii) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in cash upon the occurrence of certain prepayments of the term loan under the Credit Agreement; and (iii) 7.00% of the aggregate amount of the revolving commitments held by each consenting revolving lender, to be paid in cash upon the occurrence with certain permanent reductions of the revolving loans under the Credit Agreement.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our services and products; (iii) trends in the industries that consume our services and products; (iv) our ability to develop or acquire new services and products; (v) our ability to source animal research models from Asia; (vi) our ability to make capital expenditures and finance operations; (vi)(vii) global economic conditions, especially as they impact our markets; (vii)(viii) our cash position; (viii)(ix) our ability to successfully integrate the operations and personnel related to recent acquisitions; (ix)(x) our ability to effectively manage current expansion efforts or any future expansion or acquisition initiatives undertaken by us; (x)(xi) our ability to develop and build infrastructure and teams to manage growth and projects; (xi)(xii) our ability to continue to retain and hire key talent; (xii)(xiii) our ability to market our services and products under our corporate name and relevant brand names; (xiii)(xiv) our ability to service our outstanding indebtedness, (xiv)indebtedness; (xv) our expectations regarding the volume of new bookings, pricing, gross profit margins and liquidity, (xv)liquidity; (xvi) our ability to manage recurring and non-recurring costs, (xvi)costs; (xvii) our ability to execute on our restructuring and site optimization plans; and (xviii) the impact of public health emergencies, including COVID-19, on the economy, demand for our services and products and our operations, including the measures taken by governmental authorities to address the pandemic,such public health emergencies, which may precipitate or exacerbate other risks and/or uncertainties, and additional risks set forth in our filings with the Securities and Exchange Commission (the “SEC”). Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to the risk factors disclosedthose discussed in Part I, Item 1A, Risk Factors contained in our reportsAnnual Report on Form 10-K for the fiscal year ended September 30, 2022, and in subsequent filings with the SEC, many of which are beyond our control.
In addition, we have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the assumptions on which the forward-looking statements contained herein are based on are reasonable, actual events may differ fromany of those assumptions could prove inaccurate and, as a result, the forward-looking statements based upon those assumptions maycould be significantly 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 accurately project future events. 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, except as required by law. Our actual results could differ materially from those discussed in the forward-looking statements.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included or incorporated by reference elsewhere in this Report. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements that may be affected by risks and uncertainties, including those discussed in Item 1A, Risk Factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2021. Our actual results could differ materially from those discussed in the forward-looking statements.
Amounts in this Item 2 are in thousands, unless otherwise indicated.
Recent Developments and Executive Summary
Since the start of fiscal 2022,During recent periods, we have continuedundertaken significant internal and external growth initiatives. Our growth initiatives include (1) acquisitions, (2) expansion of existing and acquired businesses, and (3) startup of new services. Previously, our momentum building Inotiv into a comprehensive provider of preclinical druggrowth initiatives focused on discovery and safety assessmentassement services, through our strategic acquisitions of Plato, ILS and, Histion and our collaboration with Synexa Life Sciences. Plato brings us important new in vivo pharmacology capabilities, ILS complements our BioReliance® assets and accelerates the buildoutas a result of our genetic toxicology offerings, and the partnership with Synexa Life Sciences enhances our biomarker platform. Histion accelerates our development and growth in the highly-specialized plastics and medical device histopathology business. Over the last few years, we’ve significantly broadened and scaled our DSA business, enabling one-stop-shop preclinical programs and quicker speed to market, positioning Inotiv as a primary contract research provider for our growing client base.
The transformativestrategic acquisition of Envigo which closedRMS Holding Corp. (“Envigo”) in the first quarter of fiscal 2022, established the foundation of our new Research Models and Services business, or RMS, which we consider critical to the discovery and development business. Through Envigo, we secured access to critical research models essential for our clients’ success, further differentiating Inotiv from many of our peers. Following the Envigo acquisition, we took steps to leverage our existing RMS capacity with the acquisition of RSI’s rabbit breeding business and the acquisition of OBRC’s non-human primate facilities, which neighbor our Alice, Texas location. In an environment during which global research model demand outstrips supply, these moves mitigate potential supply bottlenecks as we pursue a multitude of cross-selling and growth opportunities across our integrated services.
Finally, this quarter we augmented inorganic growth with another period of strong internal growth, reflecting our focus on delivering superior client experiences and investing in G&A and technology to support new services and expansion. Our quarter-end DSA backlog of $133,635 reinforces our optimism for continuing robust near-term revenue growth, and over the long-term we believe our strategy will deliver meaningfully higher operating margins as we scale.
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Significant accomplishments during three months ended March 31, 2022
Events subsequent to March 31, 2022
Business Overview
As a result of the strategic Envigo acquisition, which added a complementary research model platform, our full spectrum solutions now span two segments:
34
Discovery and Safety Assessment or DSA,(“DSA”) and Research Models and Services or RMS.(“RMS”). In addition to growth initiatives previously announced, we have initiated site optimization plans in the U.S. and France, and are consulting with employee respresentatives for a proposed consolidation of a U.K. site, in order to enhance margins.
DSAUpdate on Expansions of Facilities and Businesses
Our DSADuring the twelve months ended September 30, 2022, we initiated a facility expansion to our facility in Boulder, Colorado (“Boulder facility”), which was completed in December 2022; we invested in infrastructure, equipment and facility upgrades to increase revenue capacity at our facility in Morrisville, North Carolina (“Morrisville facility”), which was complete in December 2022; and we invested in a buildout of a newly leased 48,000 square foot facility in Rockville, Maryland (“Rockville facility”) to support biotherapeutics and genetic toxicology growth, which is expected to be complete by March 2023. In addition, we made significant investments in upgrading facilities and equipment across the facilities that serve the RMS segment specializes in order to implement planned and proposed site optimizations and enhance animal welfare. Further, we have filled critical leadership and scientific positions.
Update on New Service Offerings
We announced new service offerings which we are building internally and startup operations, including mechanistic pharmacology and toxicology, safety pharmacology, juvenile toxicology, SEND (Standard for the Exchange of Nonclinical Data) data reporting; clinical pathology; biotherapeutics; histopathology for devices; genetic toxicology; and cardiovascular safety pharmacology. In the three months ended December 31, 2022 and 2021, we incurred start up costs of $1.5 million and $1.0 million, respectively.
Update on Restructurings and Site Optimization Plans
Prior to our acquisition of Envigo, the relocation of our operations in Haslett, Michigan and Boyertown, Pennsylvania to our newly refurbished facility in Denver, Pennsylvania was announced. We expect the Haslett and Boyertown facility closures to be completed by March 2023. Further, we announced in June 2022 that we were closing a purpose-bred canine facility in Cumberland, Virgina and a rodent breeding facility in Dublin, Virginia as part of restructuring activities. The rodent breeding operations were consolidated into an existing, recently renovated site. The Cumberland facility closure was completed in September 2022 and the Dublin facility closure was completed in November 2022.
On November 29, 2022, we announced additional site consolidation plans in the U.S., intent to consult with employee representatives for a proposed consolidation of our facilities in Gannat, France, and Blackthorn, Bicester U.K., and provided an update on site optimization plans in process. The site optimization plans are intended to allow us to reduce overhead and create efficiencies through scale. Subsequent to December 31, 2022, we completed the consultation and approval process in Gannat, France and will be relocating the operations of this facility to our recently updated Horst, Netherlands facility, which we expect to be completed by June 30, 2023. The site optimization for our Blackthorn, U.K. site remained subject to approval as of December 31, 2022 and through the date of this report.
Over the last year, we have continued to improve our infrastructure and platform to support future growth and additional potential acquisitions. These improvements included investments in our information technology platforms, building program management functions to enhance management and communication with clients and multi-site programs, further enhancing client services and improving the client experience. We believe the actions taken and investments made in recent periods form a solid foundation upon which we can continue to build.
Business Overview
Inotiv is a leading contract research organization (“CRO”) dedicated to providing nonclinical and analytical drug discovery and development services to the pharmaceutical chemical, governmental, academic and medical device industries and sells analytical instrumentsselling a range of research-quality animals and diets to the pharmaceutical developmentsame industries as well as academia and contract research industries.government clients. Our mission is toproducts and services focus on bringing new drugs and medical devices through the discovery and preclinical phases of development, all while increasing efficiency, improving data, and reducing time andthe cost of discovering and taking new drugs to market. Inotiv is committed to supporting discovery and development objectives as well as helping researchers realize the full potential of their critical R&Dresearch and development projects, all while working together to build a healthier and safer world. Our strategy isWe are dedicated to provide services that will generate high-qualitypracticing high standards of laboratory animal care and timely data inwelfare.
Through our DSA segment, we support of new drug and product approval or expand their use. Our clients and partners include pharmaceutical, biotechnology, biomedical device, academic and government organizations. We believe that we offer an efficient, variable-cost alternative to our clients’ internal drug and productthe discovery, nonclinical development programs. Outsourcing development work to reduce overhead and speed product approvals through the U.S. Food and Drug Administration ("FDA") and other regulatory authorities is an established alternative to in-house product development efforts. We derive our revenues from sales of our research services and instruments, both of which are focused on evaluating drug and product safety and efficacy. We have been involved in the research of drug and products to treat diseases in numerous therapeutic areas for over 47 years since our formation as a corporation organized in Indiana in 1974, under the name Bioanalytical Systems, Inc. On March 18, 2021, we changed our name from Bioanalytical Systems, Inc. to Inotiv, Inc.
We support both the non-clinical and clinical development needs of researchers and clinicians for primarily small molecule drug candidates, but also provide services toas well as biotherapeutics and device companies. We believe that ourbiomedical devices. Our scientists have the skills in analytical instrumentation development, chemistry, computer software development, pharmacology, histology, pathology, physiology, medicine, surgery, analytical chemistry, drug metabolism, pharmacokinetics, and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are companies whose scientists are engaged in analytical chemistry, pharmacology,
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drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research from small startupstart-up biotechnology companies to some of the largest global pharmaceutical companies. We are committed
Through our RMS segment, we offer access to bringing scientific expertise, qualitya wide range of high-quality small and speed to everylarge research models for basic research and drug discovery and development, programas well as specialized models for specific diseases and therapeutic areas. We combine deep animal husbandry expertise and expanded access to helpscientists across the discovery and preclinical continuum, which reduces nonclinical lead times and provides enhanced project delivery. In conjunction with our CRO business, we have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and access to innovative genetically engineered models and services solutions. Our principal clients develop safeinclude biopharmaceutical companies, CROs, and effective life-changing therapies.academic and government organizations.
Developments withinTemporarily Suspended or Limited Operations
On November 16, 2022, the industries we serve haveCompany became aware that the U.S. Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) had criminally charged employees of the principal supplier of non-human primates (“NHPs”) to the Company, along with two Cambodian government officials, with conspiring to illegally import NHPs into the U.S. from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021 (“November 16, 2022 event”). Also as previously disclosed, two of the Company’s subsidiaries, Orient BioResource Center, Inc. (“OBRC”) and Envigo Global Services, Inc. (“EGSI”), companies acquired by the Company on January 27, 2022 and November 5, 2021, respectively, had received grand jury subpoenas from USAO-SDFL requiring the production of documents and information related to their importation of NHPs into the U.S. The Company has been fully cooperating, and will continue to cooperate, with USAO-SDFL.
The Company has not been directed to refrain from selling the Cambodian NHPs in its possession in the U.S. However, due to the allegations contained in the indictment involving the supplier and the Cambodian government officials, the Company believed that it was prudent, at the time and through the date of Form 10-K filed on January 13, 2023, to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts evaluated what additionally could be done to satisfy itself that the NHPs in inventory from Cambodia can be reasonably determined to be purpose-bred. Historically, the Company has relied on the Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”) documentation and related processes and procedures, including release of each import by U.S. Fish and Wildlife Service. The Company has continued to sell NHPs from other suppliers. Subsequent to January 13, 2023, and through the date of this report, and after an internal analysis and review, the Company has shipped a direct,select number of its Cambodian NHP inventory; however, the Company is not currently shipping Cambodian NHPs at the same volumes that it was prior to the November 16, 2022 event. The Company expects to establish new procedures before it will resume Cambodian NHP imports. The Company expects that future imports of NHPs from Cambodia will be dependent on working with third parties to establish additional procedures aiming at providing additional assurances that future NHP imports from Cambodia are purpose-bred.
Of the Company’s total revenue of $547.7 million in the fiscal year ended September 30, 2022, approximately $140.0 million was from NHPs that it had imported from Cambodia. Refer to the Liquidity section below and sometimesNote 5 – Goodwill and Intangible Assets for further discussion of impacts to the three months ended December 31, 2022, and expected future impacts.
Liquidity
As of December 31, 2022, the Company has cash and cash equivalents of $20.8 million. The November 16, 2022 event and subsequent decision to refrain from selling or delivering Cambodian NHPs held in the U.S., triggered a material impactadverse event clause in our Credit Agreement resulting in, among other things a limitation of our ability to draw on our operations. Currently, many large pharmaceutical companiesrevolving credit facility. The loss of access to our revolving credit facility and reduced liquidity resulting from the decision to refrain from selling Cambodian NHPs held in the U.S. resulted in reduced forecasted liquidity. As a result of these events, the Company took steps to improve its liquidity, which included negotiating an amendment to its Credit Agreement, which was executed on January 9, 2023, to reinstate its ability to borrow under its revolving credit facility. Without the amendment, the Company was at risk of not having the revolving credit facility available.
During the three months ended December 31, 2022, the Company announced the completion of the closure of the Cumberland and Dublin, Virginia facilities and announced further intended site optimizations plans for 2023 and 2024, including two U.S. facilities, which have major "blockbuster" drugsbeen approved, and two non-U.S. facilities, Blackthorn, U.K. and Gannat, France, which were subject to a consultation and approval process in those countries. The site optimization for our Blackthorn, U.K. site remained subject to approval as of December 31, 2022 and through the date of this report. Subsequent to December 31, 2022, we completed the consultation and approval process in Gannat, France and will be relocating the operations of this facility to our recently updated Horst, Netherlands facility, which we expect to be completed by June 30, 2023. Further, the Company has communicated price increases that are nearingbegan in January 2023. The Company also took steps in reducing its 2023 budgeted capital expenditures and certain forecasted expenses, including a reduction of nonessential travel and employee-related expenses, among other efficiency-based reductions. As a result of the endabove measures, the Company
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believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and comply with minimum liquidity and financial covenant requirements under its debt covenants under its Credit Agreement for at least the next twelve months. The forecasted operating cash flows include the shipping of the Company’s existing Cambodian NHP inventory. See Note 6 – Debt and Note 15 – Subsequent Events for further information about the Company’s existing credit facilities and requirements under its debt covenants. The Company’s liquidity needs and compliance with covenants depend, among other things, on the timing of NHP shipments and its ability to generate cash from operations.
Financial Highlights During Three Months Ended December 31, 2022
● | Revenue grew to $122.8 million in three months ended December 31, 2022 from $84.2 million during the three months ended December 31, 2021, driven by a $8.3 million rise in DSA segment revenue and a $30.3 million rise in RMS segment revenue. Growth resulted primarily from acquisitions, favorable pricing for both segments, and increased customer demand at DSA that produced revenue exceeding acquisition contributions. |
● | Consolidated net loss for the three months ended December 31, 2022 was $(86.9) million, or (70.8)% of total revenue, compared to consolidated net loss of $(83.4) million, or 99.1% of total revenue, in the three months ended December 31, 2021. The consolidated net loss in the three months ended December 31, 2022 included a $66.4 million non-cash goodwill impairment charge related to our RMS segment. The remaining consolidated net loss was primarily driven by the impact on revenue and gross margin from the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts can reasonably determine that the NHPs in inventory from Cambodia are purpose-bred. |
·Book-to-bill ratio was 1.02x for the DSA services business.
● | DSA backlog was $147.9 million at December 31, 2022, up from $147.2 million at September 30, 2022 and $104.6 million at December 31, 2021. |
Events Subsequent to December 31, 2022
● | On January 9, 2023, the Company entered into a Third Amendment to the Credit Agreement, as described below under “Liquidity and Capital Resources – Third Amendment to Credit Agreement.” |
Results of Operations
Three Months Ended December 31, 2022 Compared to Three Months Ended December 31, 2021
DSA
| | | | | | | | | | | | |
(in millions, except percentages) | | Three Months Ended | | | | | | | ||||
| | December 31, | | | | | | | ||||
|
| 2022 |
| 2021 | | | $ Change | | % Change | | ||
Revenue | | $ | 41.1 | | $ | 32.8 | | $ | 8.3 | | 25.3 | % |
Cost of revenue1 | | | 28.0 | | | 20.6 | | | 7.4 | | 35.9 | % |
Operating expenses2 | | | 8.8 | | | 5.2 | | | 3.6 | | 69.2 | % |
Amortization of intangible assets | | | 1.9 | | | 1.0 | | | 0.9 | | 90.0 | % |
Operating income (loss)2, 3, 4 | | $ | 2.4 | | $ | 6.0 | | $ | (3.6) | | (60.0) | % |
Operating income (loss) % of total revenue | | | 1.9 | % | | 7.2 | % | | | | | |
1 Cost of revenue excludes amortization of intangible assets, which is separately stated | ||||||||||||
2 Operating expenses includes selling, general and administrative and other operating expenses | ||||||||||||
3 Goodwill impairment loss shown on the consolidated statement of operations only impact the RMS Segment | ||||||||||||
4 Table may not foot due to rounding |
DSA revenue increased $8.3 million in the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase in the DSA revenue was primarily driven by revenue generated from Integrated Laboratory Systems, LLC (“ILS”), which was acquired on January 10, 2022. The remaining increase was primarily driven by an increase in general toxicology services.
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pressure on these companies to discover, acquire or develop new drugs with large market opportunity, and to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations have benefited from these developments, as the pharmaceutical industry has turned to outsourcing to both reduce fixed costs and to increase the speed of research and data development necessary for new product 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 CROs as they develop, test and manufacture their generic compounds.
RMS
Our RMS segment breeds, imports and sells research-quality animal models for use in laboratory tests, manufactures and sells standard and custom diets, distributes bedding and enrichment products, and provides other services associated with these products. We are the second largest commercial provider of research models and services globally, and our predecessors have been supplying research models since 1931. With over 130 different species and strains, we are a global leader in the production and sale of the most widely used rodent research model strains, among other species. We maintain production facilities, including barrier and isolator facilities, in the U.S., U.K., mainland Europe, and Israel.
Financial Performance Highlights
We review various metrics to evaluate our financial performance, including revenue, margins and earnings. In the three months ended March 31, 2022, total revenues increased to $140,313 from $18,751, a 648% increase from the three months ended March 31, 2021. In the six months ended March 31, 2022, total revenue increased to $224,524 from $36,636, a 513% increase from the six months ended March 31, 2021. OperatingDSA operating income totaled $7,868decreased by $3.6 million in the three months ended MarchDecemner 31, 2022 compared to an operating loss of $521 in the three months ended MarchDecember 31, 2021, reflectingprimarily due to higher gross profit on higheroperating expenses. Operating expenses increased due to increases in selling costs, primarily due to increased revenue, offset by increase in operating expenses and higher strategic investment in unallocated corporate general and administrative expenses (“G&A”) reflecting various acquisitions, as well as strategic investments in G&A expense to support additional future revenue growth, which included additional headcount recruiting and relocation expense, higher compensation expense, transaction costsamong other costs. Amortization of intangibles increased year over year primarily as a result of additional acquired intangible assets since December 31, 2021.
RMS
| | | | | | | | | | | | |
(in millions, except percentages) | | Three Months Ended | | | | | | | ||||
| | December 31, | | | | | | | ||||
|
| 2022 |
| 2021 | | | $ Change | | % Change | | ||
Revenue | | $ | 81.7 | | $ | 51.4 | | $ | 30.3 | | 58.9 | % |
Cost of revenue1 | | | 73.1 | | | 44.3 | | | 28.8 | | 65.0 | % |
Operating expenses2 | | | 6.6 | | | 4.6 | | | 2.0 | | 43.5 | % |
Amortization of intangible assets | | | 6.9 | | | 2.4 | | | 4.5 | | 187.5 | % |
Goodwill impairment loss3,4 | | | 66.4 | | | - | | | 66.4 | | 100.0 | % |
Operating (loss) income 2, 3, 4 | | $ | (71.3) | | $ | 0.1 | | $ | (71.4) | | NM | |
Operating (loss) income % of total revenue | | | (58.1) | % | | 0.0 | % | | | | | |
1 Cost of revenue excludes amortization of intangible assets, which is separately stated | ||||||||||||
2 Operating expenses includes selling, general and administrative and other operating expenses | ||||||||||||
3 Goodwill impairment loss shown on the consolidated statement of operations only impact the RMS Segment | ||||||||||||
4 Table may not foot due to rounding, % change of operating (loss) income is not meaningful ("NM") |
RMS revenue increased $30.3 million in the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase in the RMS revenue was due primarily to the timing of contributions from the acquisitions of Envigo, RSI and OBRC. Envigo was acquired on November 5, 2021, RSI was acquired on December 29, 2021, and OBRC was acquired on January 27, 2022.
RMS operating loss was $71.3 million in the three months ended December 31, 2022, a decrease of $71.4 million compared to the three months ended December 31, 2021, primarily due to a $66.4 million non-cash goodwill impairment charge related to our RMS segment. The Company determined that as a result of the November 16, 2022 event, which led to the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S., the uncertainty related to the Company’s ability to import NHPs from Cambodia and the decrease in its stock price, the carrying value of our goodwill as of December 31, 2022, must be quantitatively evaluated. The carrying value of the Company’s goodwill by reporting unit was determined utilizing the income approach. Based on the Company’s quantitative goodwill impairment test, the fair value of the DSA reporting unit exceeded the reporting unit’s carrying value and, therefore, goodwill was not impaired. However, the fair value of the RMS reporting unit was less than the RMS reporting unit’s carrying value. As a result, a goodwill impairment loss of $66.4 million was recorded within the RMS segment.
Additionally, operating expenses increased primarily due to increases in selling costs, primarily due to increased revenue, and G&A expenses reflecting various acquisitions, as well as strategic investments in G&A expense to support additional future revenue growth, which included additional headcount, higher compensation expense and higher legal expense, among other costs. Amortization of RSI, Histion, ILSintangibles increased year-over-year, primarily as a result of additional acquired intangible assets since December 31, 2021.
Unallocated Corporate
| | | | | | | | | | | | |
(in millions, except percentages) | | Three Months Ended | | | | | | | ||||
| | December 31, | | | | | | | ||||
|
| 2022 |
| 2021 | | | $ Change | | % Change | | ||
Operating (loss)1 | | $ | (21.7) | | $ | (39.8) | | $ | 18.1 | | (45.5) | % |
Operating (loss) % of total revenue | | | (17.7) | % | | (47.2) | % | | | | | |
1 Operating (loss) includes selling, general and administrative and other operating expenses |
Unallocated corporate costs consist of selling and OBRC,general and administrative and other operating expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $18.1 million, compared to the corresponding period in 2021 was primarily related to a decrease in stock-based compensation expense. Unallocated corporate costs for the three months ended December 31, 2021 included a one-time charge of $23.0 million for post combination stock compensation expense relating to the adoption of the Envigo Equity Plan. Offsetting the decrease in stock compensation expense was an increase in sales commissions due to higher sales awards and an increase in startup costs for internal investments in new service offerings.
As of March 31, 2022, we had $47,042 of cash and cash equivalents as compared to $138,924 of cash and cash equivalents at September 30, 2021.
During the second quarter of fiscal 2022, we obtained additional borrowings in connection with the ILS and OBRC acquisitions. Refer to the Liquidity and Capital Resources section herein for a description of our cash flows from operating, investing and financing activities and details related to our credit arrangement, the incremental term loans, our convertible notes and the related fair value remeasurement of the embedded derivative component of our convertible notes.
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Results of Operations
The following table summarizes our condensed consolidated statements of operations as a percentage of total revenue for the periods shown:
| | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | | | ||||
| | March 31, | | | March 31, | | | ||||
|
| 2022 |
| 2021 |
| | 2022 | | 2021 |
|
|
Services revenue |
| 35.3 | % | 95.5 | % | | 39.1 | % | 95.4 | % | |
Products revenue | | 64.7 |
| 4.5 |
| | 60.9 | | 4.6 |
| |
Total revenue | | 100.0 |
| 100.0 |
| | 100.0 | | 100.0 |
| |
| | | | | | | | | | | |
Cost of services provided (a) | | 67.2 |
| 66.5 |
| | 65.5 | | 67.3 |
| |
Cost of products sold (a) | | 68.6 | | 61.5 |
| | 75.3 | | 54.8 |
| |
Total cost of revenue | | 68.1 |
| 66.3 |
| | 71.5 | | 66.7 |
| |
| | | | | | | | | | | |
Operating expenses | | 26.3 | | 36.5 |
| | 40.0 | | 34.7 |
| |
| | | | | | | | | | | |
Operating income (loss) | | 5.6 |
| (2.8) |
| | (11.5) | | (1.4) |
| |
| | | | | | | | | | | |
Other income (expense) | | (5.5) |
| (1.0) |
| | (31.3) | | (1.5) |
| |
Income (loss) before income taxes | | 0.1 |
| (3.8) |
| | (42.8) | | (2.9) |
| |
Income tax (expense) benefit | | (4.9) |
| (0.1) |
| | 2.6 | | (0.1) |
| |
Consolidated net income (loss) | | (4.8) | % | (3.9) | % | | (40.2) | % | (3.0) | % | |
Note: Table may not footunallocated corporate costs due to rounding.
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
DSA and RMS Revenue
Total revenue increased to $140,313 in the three months ended March 31, 2022 from $18,751 in the three months ended March 31, 2021, driven by a $20,303 increase in DSA revenue and $101,259 of incremental RMS revenue. The acquisitions of HistoTox Labs, Bolder BioPATH, Gateway Pharmacology, Plato BioPharma and ILS added $12,858 of DSA revenue and internal growth generated $7,446 of service revenue in our DSA segment during the three months ended March 31, 2022. Our acquisition of Envigo and RSI along with our acquisition of OBRC contributed $78,067 and $23,192 respectively of product revenue to our RMS segment during the three months ended March 31, 2022. We did not have any RMS revenue in the comparable prior year period.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2022 was $95,587 or 68.1% of revenue, compared to $12,427, or 66.3% of revenue for the three months ended March 31, 2021.
Cost of services provided as a percentage of service revenue increased to 67.2% during the three months ended March 31, 2022 from 66.5% in the three months ended March 31, 2021, due to investing in capacity to meet increased customer demand.
Cost of products sold as a percentage of products revenue in the three months ended March 31, 2022 increased to 68.6% from 61.5% in the three months ended March 31, 2021 due to $2,609 of non-cash inventory step-up amortization in the three months ended March 31, 2022 and the change in product mix.
Operating Expenses
Operating expenses, including selling, general and administrative amortization of intangible assets and other operating expense, increased by 438.5%, or $30,013, due toexpenses reflecting various acquisitions, as well as strategic investmentinvestments in unallocated corporate G&A expense to support additional future revenue growth, which included additional headcount, recruiting and relocation expense, higher compensation expense transaction costs primarily related to the acquisitions of RSI, ILS, OBRC and Histion, an increase in sales commissions due to higher sales awards and an increase in startup costslegal expense, amongst other costs. Additionally, for internal investments in new service offerings. Additionally, there was an increase in selling expenses due to an increase in travel cost as our sales and marketing teams have traveled more as the COVID-19 pandemic
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eases. During the three months ended MarchDecember 31, 2022, we continued investingunallocated corporate costs included $1.3 million for legal, consulting and audit fees incurred in internal capabilitiesconnection with the impact of the Company’s decision to provide additional service offerings suchrefrain from selling or delivering Cambodian NHPs held in the U.S. Costs as laboratory solutions, medical device pathology, biotherapeutics and genetic toxicology.a percentage of revenue for the three months ended December 31, 2022 was 17.7% compared to 47.2% for the corresponding period in 2021.
Other Expense
Other Income (Expense)
Interestexpense decreased by $50.2 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The decrease in other expense was primarily due to a decrease of $55.8 million in other expense for the three months ended MarchDecember 31, 2022, increased to $7,547 from $366 compared to the three months ended March 31, 2021. The increase in interest expense is due primarily to the convertible senior notes and the senior term loan facility and incremental loans, as well as various promissory notes. Interest expense for the three months ended March 31, 2022 includes approximately $1,257 of non-cash interest expense.
Other income (expense) for the three months ended March 31, 2022 was an expense of ($139) compared to income of $179 for the three months ended March 31, 2021.
Income Taxes
Our effective income tax rates for the three months ended March 31, 2022 and 2021 were 3,761.5% and (2.1)%, respectively. The expense recorded for each period was $6,846 and $15, respectively. The income tax expense in the second quarter of fiscal 2022 was related to a change in the Company’s forecasted rate primarily due to the earnings impact of acquisitions, in conjunction with the minimal change between actual year-to-date pre-tax book income (loss) as of first quarter and second quarter of the fiscal year. The expense from income taxes in the second quarter of 2021 relates primarily to certain credits that arise when deferred tax liabilities that are created by indefinite-lived assets cannot be used as a source of taxable income to support the realization of deferred tax assets for valuation allowance purposes.
Net Income/Loss
As a result of the above described factors, we had a consolidated net lossone-time charges of $6,664 for the three months ended March 31, 2022 as compared to a consolidated net loss of $723$56.7 million during the three months ended March 31, 2021.
Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
DSA and RMS Revenue
Total revenue increased 512.9% to $224,524 in the six months ended March 31, 2022, from $36,636 in the six months ended MarchDecember 31, 2021 driven by a $35,243 increase in DSA revenue and $152,645 of incremental RMS revenue. The acquisitions of HistoTox Labs, Bolder BioPATH, Gateway Pharmacology, Plato and ILS added $21,008 of DSA revenue and internal growth generated approximately $14,271 of revenue in our DSA segment during the six months ended March 31, 2022. Our acquisition of Envigo and RSI along with our acquisition of OBRC contributed $126,683 and $25,971 respectively of product revenue to our RMS segment during the six months ended March 31, 2022. RMS revenue in the six months ended March 31, 2022 reflected one partial and one full quarter contribution from Envigo, which was acquired on November 5, 2021.
Cost of Revenues
Cost of revenues for the six months ended March 31, 2022 was $160,473 or 71.5% of revenue, compared to $24,435, or 66.7% of revenue, for the six months ended March 31, 2021.
Cost of services provided as a percentage of service revenue decreased to 65.5% during the six months ended March 31, 2022 from 67.3% in the six months ended March 31, 2021, due to higher margins on acquisitions of HistoTox Labs, Bolder BioPATH and Gateway Pharmacology and greater utilization of recently expanded capacity.greater utilization of recently expanded capacity.
Cost of products sold as a percentage of products revenue in the six months ended March 31, 2022 increased to 75.3% from 54.8% in the six months ended March 31, 2021 due to $6,277 of non-cash inventory step-up amortization, which negatively impacted the cost of products as a percentage of revenue by 4.6% in the six months ended March 31, 2022, and the change in product mix.
Operating Expenses
Operating expenses, including selling, general and administrative, amortization of intangible assets and other operating expense, increased by 606.8%, or $77,116, due to post combination non-cash stock compensation expense relating to the adoption of the Envigo Equity Plan recognized in connection with the Envigo acquisition of $23,014, which is inclusive of $4,772 stock based compensation settled in cash and higher strategic investment in unallocated corporate G&A expense to support additional future
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revenue growth, which included additional headcount, recruiting and relocation expense, higher compensation expense, transaction costs related to the acquisitions closed in the six months ended March 31, 2022 and Histion, an increase in sales commissions due to higher sales awards and an increase in startup costs for internal investments in new service offerings. Additionally, there was an increase in selling expenses due to an increase in travel cost as our sales and marketing teams have traveled more as the COVID-19 pandemic. During the six months ended March 31, 2022, we continued investing in internal capabilities to provide additional service offerings such as laboratory solutions, medical device pathology, biotherapeutics and genetic toxicology.
Other Income (Expense)
Interest expense for the six months ended March 31, 2022 increased to $12,375 from $713 compared to the six months ended March 31, 2021. The increase in interest expense is due primarily to the convertible senior notes and the senior term loan facility amd incremental loans, as well as various promissory notes, entered into subsequent to March 31, 2021. Interest expense for the six months ended March 31, 2022 includes approximately $2,512 of non-cash interest expense.
Other income (expense) for the six months ended March 31, 2022 was an expense of $57,866 compared to income of $179 for the six months ended March 31, 2021, due primarily to the Company recognizing a $56,714 fair value remeasurement of the embedded derivative component of the convertible notes issued in September 2021, and $877 loss onpartially offset by an increase in interest expense of $5.6 million in the three months ended December 31, 2022 compared to the three months ended December 31, 2021, as a result of the additional debt extinguishment.obtained in connection with various acquisitions.
Income Taxes
Our effective income tax rates for the sixthree months ended MarchDecember 31, 2022 and 2021 were 6.2%15.5% and (4.6)%13.3%, respectively. The (benefit) expensebenefit recorded for each period was ($5,939)$16.0 million and $48,$12.8 million, respectively. The income tax benefit in the three months ended December 31, 2022 related to deferred tax benefits on the pre-tax loss, partially offset by the impact on tax expense of non-deductible goodwill impairment and other permanent items. The benefit from income taxes forin the sixthree months ended MarchDecember 31, 2022 was2021 related primarily related to a release of valuation allowance due to deferred tax liabilities established as part of the acquisition of Envigo, which resulted in a release of valuation allowance, as well as the impact on tax expense of certain book to tax differences on the deductibility of certain transaction costs and non-deductibility of the loss on fair value remeasurement of the embedded derivative component of the convertible notes, and other permanent items. The expense from income taxes in the six months ended March 31, 2021 relates primarily to certain credits that arise when deferred tax liabilities that are created by indefinite-lived assets cannot be used as a source of taxable income to support the realization of deferred tax assets for valuation allowance purposes.
Net Income/Lossnotes.
Consolidated net loss
As a result of the above described factors, we had a consolidated net loss of $90,075$86.9 million for the sixthree months ended MarchDecember 31, 2022 as compared to a consolidated net loss of $1,089$83.4 million during the sixthree months ended MarchDecember 31, 2021.
Liquidity and Capital Resources
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations which include principal and interest payments, operating lease payments, costs associated with the integrations of our acquisitions. In addition, we have the ability to access capital markets to obtain debt refinancing for longer-term funding, if required, to service our long-term debt obligations. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
Comparative Cash Flow Analysis
At MarchDecember 31, 2022, we had cash and cash equivalents of $47,042,$20.8 million, compared to $138,924$18.5 million at September 30, 2021, exclusive of restricted cash.2022.
Net cash provided byused in operating activities was $4,027$(7.4) million for the sixthree months ended MarchDecember 31, 2022 compared to net cash providedused by operating activities of $4,526$(1.1) million for the sixthree months ended MarchDecember 31, 2021. Net cash used in operations in the three months ended December 31, 2022, was primarily driven by a net loss of $(86.9) million for the three months ended December 31, 2022, partially offset by a net increase in operating assets and liabilities of $13.4 million and a net increase in noncash charges of $66.1 million. Changes in noncash charges included, but are not limited to, $66.4 million for goodwill impairment loss, $13.3 million for depreciation and amortization, $2.0 million for non-cash stock compensation expense, non-cash interest and accretion of $1.4 million, amortization of debt issuance costs and original issue discount of $0.7 million and non-cash amortization of inventory fair value step-up of $0.2 million, partially offset by changes in deferred taxes of $(20.1) million.
Contributing factors to our cash providedused by operations in the sixfirst three months ended March 31, 2022,of fiscal 2021 were noncash charges of $15,866 for depreciation and amortization, $20,300 for non-cash stock compensation expense, $56,714$56.7 million for loss on fair value measurement of convertible senior notes, $19.2 million for non-cash stock compensation expense, changes in deferred taxes of $1,907, amortization of debt issuance costs and original issue discount of $1,203, non-cash amortization of inventory fair value step-up of $6,277 and$14.3 million, a net decreaseincrease due to changes in operating assets and liabilities of $8,725 .
Contributing factors to our cash provided by operations for the six months ended March 31, 2021 were noncash charges of $2,154$8.4 million, $6.0 million for depreciation and amortization, $460 for stock compensation expense, and a net increasenon-cash amortization of inventory fair value step-up of $3.7 million.
Net cash used in customer advancesinvesting activities of $3,831, as a result$8.2 million in the three months ended December 31, 2022 was due mainly to capital expenditures of increasing orders. These items were partially offset by an increase$8.4 million. The capital additions during the three months ended December 31, 2022 primarily consisted of $1,927investments in accounts receivable.facility improvements, site expansions, enhancements to laboratory technology, and system enhancements to improve the client experience.
Investing activities used $232.4 million in the three months ended December 31, 2021 due mainly to cash paid in the acquisition of Plato, Envigo and RSI and capital expenditures of $5.7 million. The capital additions during the three months ended December 30,
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Investing activities used $303,621 in the six months ended March 31, 2022 due mainly to $288,702 paid in the acquisitions of Plato, Envigo RSI, ILS and OBRC and capital expenditures of $15,202 as compared to $2,425 used in the six months ended March 31, 2021. The capital additions during the six months ended March 30, 2022 primarily2021 consisted of the renovation and expansion of the Denver, Pennsylvania facility and continued construction of our St. Louis facility, as well as purchases of certain lab equipment.
Financing activities provided $190,531$18.4 million in the sixthree months ended MarchDecember 31, 2022. The cash provided in the three months ended December 31, 2022 compared to $1,321 usedprimarily included borrowings on the delayed draw term loan of $35.0 million, partially offset by the repayment on the revolving loan facility of $15.0 million.
Financing activities provided $119.5 million in the sixthree months ended MarchDecember 31, 2021. The cash provided in the sixfirst three months ended March 31,of fiscal 2022 included borrowings on a senior term notesloan of $165,000 related to the term loan facility used in the Envigo acquisition$165.0 million and $40,000 related to the Amendment, which was partially used in the OBRC acquisition and partially used to repay the revolving loan facility borrowings, and included borrowings on the DDTLconstruction loans of $35,000, which was used in the ILS acquisition,$1.2 million, partially offset by payments of long-term borrowings of $37,746, payments of$37.8 million, debt issuance costs of $9,887$7.1 million and repayment of our previous capex line of credit of $1,749.$1.7 million.
Capital Resources
Credit Facility
On November 5, 2021, the Company, certain of subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and Jefferies Finance LLC, as administrative agent (the “Agent”), entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in the original principal amount of $165,000,$165.0 million, a delayed draw term loan facility in the original principal amount of $35,000$35.0 million (available to be drawn up to 18 months from the date of the Credit Agreement), and a revolving loancredit facility in the original principal amount of $15,000. In addition, the Credit Agreement provides for an aggregate combined increase of the revolving loan facility and the term loan facility of up to $35,000, which amount will be available to be drawn once the delayed draw term loan facility is no longer available.$15.0 million. On November 5, 2021, the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the delayed draw term loan facility or the revolving loancredit facility.
The Company may elect to borrow on each of the loan facilities at either an adjusted LIBOR rate of interest or an adjusted prime rate of interest. Adjusted LIBOR rate loans shall accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The LIBOR rate must be a minimum of 1.00%. The initial adjusted LIBOR rate of interest is the LIBOR rate plus 6.25%. Adjusted prime rate loans shall accrue interest at an annual rate equal to the prime rate plus a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio. The initial adjusted prime rate of interest is the prime rate plus 5.25%. Actual interestInterest expense was accrued at 7.25% through Marchan effective rate of 9.84% for the three months ended December 31, 2022.
The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving loancredit facility and (ii) a fee based on a percentage per annum equal to 1.00% on the average daily undrawn portion of the commitments in respect of the delayed draw loan facility. In each case, such fee shall be paid quarterly in arrears.
Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to 1.0%1.00% of their respective original principal amounts. The Company shall also repay the term loan facility on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time with premium or penalty.
The Company is required to maintain an initial Secured Leverage Ratio of not more than 4.25 to 1.00. The maximum permitted Secured Leverage Ratio shall reduce to 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023 and to 3.00 to 1.00 beginning with the Company’s fiscal quarter ending March 31, 2025. The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio shall be 1.00 to 1.00 during the first year of the Credit Agreement and shall be 1.10 to 1.00 from and after the Credit Agreement’s first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
Utilizing proceeds from the Credit Agreement on November 5, 2021, the Company repaid all indebtedness and terminated the credit agreement related to the First Internet Bank of Indiana (“FIB”) credit facility as described in Note 10 and recognized an $877 loss on debt extinguishment.extinguishment during the three months ended December 31, 2021.
On January 7, 2022, the Company drew $35.0 million on the delayed draw term loan facility. The delayed draw term loan facility in the original principal amount of $35.0 million is referred to herein as the “Initial DDTL”. Amounts outstanding under the Initial DDTL accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Interest expense was accrued at an effective rate of 9.91% for the three months ended December 31, 2022.
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First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and Jefferies Finance LLC,the Agent, as administrative agent, entered into a First Amendment (“(the “First Amendment”) to the existing Credit Agreement. The First Amendment provides for,
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among other things, an increase to the existing term loan facility in the amount of $40,000$40.0 million (the “Incremental Term Loans”) and a new delayed draw term loan facility in the original principal amount of $35,000,$35.0 million, which amount is available to be drawn up to 24 months from the date of the Amendment (the “Additional DDTL” and together with the Initial DDTL, the “DDTL”). The Incremental Term Loans and any amounts borrowed under the Additional DDTL are referred to herein as the “Additional Term Loans”. On January 27, 2022, the Company borrowed the full amount of the Incremental Term Loans, but did not borrow any amounts underand October 12, 2022, the Company borrowed the full $35.0 million of the Additional DDTL.
Amounts outstanding under the Additional Term Loans will accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Actual interest accrued at 7.25% through March9.84% for the three months ended December 31, 2022.
The Additional Term Loans require annual principal payments in an amount equal to 1.0% of the original principal amount. Voluntary prepayments of the Additional Term Loans will be subject to a 2% prepayment premium if made on or prior to November 5, 2022 and a 1% prepayment premium if made on or prior to November 5, 2023. Voluntary prepayments made after November 5, 2023 are not subject to a prepayment premium.
Each of the Additional Term Loans require annual principal payments in an amount equal to 1.0% of theirits respective original principal amounts. The Company shall also repay the term loans on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio.
The Additional Term Loans are secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of the Additional Term Loans is guaranteed by each of the Subsidiary Guarantors.
The Additional Term Loans will mature on November 5, 2026.
Second Amendment to Credit Agreement
On December 29, 2022, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement.
The Second Amendment provides for, among other things, an extension of the deadline for the Company to provide to the lenders the audited financial statements for the Company’s fiscal year ended September 30, 2022 and an annual budget for 2023; the Company satisfied these requirements by the extended deadline. The Second Amendment adds a requirement that the Company provide, within 30 days after the end of each month, an unaudited consolidated balance sheet, statement of income and statement of cash flows as of the end of, and for, such month, as well as a “key performance indicator” report. The Second Amendment also requires that, within 10 business days after the end of each month, the Company will provide a rolling 13-week cash flow forecast prepared on a monthly basis. The Second Amendment further provides that, upon the request of the Required Lenders (as defined in the Credit Agreement), the Company will permit a financial advisor designated by the Required Lenders to meet with management of the Company to discuss the affairs, finances, accounts and condition of the Company during the six-month period following the effective date of the Second Amendment. In addition, the Second Amendment requires the Company to deliver an updated organization chart and certain supplemental information regarding the Company’s subsidiaries in connection with each quarterly report required pursuant to the Credit Agreement.
Under the Second Amendment, the Company may elect to borrow on each of the loan facilities at either an adjusted term secured overnight financing rate (“Term SOFR”) rate of interest or an alternate base rate of interest. Adjusted Term SOFR loans shall accrue interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448% and 0.42826%, depending on the term of the loan (“Adjusted Term SOFR”); provided that, Adjusted Term SOFR shall never be less than 1.00%, and (ii) a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). Alternate base rate loans shall accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.5%, (b) the Agent’s prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00% (the “Alternate Base Rate”); provided that, the Alternate Base Rate shall never be less than 2.00%, plus (ii) a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio.
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The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement: (i) prior to delivery of the audited financial statements and related compliance certificate for the fiscal year ended September 30, 2022; and (ii) thereafter, if any of the conditions precedent set forth in Section 4.02 of the Credit Agreement cannot be satisfied, including, without limitation, the making of the representation and warranty that as of the date of the most recent audited financial statements delivered to the Agent, no event, change, circumstance, condition, development or occurrence has had, or would reasonably be expected to result in, either individually or in the aggregate, a Material Adverse Effect (as defined in the Credit Agreement).
In addition, the Second Amendment provides that, no later than January 13, 2023 (or such later date as the Required Lenders shall agree in their discretion), the Company shall (i) appoint a financial advisor on terms reasonably acceptable to the Required Lenders and the Company for a term of at least six months, (ii) provide a 13-week budget to the Agent, and (iii) deliver a perfection certificate supplement updating certain information previously provided with respect to each of the Company and the Subsidiary Guarantors, including information regarding certain collateral and other assets owned by such parties. The Company has timely satisfied each of these requirements.
Long term debt as of MarchDecember 31, 2022 and September 30, 20212022 is detailed in the table below.
| | | | | | |
| | As of: | ||||
(in millions) |
| December 31, 2022 |
| September 30, 2022 | ||
Seller Note – Bolder BioPath | |
| 0.8 | |
| 0.8 |
Seller Note – Preclinical Research Services | | | 0.6 | | | 0.6 |
Seller Note – Plato BioPharma | | | 0.6 | | | 1.5 |
Seller Payable - Orient BioResource Center | | | 3.6 | | | 3.5 |
Seller Note – Histion | | | 0.3 | | | 0.4 |
Seller Note – Protypia | | | 0.6 | | | 0.6 |
Economic Injury Disaster Loan | | | 0.1 | | | 0.1 |
Convertible Senior Notes | | | 106.3 | | | 105.0 |
Term Loan Facility, DDTL and Incremental Term Loans | | | 272.5 | | | 238.2 |
| |
| 385.5 | |
| 350.7 |
Less: Current portion | |
| (7.6) | |
| (8.0) |
Less: Debt issuance costs not amortized | |
| (12.3) | |
| (12.0) |
Total long-term debt | | $ | 365.6 | | $ | 330.7 |
Note: Table may not foot due to rounding | | | | | | |
As of December 31, 2022, the Company did not have an outstanding balance on the revolving credit facility.
Third Amendment to Credit Agreement
On January 9, 2023, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Third Amendment (“Third Amendment”) to the Credit Agreement. The Third Amendment provides that, among other things, during the period beginning on January 9, 2023 and, subject to the terms of the Credit Agreement, ending on the date on which financial statements for the Company’s fiscal quarter ending March 31, 2024 are delivered or are required to be delivered, as long as no event of default has occurred (the “Amendment Relief Period”):
| | | | | | |
| | As of: | ||||
|
| March 31, 2022 |
| September 30, 2021 | ||
FIB Term Loans | | $ | — | | $ | 36,185 |
Seller Note – Bolder BioPath | |
| 940 | |
| 1,500 |
Seller Note – Smithers Avanza | |
| 70 | |
| 280 |
Seller Note – Preclinical Research Services | | | 650 | | | 685 |
Seller Note – Plato BioPharma | | | 2,571 | | | — |
Seller Payable - Orient BioResource Center | | | 3,325 | | | |
Economic Injury Disaster Loan | | | 140 | | | — |
Convertible Senior Notes | | | 102,324 | | | 131,673 |
Term Loan Facility and Incremental Term Loans | | | 239,400 | | | — |
| |
| 349,420 | |
| 170,323 |
Less: Current portion | |
| (5,339) | |
| (9,656) |
Less: Debt issue costs not amortized | |
| (11,807) | |
| (6,458) |
Total Long-term debt | | $ | 332,274 | | $ | 154,209 |
● | the Cambodian NHP-related matters, to the extent existing and disclosed to the lenders prior to December 29, 2022, shall not constitute a material adverse effect under the Credit Agreement and will not restrict the Company’s ability to request credit extensions under the revolving credit facility; |
● | the use of borrowings under the revolving credit facility is limited to funding operational expenses of the Company in the ordinary course and cannot be used for the making or funding of investments, permitted acquisitions or restricted payments, payments or purchases with respect to any indebtedness, bonuses or executive compensation, or judgments, fines or settlements; and |
● | additional limitations are imposed on the Company under the Credit Agreement, including restrictions on permitted asset sales, a prohibition on making permitted acquisitions, and significant limitations on the ability to incur additional debt, make investments and make restricted payments. |
The Third Amendment provides that from and after the date thereof, no incremental facilities under the Credit Agreement may be established or incurred. The Third Amendment also provides for additional mandatory prepayments of borrowed amounts following
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the receipt by the Company of certain cash receipts, including proceeds from certain equity issuances and cash received by the Company not in the ordinary course of business. Under the Third Amendment, after any draw on the revolving credit facility, the Company’s cash and cash equivalents held on hand domestically within the U.S. cannot exceed $10 million.
The fee consideration payable by the Company for each consenting lender party to the Third Amendment is: (i) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender; (ii) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in cash upon the occurrence of certain prepayments of the term loan under the Credit Agreement; and (iii) 7.00% of the aggregate amount of the revolving commitments held by each consenting revolving lender, to be paid in cash upon the occurrence with certain permanent reductions of the revolving loans under the Credit Agreement.
Acquisition-related Debt
In addition to the indebtedness under the Credit Agreement, certain of the Company’s subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.
As part of the acquisition of Plato, which is a part of the Company’s Inotiv Boulder subsidiary, Inotiv Boulder, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Plato in an aggregate principal amount of $3,000.$3.0 million. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023.
As part of the acquisition of OBRC, the Company agreed to leave in place a payable owed by OBRC to the seller in the amount of $3,700,$3.7 million, which the Company determined to have a fair value of $3,325$3.3 million as of January 27, 2022. The payable willdoes not bear interest and is required to be paid to seller on the date that is 18 months after the closing date of January 27, 2022. The Company has the right to set
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off against the payable any amounts that become payable by the seller on account of indemnification obligations under the purchase agreement.
As part of the acquisition of Histion, which is a part of the Company’s subsidiary, Bronco Research Services, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $0.4 million. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of April 1, 2025.
As part of the acquisition of Protypia, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Protypia in an aggregate principal amount of $0.6 million. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of January 7, 2024.
Convertible Senior Notes
On September 27, 2021, the Company issued $140,000$140.0 million principal amount of its 3.25% Convertible Senior Notes due 2027 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 27, 2021, among the Company, the Company’s wholly ownedwholly-owned subsidiary, BAS Evansville, Inc., as guarantor (the “Guarantor”), and U.S. Bank National Association, as trustee (the “Indenture”). Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $15,000$15.0 million principal amount of the Notes. The Notes issued on September 27, 2021 include $15,000included $15.0 million principal amount of the Notes issued pursuant to the full exercise by the initial purchaser of such option. The Company used the net proceeds from the offering of the Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of the Envigo acquisition and related fees and expenses.
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by the Guarantor.
The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2022. The Notes will mature on October 15, 2027, unless earlier repurchased, redeemed or converted.
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Before April 15, 2027, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 15, 2027, noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company’s election. The initial conversion rate is 1.716221.7162 common shares per $1,000$1.0 million principal amount of Notes, which represents an initial conversion price of approximately $46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
As of December 31, 2022 and September 30, 2022, there were $4.8 million and $5.1 million, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended December 31, 2022, the total interest expense was $2.8 million, including coupon interest expense of $1.2 million, accretion expense of $1.4 million, and the amortization of debt discount and issuance costs of $0.2 million.
The Notes are redeemable, in whole and not in part, at the Company’s option at any time on or after October 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental changeFundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common shares.
The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or
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the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least $20,000;$20.0 million; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20,000,$20.0 million, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes.
If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company or the Guarantor (and not solely with respect to a significant subsidiary of the Company or the Guarantor) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then the trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
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In accordance with ASC 815, at issuance, the Company evaluated the convertible feature of the Notes and determined it was required to be bifurcated as an embedded derivative and did not qualify for equity classification. The convertible feature of the Notes is subject to fair value remeasurement as of each balance sheet date or until it meets equity classification requirements and is valued utilizing Level 3 inputs as described below. The discount resulting from the initial fair value of the embedded derivative will be amortized to interest expense using the effective interest method. Non-cash interest expense during the period primarily related to this discount.
In the first quarter of 2022, the Company adopted Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06)”. The update simplifies the accounting for convertible debt instruments and convertible preferred shares by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. As a result of the approval of the increase in authorized shares on November 4, 2021 (see Note 2 – Equity), the Note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as of November 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital.
Based upon the above, the Company remeasured the fair value of the embedded derivative as of November 4, 2021, which resulted in a fair value measurement of $88,576$88.6 million and a loss on remeasurement included in other income (loss) for the sixthree months ended MarchDecember 31, 20222021 of $56,714. The embedded derivative liability of $88,576 was then reclassified to additional paid-in capital in accordance with ASC 815.
$56.7 million.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of MarchDecember 31, 2022, our debt portfolio was reliant on reference rates. Based on our interest rate exposure at MarchDecember 31, 2022, assumed debt levels throughout the next 12 months, a one-percentage-point increase in interest rates would result in an estimated $2.4$2.7 million pre-tax reduction in net earnings over a one-year period.
Foreign Currency Exchange Rate Risk
We operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our financial position, results of operations, and cash flows.
While the financial results of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations in their respective local currency. The principal functional currencies of the Company’s foreign subsidiaries are the Euro, British Pound and Israeli Shekel.
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Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our financial position, results of operations, and cash flows. As the U.S. dollar strengthens against other currencies, the value of our non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally decline when reported in U.S. dollars. The impact to net incomeloss as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expenses, which will decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally increase when reported in U.S. dollars.
A hypothetical 10% change in the foreign exchange rates applicable to our business would change our MarchDecember 31, 2022 cash balance by approximately $1$0.9 million and our revenue by approximately $6.85 million.$2.4 million for the three months ended December 31, 2022.
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ITEM 4 -– CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosureDisclosure controls and procedures that(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures designed to provide reasonable assurance that information, which is required to be disclosed timely, is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management is necessarily required to use judgment in evaluating controls and procedures.
Management performs periodic evaluations to determine if our disclosure controls and procedures are effective to provide reasonable assuranceensure that information required to be disclosed by the Companyus in the reports that it filesfiled or submitssubmitted by us under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported, within the time periods specified byin the SEC'sSEC’s rules and forms. An evaluation offorms, including those designed to ensure that information required to be disclosed by us in the effectiveness ofreports filed or submitted by us under the designExchange Act is accumulated and operationcommunicated to the Company’s management, including our President and Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report was performed under the supervision and with the participation of management, which resulted in a determination byReport. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of MarchDecember 31, 2022.
On December 15, 2021, the Company's management and the Audit Committee2022 because of the Board of Directors concluded that, due to a failure to properly account for certain tax attributes related to an acquisition that occurredmaterial weaknesses in the Company's third fiscal quarter of 2021, the Company's previously issued unaudited interim financial statements as of and for the three and nine months ended June 30, 2021 included in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (the "Original Quarterly Report") should no longer be relied upon. The Company’s management, together with the Audit Committee, determined that the Company’s financial statements and other financial data as of and for the quarterly period ended June 30, 2021 included in the Original Quarterly Report should be restated and the Company issued restated financials for the period in the Form 10-Q/A filed on December 21, 2021. In connection with the restatement, management reevaluated the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting described below.
Previously Identified Material Weaknesses
We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
As of September 30, 2022, management identified the following material weaknesses in internal controls, which continued to exist as of JuneDecember 31, 2022:
a) Management did not design and maintain effective controls over information technology general controls (ITGCs) for all applications that are relevant to the preparation of the consolidated financial statements throughout the year ended September 30, 2022, which resulted in ineffective business process controls (automated and IT-dependent manual controls) that could result in misstatements potentially impacting all of the financial statement accounts and disclosures. Specifically, management did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; and program change management controls to ensure that information technology (IT) program and data changes affecting financial information technology applications and underlying accounting records are authorized, tested, and implemented appropriately. As a result, business process controls (automated and IT-dependent manual controls) that are dependent on the ineffective ITGCs, or that use data produced from systems impacted by the ineffective ITGCs were deemed ineffective at September 30, 2022; and
b)Management did not have an adequate process in place to design and test the operating effectiveness of internal control over financial reporting in a timely manner or an adequate process in place to monitor and provide oversight over the completion of its assessment of internal controls over financial reporting. As such, we determined that management did not effectively design and implement components of the COSO framework to address all relevant risks of material misstatement, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to: (i) providing sufficient and timely management oversight and ownership over the internal control evaluation process; (ii) hiring and training sufficient personnel to timely support the Company’s internal control objectives; and (iii) performing timely monitoring and oversight to ascertain whether the components of internal control are present and functioning effectively. As a result, controls relevant to all business processes and related controls (including relevant entity level controls) were deemed ineffective at September 30, 2022.
Additionally, management determined that the material weakness previously identified and disclosed related to the accounting for the tax impacts of acquisitions that qualify as stock transactions for tax purposes existing as of September 30, 2021 continued to exist as of December 31, 2022 without remediation and concluded that, in light ofis included and appropriately resides within the error described above, aCOSO related material weakness existed inidentified above.
Our management continues to re-assess the Company’sdesign of controls and modifying processes designed to improve our internal control over financial reporting and remediate the control deficiencies that certainled to the material weaknesses, including but not limited to, (a) hiring additional accounting and IT personnel with appropriate technical skillsets, (b) improving consistency in ITGCs supported by standard operating procedures to govern the authorization, testing and approval of the Company’s disclosure controls and procedures were not effective aschanges to information technology systems supporting all of June 30, 2021.
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Management has begun and plans to continue to devote significant effort and resources to the remediation and improvement of itsCompany’s internal control overprocesses, (c) enhancing design and implementation of our control environment, including the expansion of formal accounting and IT policies and procedures and financial reporting controls, and to provide processes(d) implementing appropriate timely review and oversight responsibilities within the accounting and financial reporting functions.
The material weaknesses cannot be considered remediated until the applicable controls over the research and understandingoperate for a sufficient period of the tax impact of acquisitions that qualify as stock transactions for tax purposes. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance these processes to better evaluate our research and understanding of the nuances of the tax impact of acquisitions that qualify as stock transactions for tax purposes. We plan to include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding the tax impact of acquisitions that qualify as stock transactions for tax purposes. We have re-assessed our non-audit third-party professionals with whom we consult regarding application of accounting guidance related to the tax issues and have engaged more experienced advisers. The elements of our remediation plan can only be accomplished over time and we can offer no assurancemanagement has concluded, through testing, that these initiatives will ultimately have the intended effects. Management has performed an analysis of the consolidated tax process, identifying material risks and formalizing key controls to address the related material risks. Management plans to perform testing over these key controls beginning in the third fiscal quarter and into the fourth fiscal quarter. Until management has adequately tested the applicable key controls and confirmed that they are working as designed, management concluded that the same material weakness in the Company's internal control over financial reporting and deficiency in the Company's disclosure controls and procedures that existed at September 30, 2021 continued to exist at March 31, 2022.operating effectively.
Changes in Internal Controls
ThereExcept for the changes in connection with our remediation activities as described above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the secondfirst quarter of fiscal 20222023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II
ITEM 1 – LEGAL PROCEEDINGS
Litigation
EnvigoInformation pertaining to legal proceedings can be found in Note 14 to our condensed consolidated financial statements included in Part I, Item 1 of this Report and is a defendant in a purported class action and a related action under California’s Private Attorney General Act of 2004 (“PAGA”) broughtincorporated herein by Jacob Greenwell, a former employee of Envigo, on June 25, 2021 in the Superior Court of California, Alameda County. The complaints allege that Envigo violated certain wage and hour requirements under the California Labor Code. PAGA authorizes private attorneys to bring claims on behalf of the State of California and aggrieved employees for violations of California’s wage and hour laws. The class action complaint seeks certification of a class of similarly situated employees and the award of actual, consequential and incidental losses and damages for the alleged violations. The PAGA complaint seeks civil penalties pursuant to the California Labor Code and attorney’s fees. The Company intends to continue to vigorously defend these claims.reference.
The Company is party to certain other legal actions arising out of the normal course of its business. In management's opinion, none of these actions will have a material effect on the Company's operations, financial condition or liquidity.
Government Investigations
During the period from July 2021 through March 2022, one of Envigo’s U.S. facilities was inspected on several occasions by the U.S. Department of Agriculture (“USDA”). USDA issued inspection reports with findings of non-compliance with certain USDA laws and regulations. Envigo formally appealed certain of the findings, and has made multiple remediations and improvements at the facility, of which it has kept USDA apprised. USDA has indicated it intends to conduct a formal investigation. The inspections and/or the investigation could lead to enforcement action resulting in penalties that could include a temporary restraining order or injunction, civil and/or criminal penalties, and/or license suspension or revocation. As of the 10-Q filing date, no investigation had been initiated.
On June 15, 2021, Envigo Global Services, Inc. (“EGSI”), a subsidiary of the Company acquired in the Envigo acquisition, received a grand jury subpoena requested by the U.S. Attorney’s Office for the Southern District of Florida (“USAO”) for the production of documents related to the procurement of non-human primates (“NHPs”) from foreign suppliers for the period January 1, 2018 through June 1, 2021. The subpoena relates to an earlier grand jury subpoena requested by the USAO and received by EGSI’s predecessor entity , Covance Research Products, in April 2019. Envigo acquired EGSI from Covance, Inc. (“Covance”), a subsidiary of Laboratory Corporation of America Holdings, in June 2019. The EGSI transaction agreement provides for indemnification of Envigo and its officers, directors and affiliates by Covance for any liabilities arising out of or related to the USAO’s investigation in connection with the subpoena to Covance Research Products, as well as certain other matters, subject to an overall indemnification limit for the investigation and certain other matters of $5.5 million.
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On January 27, 2022, EGSI acquired Orient BioResource Center, Inc. (“OBRC”), which owns and operates a primate quarantine and holding facility located near Alice, Texas. In 2019, OBRC received grand jury subpoenas requested by the USAO requiring the production of documents and information related to its importation of NHPs into the United States. On June 16, 2021 , OBRC received a grand jury subpoena requested by the USAO requiring the production of documents related to the procurement of NHPs from foreign suppliers for the period January 1, 2018 through June 1, 2021. The OBRC purchase agreement provides for indemnification of EGSI and its officers, directors and affiliates by the seller, Orient Bio, Inc., for liabilities resulting from actions, inactions, errors or omissions of Orient Bio, Inc. or OBRC related to any period prior to the closing date.
The Company is cooperating with the USAO.
No form of proceedings has been brought, instigated or is known to be contemplated against the Company by any government agency.
ITEM 1A -– RISK FACTORS
Before investing in our securities youYou should carefully consider the risks described below and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021,2022, including those disclosed under the heading “Risk Factors” appearing in Item 1A of Part I of the Form 10-K, as well as the information contained10-K. There have been no material changes in our subsequent Quarterly Reports.those risk factors. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The risks described in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q from time to time are not the only risks we face. New risk factors or risks that we currently deem immaterial emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the impact such risk factors might have on our business, financial condition and operating results, or the extent to which any such risk factor or combination of risk factors may impact our business, financial condition and operating results.
ITEM 2 -– UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 4, 2021, pursuant to an Agreement and Plan of Merger among the Company, Greek Merger Sub, Inc., Plato BioPharma, Inc. and Shareholder Representative Services, LLC, the Company issued 57,587 common shares to the former shareholders of Plato BioPharma, Inc. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act and Regulation D thereunder as sales by an issuer not involving any public offering.
On December 29, 2021, pursuant to an Asset Purchase Agreement among Robinson Services Incorporated, the owners of Robinson Services Incorporated and Envigo Global Services, Inc., the Company issued 70,633 of its common shares to one of the owners of Robinson Services, Inc. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act as sales by an issuer not involving any public offering..
On January 10, 2022, pursuant to a Membership Interest Purchase Agreement among Inotiv Morrisville, LLC, Integrated Laboratory Systems Holdings, LLC, Inotiv, Inc., and Integrated Laboratory Systems, LLC, the Company issued 429,118 common shares to Integrated Laboratory Systems Holdings, LLC. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act as sales by an issuer not involving any public offering.
On January 27, 2022, pursuant to a Stock Purchase Agreement among Envigo Global Services, Inc., Inotiv, Inc. and Orient Bio, Inc., the Company issued 677,339 common shares to Orient Bio, Inc. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act as sales by an issuer not involving any public offering.Not applicable.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5 – OTHER INFORMATION
Not applicable.
ITEM 6 -– EXHIBITS
Number |
| Description of Exhibits | |
(2) | 2.1 | | |
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| 2.2 | | |
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(3) | 3.1 |
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| 3.2 |
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(10) | 10.1 |
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| 10.2 | | |
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| 10.3 | | |
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| 10.4 | | |
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(31) | 31.1 |
| Certification of Principal Executive Officer (filed herewith). |
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| 31.2 |
| Certification of Principal Financial Officer (filed herewith). |
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(32) | 32.1 |
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| 32.2 |
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| 101 |
| Inline XBRL data file (filed herewith) |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
Number |
| Description of Exhibits | |
(3) | 3.1 |
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| 3.2 |
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10.1 | |||
10.2 | |||
(31) | 31.1 |
| Certification of Principal Executive Officer (filed herewith). |
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| 31.2 |
| Certification of Principal Financial Officer (filed herewith). |
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(32) | 32.1 |
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| 32.2 |
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| 101 | | Inline XBRL data file (filed herewith) |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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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:
Date: | INOTIV, INC. | |
| (Registrant) | |
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| |
| By: | /s/ Robert W. Leasure |
| Robert W. Leasure | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) |
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| |
Date: | By: | /s/ Beth A. Taylor |
| Beth A. Taylor | |
| Chief Financial Officer and Senior Vice President of Finance (Principal Financial | |
Date: February 14, 2023 | By: | /s/ Brennan Freeman |
Brennan Freeman | ||
Vice President of Finance and Corporate Controller (Principal Accounting Officer) | ||
|
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