Form 10-Q Inotiv, Inc. For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(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
(Exact name of the registrant as specified in its charter)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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. ⌧ 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). ⌧ 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 ◻ | 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
As of August 3, 2022,
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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Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and September 30, 2021 | 4 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38 | ||
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3
INOTIV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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| September 30, |
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2022 | 2021 | ||||||
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | |||
Restricted cash |
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Trade receivables and contract assets, net of allowances for doubtful accounts of $ |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets, net | | | |||||
Goodwill |
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Other intangible assets, net |
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Other assets |
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Total assets | $ | | $ | | |||
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Liabilities, shareholders' equity and noncontrolling interest |
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Current liabilities: |
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Accounts payable | $ | | $ | | |||
Accrued expenses and other liabilities |
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Capex line of credit | | | |||||
Fees invoiced in advance | | | |||||
Current portion of long-term operating lease |
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Current portion of long-term debt | | | |||||
Total current liabilities |
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Long-term operating leases, net | | | |||||
Long-term debt, less current portion, net of debt issuance costs |
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Other liabilities | | | |||||
Deferred tax liabilities, net | | | |||||
Total liabilities |
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Contingencies (Note 15) | |||||||
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Shareholders’ equity and noncontrolling interest: |
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Common shares, |
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Authorized |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss | ( | | |||||
Total equity attributable to common shareholders | | | |||||
Noncontrolling interest | ( | | |||||
Total shareholders’ equity and noncontrolling interest |
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Total liabilities and shareholders’ equity and noncontrolling interest | $ | | $ | | |||
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)
Three Months Ended | Nine Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
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Service revenue | $ | | $ | | $ | | $ | | |||||
Product revenue |
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Total revenue | $ | |
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Costs and expenses: |
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Cost of services provided | | | | | |||||||||
Cost of products sold | | | | | |||||||||
Selling |
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General and administrative | | | | | |||||||||
Amortization of intangible assets | | | | | |||||||||
Other operating expense | | | | | |||||||||
Operating income (loss) | $ | | $ | ( | $ | ( | $ | ( | |||||
Other income (expense): | |||||||||||||
Interest expense |
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Other income (expense) |
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Loss before income taxes | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Income tax (expense) benefit |
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Consolidated net (loss) income | $ | ( | $ | | $ | ( | $ | | |||||
Less: Net income (loss) attributable to noncontrolling interests | | — | ( | — | |||||||||
Net (loss) income attributable to common shareholders | $ | ( | $ | | $ | ( | $ | | |||||
(Loss) income per common share | |||||||||||||
Net (loss) income attributable to common shareholders: | |||||||||||||
Basic | $ | ( | $ | | $ | ( | $ | | |||||
Diluted | $ | ( | $ | | $ | ( | $ | | |||||
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Weighted-average number of common shares outstanding: |
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Basic |
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Diluted | | | | | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
Three Months Ended | Nine Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
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| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Consolidated net (loss) income | $ | ( | $ | | $ | ( | $ | | ||||
Foreign currency translation |
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| ( |
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Defined benefit plans: | ||||||||||||
Amortization of periodic benefit costs | | | | | ||||||||
Other comprehensive loss, net of tax | ( | | ( | | ||||||||
Consolidated comprehensive (loss) income | ( | | ( | | ||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests |
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Comprehensive (loss) income attributable to common stockholders | $ | ( | $ | | $ | ( | $ | | ||||
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
(UNAUDITED)
(In thousands, except number of shares)
Three and Nine Month Periods Ended June 30, 2022 | |||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||
| Additional |
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| Other | Non- | Total | ||||||||||||||||||
Preferred Shares | Common Shares | paid-in | Accumulated | Comprehensive | Controlling | shareholders’ | |||||||||||||||||||
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| Number |
| Amount |
| Number |
| Amount |
| capital |
| deficit |
| (Loss) Income | Interests | equity | |||||||||
Balance at September 30, 2021 |
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| | $ | | $ | | $ | ( | $ | — | $ | — | $ | | |||||||
Consolidated net (loss) income |
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| — |
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Stock issued in acquisitions | |
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Noncontrolling interest related to Envigo acquisition | |
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Issuance of stock under employee stock plans | | | | | | | — | — | | ||||||||||||||||
Stock based compensation | | | | | | | — | — | | ||||||||||||||||
Pension cost amortization | | | | | | | ( | — | ( | ||||||||||||||||
Foreign currency translation adjustment | | | | | | | | — | | ||||||||||||||||
Reclassification of convertible note embedded derivative to equity (Note 7) | | | | | | | — | — | | ||||||||||||||||
Balance at December 31, 2021 | | $ | | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||||
Consolidated net (loss) income | |
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Stock issued in acquisitions | |
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Noncontrolling interest related to Envigo acquisition | |
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Issuance of stock under employee stock plans | | | | | | | — | — | | ||||||||||||||||
Stock based compensation | | | | | | | — | — | | ||||||||||||||||
Pension cost amortization | | | |
| | | | | — | | |||||||||||||||
Foreign currency translation adjustment | | | | | | | ( | ( | ( | ||||||||||||||||
Balance March 31, 2022 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||||
Consolidated net loss | | | | | | ( | — | ( | ( | ||||||||||||||||
Stock issued in acquisitions |
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Noncontrolling interest related to Envigo acquisition |
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Issuance of stock under employee stock plans | | | | | | | — | — | | ||||||||||||||||
Stock based compensation | | | | | | | — | — | | ||||||||||||||||
Pension cost amortization | | | | | | | | — | | ||||||||||||||||
Foreign currency translation adjustment |
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Balance at June 30, 2022 |
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| | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
7
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(UNAUDITED)
(In thousands, except number of shares)
Three and Nine Month Periods Ended June 30, 2021 | |||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||
| Additional |
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| Other | Non- | Total | ||||||||||||||||||
Preferred Shares | Common Shares | paid-in | Accumulated | Comprehensive | Controlling | shareholders’ | |||||||||||||||||||
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| Number |
| Amount |
| Number |
| Amount |
| capital |
| deficit |
| Loss | Interests | equity | |||||||||
Balance at September 30, 2020 |
| | $ | |
| | $ | | $ | | $ | ( | $ | — | $ | — | $ | | |||||||
Consolidated net loss | |
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Stock option exercises | — | — | | | | | — | — | | ||||||||||||||||
Stock based compensation | | | | | | | | | | ||||||||||||||||
Balance at December 31, 2020 | | $ | | | $ | | $ | | $ | ( | $ | — | $ | — | $ | | |||||||||
Consolidated net loss | — |
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Stock based compensation | — | — | | | | | — | — | | ||||||||||||||||
Stock option exercises | — | — | | | | | — | — | | ||||||||||||||||
Preferred stock conversion | ( | ( | | | | | — | — | | ||||||||||||||||
Balance at March 31, 2021 | — | $ | — | | $ | | $ | | $ | ( | $ | — | $ | — | $ | | |||||||||
Consolidated net income | — | — | | | | | — | — | | ||||||||||||||||
Stock based compensation | — | — | | | | | — | — | | ||||||||||||||||
Stock option exercises | — | — | | | | | — | — | | ||||||||||||||||
Stock issued in acquisition | — | — | | | | | — | — | | ||||||||||||||||
Equity raise |
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Balance at June 30, 2021 |
| — | $ | — | | $ | | $ | | $ | ( | $ | — | $ | — | $ | | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
8
INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||
June 30, | ||||||
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| 2022 |
| 2021 | ||
Operating activities: |
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Consolidated net (loss) income | $ | ( | $ | | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of acquisitions: |
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Depreciation and amortization |
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Undistributed earnings of noncontrolling interest | | | ||||
Employee stock compensation expense |
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Changes in deferred taxes | ( | ( | ||||
Provision for doubtful accounts | | | ||||
Unrealized foreign currency loss | ( | | ||||
Amortization of debt issuance costs and original issue discount | | | ||||
Noncash interest and accretion expense | | | ||||
Loss on fair value remeasurement of embedded derivative | | | ||||
Other non-cash operating activities | | | ||||
Loss on debt extinguishment | | | ||||
Non-cash amortization of inventory fair value step-up | | | ||||
Non-cash restructuring costs | | |||||
Gain on disposal of property and equipment | ( | | ||||
Changes in operating assets and liabilities: |
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Trade receivables and contract assets |
| ( |
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Inventories |
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Prepaid expenses and other current assets | ( | | ||||
Operating lease right-of-use assets and liabilities, net | | | ||||
Accounts payable |
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Accrued expenses and other liabilities |
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Fees invoiced in advance |
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Other asset and liabilities, net | ( | ( | ||||
Net cash (used in) provided by operating activities |
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Investing activities: |
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Capital expenditures | ( | ( | ||||
Proceeds from sale of equipment | | | ||||
Cash paid in acquisitions |
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Net cash used in investing activities |
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Financing activities: |
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Payments on finance lease liability | | ( | ||||
Payments of long-term debt | ( | ( | ||||
Payments of debt issuance costs | ( | ( | ||||
Payments on promissory notes |
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Payments on revolving credit facility |
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Payments on senior term notes | ( | | ||||
Payments on delayed draw term loan | ( | | ||||
Borrowings on long-term loan | | | ||||
Borrowings on revolving credit facility |
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Borrowings on delayed draw term loan | | | ||||
Borrowings on senior term notes | | | ||||
Proceeds from exercise of stock options | | | ||||
Proceeds from issuance of common stock, net | | | ||||
Net cash provided by financing activities |
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Effect of exchange rate changes on cash and cash equivalents | ( | | ||||
Net (decrease) increase in cash and cash equivalents |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period | $ | | $ | | ||
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Noncash financing activity: | ||||||
Seller financed acquisition | $ | | | |||
Supplemental disclosure of cash flow information: |
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Cash paid for interest | $ | | $ | | ||
Income taxes paid, net | $ | | $ | | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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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
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 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 by pharmaceutical companies, universities, government research centers and medical research institutions.
On November 5, 2021, the Company completed the acquisition of Envigo RMS Holding Corp. (“Envigo”) by merger of a wholly owned subsidiary of the Company with and into Envigo.
As a result of the Envigo transaction, the Company’s business now includes breeding, importing and selling research-quality animal models for use in laboratory tests, manufacturing and distributing standard and custom diets, distributing bedding and enrichment products, and providing other services associated 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, among other species. The Company maintains production and distribution facilities in the United States (“U.S.”), United Kingdom (“U.K.”), mainland Europe, and Israel.
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. In the opinion of management, the condensed consolidated financial statements for the three and nine months ended June 30, 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 June 30, 2022. The results of operations for the three and nine months ended June 30, 2022 may not be 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 reclassifications have been made to prior periods in the unaudited condensed consolidated financial statements and accompanying notes to conform with current presentation, which more closely reflects management’s perspective of the business as it currently exists.
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.
Consolidation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company, including all subsidiaries and a 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 (loss) income.
The Company accounts for noncontrolling interests in accordance with Accounting Standards 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 statements of operations.
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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.
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 June 30, 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 14 – 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 (loss). The Company records gains and losses from re-measuring intercompany loans within Other income (expense) 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 nine months ended June 30, 2022,
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2. EQUITY
Common Stock Offering
On April 23, 2021, we closed an underwritten public offering of
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
Stock Issued in Connection with Acquisitions
During the three and nine months ended June 30, 2022,
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 nine months ended June 30, 2022, was $
3. NET (LOSS) INCOME 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
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The following table reconciles the computation of basic net (loss) income per share to diluted net loss per share:
| Three Months Ended |
| Nine Months Ended | ||||||||||
June 30, | June 30, | ||||||||||||
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| 2022 |
| 2021 |
| 2022 |
| 2021 |
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Basic and diluted net (loss) income per share: |
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Net (loss) income applicable to common shareholders | $ | ( | $ | | $ | ( | $ | | |||||
Weighted average common shares outstanding (in thousands) | |||||||||||||
Basic | | | | | |||||||||
Diluted |
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Basic net (loss) income per share | $ | ( | $ | | $ | ( | $ | | |||||
Diluted net (loss) income per share | $ | ( | $ | | $ | ( | $ | | |||||
4. OTHER OPERATING EXPENSE
Other operating expense consisted of the following:
Three Months Ended | Nine Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Acquisition and integration costs | $ | | $ | | $ | | $ | | ||||
Restructuring costs1 | | | | | ||||||||
Startup costs | | | | | ||||||||
Remediation costs | | | | | ||||||||
Other costs | | | | | ||||||||
Acquisition-related stock compensation costs | | | | | ||||||||
$ | | $ | | $ | | $ | | |||||
1 Restructuring costs represent costs incurred in connection with the exit of our Dublin and Cumberland facilities. See Note 12 – Restructuring for additional information. | ||||||||||||
5. SEGMENT INFORMATION
Due to the Envigo acquisition, the Company reports its results in
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 (Good Laboratory Practice (“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 products (“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.
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During the three and nine months ended June 30, 2022, the RMS segment reported intersegment revenue of $
Three Months Ended | Nine Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue | ||||||||||||
DSA | $ | | $ | | $ | | $ | | ||||
RMS |
| |
| |
| |
| | ||||
$ | | $ | | $ | | $ | | |||||
Operating Income (Loss) | ||||||||||||
DSA | $ | | $ | | $ | | $ | | ||||
RMS | | | | | ||||||||
Unallocated Corporate |
| ( |
| ( |
| ( |
| ( | ||||
$ | | $ | ( | $ | ( | $ | ( | |||||
Interest expense | ( | ( | ( | ( | ||||||||
Other income (expense) | | | ( | | ||||||||
Loss before income taxes | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Total assets by reporting segment is as follows:
June 30, | September 30, | |||||
|
| 2022 |
| 2021 | ||
DSA | $ | | $ | | ||
RMS | | | ||||
$ | | $ | | |||
Revenue by geographic area is as follows:
Three Months Ended | Nine Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
United States | $ | | $ | | $ | | $ | | ||||
Netherlands | | | | | ||||||||
Other | | | | | ||||||||
$ | | $ | | $ | | $ | | |||||
6. 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 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
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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 June 30, 2022, the Company’s only uncertain tax position was derived from a business combination.
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 to
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 June 30, 2022, the Company has a FICA deferral of approximately $
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.
7. DEBT
Credit Facility
On November 5, 2021, the Company, certain subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and Jefferies Finance LLC, as administrative agent, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in the original principal amount of $
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
The Company must pay (i) a fee based on a percentage per annum equal to
Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to
15
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
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 and recognized an $
On January 7, 2022, the Company drew $
First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and Jefferies Finance LLC, as administrative agent, entered into a First Amendment (the “Amendment”) to the existing Credit Agreement. The Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $
Amounts outstanding under the Additional Term Loans will accrue interest at an annual rate equal to the LIBOR rate plus a margin of between
The Additional Term Loans require annual principal payments in an amount equal to
Each of the Additional Term Loans require annual principal payments in an amount equal to
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.
16
Long term debt as of June 30, 2022 and September 30, 2021 is detailed in the table below.
| June 30, 2022 |
| September 30, 2021 | |||
FIB Term Loans | $ | | $ | | ||
Seller Note – Bolder BioPath |
| |
| | ||
Seller Note – Smithers Avanza |
| |
| | ||
Seller Note – Preclinical Research Services | | | ||||
Seller Note – Plato BioPharma | | | ||||
Seller Payable - Orient BioResource Center | | | ||||
Seller Note – Histion | | | ||||
Economic Injury Disaster Loan | | | ||||
Convertible Senior Notes | | | ||||
Term Loan Facility, Initial DDTL and Incremental Term Loans | | | ||||
| |
| | |||
Less: Current portion |
| ( |
| ( | ||
Less: Debt issue costs not amortized |
| ( |
| ( | ||
Total Long-term debt | $ | | $ | | ||
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 $
As part of the acquisition of Orient BioResource Center (“OBRC”), the Company agreed to leave in place a payable owed by OBRC to the seller in the amount of $
As part of the acquisition of Histion, LLC (“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 $
Convertible Senior Notes
On September 27, 2021, the Company issued $
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
17
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
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
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 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 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
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
18
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 $
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 $
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:
| ● | Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. |
| ● | Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| ● | Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
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
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
19
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 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.
8. SUPPLEMENTAL BALANCE SHEET INFORMATION
Trade receivables and contract assets, net consisted of the following:
| June 30, | September 30, | ||||
| 2022 |
| 2021 | |||
Trade receivables | $ | | $ | | ||
Unbilled revenue |
| |
| | ||
Total | | | ||||
Less: Allowance for doubtful accounts |
| ( |
| ( | ||
Trade receivables and contract assets, net of allowances for doubtful accounts | $ | | $ | | ||
Inventories, net consisted of the following:
| June 30, | September 30, | ||||
| 2022 |
| 2021 | |||
Raw materials | $ | | $ | | ||
Work in progress |
| |
| | ||
Finished goods |
| |
| | ||
Research Model Inventory | | | ||||
Total | | | ||||
Less: Obsolescence reserve |
| ( |
| ( | ||
Inventories, net | $ | | $ | | ||
Prepaid expenses and other current assets consisted of the following:
| June 30, | September 30, | ||||
| 2022 |
| 2021 | |||
Advances to suppliers | $ | | $ | | ||
Income tax receivable |
| |
| | ||
Prepaid research models | | | ||||
Other | | | ||||
Prepaid expenses and other current assets | $ | | $ | | ||
The composition of other assets is as follows:
| June 30, | September 30, | ||||
| 2022 |
| 2021 | |||
Long-term advances to suppliers | $ | | $ | | ||
Security deposits and guarantees | | | ||||
Finance lease right-of-use assets, net | | | ||||
Debt issuance costs | | | ||||
Other |
| |
| | ||
Other assets | $ | | $ | | ||
20
Accrued expenses consisted of the following:
| June 30, | September 30, | ||||
| 2022 |
| 2021 | |||
Accrued compensation | $ | | $ | | ||
Non-income taxes | | | ||||
Accrued interest | | | ||||
Other |
| |
| | ||
Consideration payable | | | ||||
Accrued expenses and other liabilities | $ | | $ | | ||
The composition of fees invoiced in advance is as follows:
| June 30, | September 30, | ||||
| 2022 |
| 2021 | |||
Customer deposits | $ | | $ | | ||
Deferred revenue | | | ||||
Fees invoiced in advance | $ | | $ | | ||
9. NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 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 discussion of the impact on the Company’s condensed consolidated financial statements.
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 (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.
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 products related to routine and specialized histology, immunohistology, histopathology and image analysis/digital pathology. Consideration for the HistoTox Labs acquisition consisted of $
HistoTox Labs, Bolder BioPATH, Inc. (“Bolder BioPATH”) and Plato (discussed below) were combined into
21
The HistoTox Labs 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 | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
| ||
Accounts receivable | | ||
Unbilled revenues | | ||
Operating lease right of use ("ROU") asset | | ||
Property and equipment |
| | |
Intangible assets | | ||
Goodwill | | ||
Accounts payable | ( | ||
Accrued expenses | ( | ||
Customer advances | ( | ||
Operating lease liability |
| ( | |
$ | | ||
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
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) $
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.
22
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Accounts receivable | | ||
Unbilled revenues | | ||
Operating lease ROU asset | | ||
Property and equipment |
| | |
Intangible asset | | ||
Other assets | | ||
Goodwill | | ||
Accounts payable | ( | ||
Accrued expenses |
| ( | |
Deferred revenue | ( | ||
Deferred tax liability | ( | ||
Operating lease liability |
| ( | |
$ | | ||
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
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
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) $
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.
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
23
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Accounts receivable | | ||
Operating lease ROU asset | | ||
Property and equipment |
| | |
Intangible asset | | ||
Other assets | | ||
Goodwill |
| | |
Accounts payable | ( | ||
Accrued expenses | ( | ||
Deferred tax liability | ( | ||
Operating lease liability |
| ( | |
$ | | ||
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) $
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Property and equipment | | ||
Intangible asset |
| | |
$ | | ||
As of June 30, 2022, the Company had approximately $
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) $
24
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 customer relationship intangible and property and equipment.
The valuation of assets acquired and liabilities assumed had not yet been finalized as of June 30, 2022. The purchase price allocation is preliminary and subject 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
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
Preliminary | |||
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Cash | | ||
Trade receivables and contract assets | | ||
Prepaid expenses and other current assets | | ||
Property and equipment | | ||
Operating lease ROU assets | | ||
Intangible asset | | ||
Goodwill | | ||
Accounts payable | ( | ||
Fees invoiced in advance | ( | ||
Operating lease liability | ( | ||
Accrued expenses and other liabilities | ( | ||
Deferred tax liability |
| ( | |
$ | | ||
Property and equipment is mostly composed of 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. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately
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 sheet of the Plato acquisition as a result of book-to-tax differences primarily related to the intangible assets.
25
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 $
Stock price | $ | | ||
Strike price | $ | | ||
Volatility | | % | ||
Expected term | ||||
Risk-free rate | | % |
The Company recognized transaction costs related to the acquisition of Envigo of $
The valuation of assets acquired and liabilities assumed had not yet been finalized as of June 30, 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
26
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
Preliminary | |||
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Cash | | ||
Restricted cash | | ||
Trade receivables and contract assets | | ||
Inventory | | ||
Prepaid expenses and other current assets | | ||
Operating lease ROU assets | | ||
Property and equipment | | ||
Other assets | | ||
Intangible asset | | ||
Goodwill | | ||
Accounts payable | ( | ||
Fees invoiced in advance | ( | ||
Current portion of long-term operating lease | ( | ||
Accrued expenses and other liabilities |
| ( | |
Long-term operating leases, net | ( | ||
Other liabilities | ( | ||
Long-term debt | ( | ||
Long-term deferred tax liabilities | ( | ||
Noncontrolling interest | | ||
$ | | ||
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
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, $
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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
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 $
The valuation of assets acquired and liabilities assumed had not yet been finalized as of June 30, 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
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
Preliminary | |||
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Customer relationship | | ||
Non-compete agreement | | ||
Supply agreement | | ||
Goodwill | | ||
$ | | ||
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
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 $
The valuation of assets acquired and liabilities assumed had not yet been finalized as of June 30, 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
ILS recorded revenue of $
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
Preliminary | |||
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Cash | | ||
Trade receivables and contract assets | | ||
Prepaid expenses and other current assets | | ||
Operating lease ROU assets | | ||
Property and equipment | | ||
Intangible asset | | ||
Goodwill | | ||
Accounts payable | ( | ||
Fees invoiced in advance | ( | ||
Current portion on long-term operating lease | ( | ||
Accrued expenses and other liabilities |
| ( | |
Long-term operating leases, net | ( | ||
Other liabilities | ( | ||
Long-term deferred tax liabilities | ( | ||
$ | | ||
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 June 30, 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
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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
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) $
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 June 30, 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
OBRC recorded revenue of $
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:
Preliminary | |||
Allocation as of | |||
June 30, 2022 | |||
Assets acquired and liabilities assumed: |
|
| |
Cash | | ||
Trade receivables and contract assets | | ||
Inventory | | ||
Prepaid expenses and other current assets | | ||
Property and equipment | | ||
Intangible asset | | ||
Goodwill | | ||
Accounts payable | ( | ||
Fees invoiced in advance | ( | ||
Accrued expenses and other liabilities |
| ( | |
Long-term deferred tax liabilities | ( | ||
$ | | ||
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 June 30, 2022 is based on preliminary assumptions which 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
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
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) $
Pro Forma Results
The Company’s unaudited pro forma results of operations for the three and nine months ended June 30, 2022 and June 30, 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 | Nine Months Ended | Nine Months Ended | ||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | ||||||||
Total revenues | $ | | $ | | $ | | $ | | |||
|
|
|
| ||||||||
Net loss |
| ( |
| ( |
| ( |
| ( | |||
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.
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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 clients’ 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 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 nine months ended June 30, 2022.
Balance at | Balance at | |||||||||||
September 30, | June 30, | |||||||||||
| 2021 |
| Additions |
| Deductions |
| 2022 | |||||
Contract Assets: Unbilled revenue | $ | | $ | | $ | ( | $ | | ||||
Contract liabilities: Fees invoiced in advance | $ | | $ | | $ | ( | $ | | ||||
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12.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 the Company’s ongoing restructuring and site optimization plan. The Cumberland facility exit is also a part of the transfer plan settlement, as further described in Note 15 – Contingencies. The operations at both the Cumberland facility and the Dublin facility are within the RMS segment. The Cumberland facility exit is expected to be complete by October 2022. Any potential decision to sell the facility and related property may extend past that date. The Company expects the Dublin facility transition to be complete by December 2022.
As part of its restructuring activities, the Company has incurred and expects to continue to incur further expenses that qualify as exit and disposal costs under GAAP. For the three and nine months ended June 30, 2022, these costs included employee severance and other costs related to workforce reductions (“employee-related”) of $
The liability balance for restructuring costs that qualify as exit and disposal costs under GAAP is shown below.
| Employee Related | Other | Total | ||||||
Liability as of September 30, 2021 | | | | ||||||
Charges | $ | | $ | | $ | | |||
Cash Payments | | | | ||||||
Liability as of June 30, 2022 | $ | | $ | | $ | |
The Company has also incurred asset-related costs that relate to our restructuring activities, which do not qualify as exit and disposal costs under GAAP. Asset-related costs include asset impairment charges. As of June 30, 2022, the Company incurred asset-related costs of $
13. LEASES
The Company records a 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. 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 to
Equipment leases provide for office equipment, laboratory equipment or services the Company uses to conduct its operations. Equipment leases range in duration from
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ROU lease assets and lease liabilities that are reported in the Company’s condensed consolidated balance sheets are as follows:
| June 30, 2022 |
| September 30, 2021 | |||
Operating ROU assets, net | $ | | $ | | ||
Current portion of operating lease liabilities | |
| | |||
Long-term operating lease liabilities | |
| | |||
Total operating lease liabilities | $ | | $ | | ||
Finance ROU assets, net | $ | | $ | | ||
Current portion of finance lease liabilities | |
| | |||
Long-term finance lease liabilities | |
| | |||
Total finance lease liabilities | $ | | $ | | ||
During the three and nine months ended June 30, 2022, the Company had operating lease amortization of $
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 nine months ended June 30, 2022 and June 30, 2021 were:
| Three Months Ended |
| Nine Months Ended | |||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 |
| 2022 | 2021 | ||||||||
Operating lease costs: |
|
|
| |||||||||
Fixed operating lease costs | $ | | $ | | $ | | $ | |||||
Short-term lease costs | |
| |
| | |||||||
Lease income | ( |
| ( |
| ( | ( | ||||||
Finance lease costs: |
|
| ||||||||||
Amortization of ROU asset expense | |
| |
| | |||||||
Interest on finance lease liability | |
| |
| | |||||||
Total lease cost | $ | | $ | | $ | | $ | | ||||
The Company serves as lessor to a lessee in
Supplemental cash flow information related to leases was as follows:
Nine Months Ended | Nine Months Ended | |||||
| June 30, |
| June 30, | |||
2022 | 2021 | |||||
Cash flows included in the measurement of lease liabilities: |
|
| ||||
Operating cash flows from operating leases | $ | | $ | | ||
Operating cash flows from finance leases | |
| | |||
Finance cash flows from finance leases | |
| | |||
Non-cash lease activity: |
| |||||
ROU assets obtained in exchange for new operating lease liabilities | $ | | $ | | ||
Right-of-use 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 June 30, 2022 and June 30, 2021 were:
June 30, 2022 | June 30, 2021 | |||||
Weighted-average remaining lease term (in years) |
|
|
| |||
Operating lease |
|
|
| |||
Finance lease |
|
|
| |||
Weighted-average discount rate (in percentages) |
|
|
| |||
Operating lease |
| | % | | % | |
Finance lease |
| | % | | % | |
Lease duration was determined utilizing renewal options that the Company is reasonably certain to execute.
As of June 30, 2022, maturities of operating and finance lease liabilities for each of the following five fiscal years and a total thereafter were as follows:
| Operating Leases |
| Finance Leases | |||
2022 (remainder of fiscal year) | $ | | $ | | ||
2023 |
| |
| | ||
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| |
| | ||
Thereafter |
| |
| | ||
Total minimum future lease payments |
| |
| | ||
Less interest |
| ( |
| ( | ||
Total lease liability |
| |
| | ||
14. DEFINED BENEFIT PLAN
The Company has a defined benefit plan in 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 $
The following table provides the components of net periodic benefit costs for the Pension Plan, which is included in general and administrative expenses in the condensed consolidated statement of operations.
Three Months Ended | Nine Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Components of net periodic benefit expense: | ||||||||||||
Interest cost | $ | | $ | | $ | | $ | | ||||
Expected return on assets | ( | | ( | | ||||||||
Amortization of prior loss | | | | | ||||||||
Net periodic benefit cost | $ | | $ | | $ | | $ | | ||||
15. 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, consequential and incidental losses and damages for the alleged violations. The PAGA
35
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 alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder related to the Company’s disclosures concerning its acquisition of Envigo RMS, LLC and its regulatory compliance. The purported class in the complaint includes all persons who purchased or otherwise acquired the Company's common stock between September 21, 2021 and June 13, 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.
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, Envigo 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 made multiple remediations and improvements at the Cumberland facility, of which it kept USDA apprised.
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 also received a grand jury subpoena requested by the U.S. Attorney’s Office for the Western District of Virginia (“USAO-VA”). 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 complaint was a civil action by DOJ alleging violations of the Animal 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 does not require that Envigo RMS pay any fines or penalties to any governmental agencies. In addition, it is expressly stated that the settlement is not an admission of liability or wrongdoing by Envigo RMS with regard to its past operation of the Cumberland facility. The settlement incorporates the transfer plan that was mutually agreed to by the DOJ and Envigo RMS on July 1, 2022 (the “Transfer Plan”), and it concludes all related civil and administrative complaints related to the Cumberland facility. As of the filing date of this Report, the Transfer Plan was still being executed by all parties involved. After the Transfer Plan is fully executed, in accordance with the settlement, Envigo RMS will refrain from any operations requiring a USDA license at the Cumberland facility. In addition, the settlement requires that the DOJ and USDA move to dismiss the civil and administrative complaints with prejudice seven days after all the canines vacate the Cumberland facility pursuant to the Transfer Plan.
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-FL”) 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-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-FL’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 $
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 USAO-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
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requested by the USAO-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. Consistent with Company policy, the Company is cooperating with USAO-FL.
16. SUBSEQUENT EVENTS
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 $
On July 27, 2022, Envigo RMS entered into a Purchase Agreement for the sale of the Dublin facility. The sale is expected to close in first quarter of fiscal year 2023. The Company does not expect any material gain or loss as a result of the sale.
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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 make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact our markets; (vii) our cash position; (viii) our ability to successfully integrate the operations and personnel related to recent acquisitions; (ix) our ability to effectively manage current expansion efforts or any future expansion or acquisition initiatives undertaken by us; (x) our ability to develop and build infrastructure and teams to manage growth and projects; (xi) our ability to continue to retain and hire key talent; (xii) our ability to market our services and products under our corporate name and relevant brand names; (xiii) our ability to service our outstanding indebtedness, (xiv) our expectations regarding the volume of new bookings, pricing, gross profit margins and liquidity, (xv) our ability to manage recurring and non-recurring costs, (xvi) our ability to execute on our restructuring and site optimization plans, and (xvii) the impact of 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, which may precipitate or exacerbate other risks and/or uncertainties, and additional risks set forth in our filings with 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 disclosed in our reports 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 from those assumptions, and as a result, the forward-looking statements based upon those assumptions may not accurately project future events. 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.
Recent Developments and Executive Summary
Since the start of fiscal 2022, we have continued our momentum building Inotiv into a comprehensive provider of preclinical drug discovery and safety assessment services through our strategic acquisitions of Plato, ILS, Histion, Protypia and our collaboration with Synexa Life Sciences. Plato brings us important new in vivo pharmacology capabilities, ILS complements our BioReliance® assets and accelerates the buildout of our genetic toxicology offerings as well as expanding our general rodent toxicology capacity, the partnership with Synexa Life Sciences enhances our large molecule bioanalysis and biomarker platform, Histion accelerates our development and growth into the highly-specialized plastics and medical device histopathology business and Protypia enhances our ability to support clients in the development of safe and effective medicines, particularly in the areas of immuno-oncology and cell and gene therapy by bringing bioanalytical capability to solid tissue specimens. 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 transformative acquisition of Envigo, which closed 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. 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.
Our results for the third quarter were above our expectations at the point of our growth, integrations and development. We continued to expand our portfolio of services, including genetic toxicology and protein/peptide bioanalytics, progressed on our enterprise-wide capacity expansion initiatives in North America and Europe, and furthered our investments in our internal processes, equipment, and personnel to better meet growing client demand and quoting activity for our pre-clinical services. We remain steadfast
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in our commitment to develop, enhance, and tailor Inotiv’s programs and services to help support our clients in developing safe and effective medicines.
Financial Highlights During Three Months Ended June 30, 2022
| ● | Revenue grew to $172.7 million from $22.9 million during the three months ended June 30, 2021, driven by a $26.3 million rise in DSA revenue and $123.4 million of incremental revenue from our RMS business. Revenue was higher due to incremental revenue from acquisitions and internal growth from increased capacity for customer demand and increased pricing. |
| ● | Consolidated net loss was $(3.6) million, or (2.1)% of total revenue, compared to consolidated net income of $2.6 million, or 11.4% of total revenue, in the three months ended June 30, 2021. |
| ● | Book-to-bill ratio was 1.19x for the DSA services business. |
| ● | DSA backlog was $143.2 million at June 30, 2022, up from $133.6 million at March 31, 2022 and $62.0 million at June 30, 2021 |
Financial Highlights During Nine Months Ended June 30, 2022
| ● | Revenue grew to $397.2 million from $59.5 million during the nine months ended June 30, 2021, driven by a $61.6 million rise in Discovery and Safety Assessment (“DSA”) revenue and $276.1 million of incremental revenue from our Research Models and Services (“RMS”) business. Revenue was higher due to incremental revenue from acquisitions and internal growth from increased capacity for customer demand and increased pricing. |
| ● | Consolidated net loss was $(93.6) million, or (23.6)% of total revenue, compared to consolidated net income of $1.5 million, or 2.5% of total revenue, in the nine months ended June 30, 2021. |
| ● | Book-to-bill ratio was 1.45x for the DSA services business. |
| ● | As of June 30, 2022, we had $21.2 million of cash and cash equivalents as compared to $138.9 million 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 agreement, the incremental term loans, our convertible notes and the related fair value remeasurement of the embedded derivative component of our convertible notes. |
Events Subsequent to June 30, 2022
| ● | On July 7, 2022, we announced the acquisition of Protypia, a CRO that provides large molecule bioanalytical capabilities in solid tissues to our already established mass spectrometry-based bioanalytical offerings. This highly-specialized technology significantly enhances our ability to support clients in the development of safe and effective medicines, particularly in the areas of immuno-oncology and cell and gene therapy, amongst others. |
| ● | On July 26, 2022, the Company announced that it has greatly expanded its capacity to conduct GLP studies for in vitro cytogenetics and bacterial mutation assays as components of the Standard Battery of genetic toxicology studies required to support first-in-human evaluations of novel therapeutics. |
| ● | On July 27, 2022, Envigo RMS entered into a Purchase Agreement for the sale of the Dublin facility. The sale is expected to close in first quarter of fiscal year 2023. The Company does not expect any material gain or loss as a result of the sale. |
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: DSA and RMS.
DSA
Our DSA segment specializes in providing nonclinical and analytical drug discovery and development services to the pharmaceutical, governmental, academic and medical device industries, and sells analytical instruments to the pharmaceutical
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development and contract research industries. Our mission is to 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 and cost of 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 research and development projects, all while working together to build a healthier and safer world. Our strategy is to provide services that will generate high-quality and timely data in 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 product development programs. Outsourcing development work to reduce overhead and speed product approvals through the U.S. Food and Drug Administration 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 to biotherapeutics and device companies. 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 scientists engaged in analytical chemistry, pharmacology, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research from small startup biotechnology companies to the largest global pharmaceutical companies. We are committed to bringing scientific expertise, quality and speed to every drug discovery and development program to help our clients develop safe and effective life-changing therapies.
Developments within the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies have major "blockbuster" drugs that are nearing the end of their patent protections. This puts significant 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 laboratory animal 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.
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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 | Nine Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 |
| |||||
Service revenue |
| 34.8 | % | 95.8 | % | 37.2 | % | 95.5 | % | |||
Product revenue | 65.2 |
| 4.2 |
| 62.8 | 4.5 |
| |||||
Total revenue | 100.0 |
| 100.0 |
| 100.0 | 100.0 |
| |||||
Cost of services provided 1 | 57.3 |
| 67.1 |
| 62.2 | 67.2 |
| |||||
Cost of products sold 1 | 77.5 | 56.3 |
| 76.3 | 55.3 |
| ||||||
Total cost of revenue | 70.5 |
| 66.6 |
| 71.0 | 66.7 |
| |||||
Operating expenses | 26.7 | 40.8 |
| 34.2 | 37.1 |
| ||||||
Operating income (loss) | 2.8 |
| (7.4) |
| (5.3) | (3.7) |
| |||||
Other expense | (4.6) |
| (2.0) |
| (19.7) | (1.7) |
| |||||
Loss before income taxes | (1.9) |
| (9.4) |
| (25.0) | (5.4) |
| |||||
Income tax (expense) benefit | (0.2) |
| 20.8 |
| 1.4 | 7.9 |
| |||||
Consolidated net (loss) income | (2.1) | % | 11.4 | % | (23.6) | % | 2.5 | % | ||||
Note: Table may not foot due to rounding | ||||||||||||
1 Percentage of services and products revenue, respectively | ||||||||||||
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
DSA
(in millions, except percentages) | Three Months Ended | |||||||||||
June 30, | ||||||||||||
| 2022 |
| 2021 | $ Change | % Change | |||||||
Revenue | $ | 49.2 | $ | 22.9 | $ | 26.3 | 114.8 | % | ||||
Cost of revenue | 27.4 | 15.2 | 12.2 | 80.3 | % | |||||||
Operating expenses1 | 7.2 | 3.2 | 4.0 | 125.0 | % | |||||||
Amortization of intangible assets | 1.5 | 0.6 | 0.9 | 150.0 | % | |||||||
Operating income (loss) 2 | $ | 13.2 | $ | 3.9 | $ | 9.3 | 238.5 | % | ||||
Operating income (loss) % of total revenue | 7.6 | % | 17.0 | % | ||||||||
1 Operating expenses includes selling, general and administrative and other operating expenses | ||||||||||||
2 Table may not foot due to rounding | ||||||||||||
DSA revenue increased $26.3 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The acquisitions of HistoTox Labs, Bolder BioPATH, BioReliance, Gateway Laboratories, Plato and ILS, along with revenue from the acquisition of (“Histion”), added $5.4 million of incremental service revenue, and internal growth generated $20.9 million of additional service revenue in our DSA segment during the three months ended June 30, 2022.
DSA operating income increased by $9.3 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to higher revenues as a result of favorable pricing and our investments in the DSA business designed to increase margins and capacity to enhance our ability to meet growing customer demand. Additionally, operating expenses increased primarily due to increases in general and administrative expenses from the overall growth in the business as a result of acquisitions and internal growth, which included increased startup costs. Amortization of intangibles increased year over year primarily as a result of additional acquired intangible assets since June 30, 2021.
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RMS
(in millions, except percentages) | Three Months Ended | ||
June 30, 2022 | |||
Revenue | $ | 123.4 | |
Cost of revenue | 94.3 | ||
Operating expenses1 | 9.8 | ||
Amortization of intangible assets | 7.4 | ||
Operating income2 | $ | 11.9 | |
Operating income % of total revenue | 6.9 | % | |
1 Operating expenses includes selling, general and administrative and other operating expenses | |||
2 Table may not foot due to rounding | |||
RMS revenue was $123.4 million for the three months ended June 30, 2022. The acquisitions of Envigo, RSI and OBRC added $81.4 million of incremental revenue based upon the baseline revenue prior to the acquisitions, and internal growth generated $42.0 million of additional revenue in our RMS segment during the three months ended June 30, 2022. Prior to the acquisition of Envigo, we did not have an RMS business.
RMS operating income was $11.9 million in the three months ended June 30, 2022, which primarily consisted of cost of revenues inclusive of $3.8 million of non-cash inventory step-up amortization, selling and general and administrative expenses for the acquired Envigo and OBRC businesses, integration costs, including change in control charges, and restructuring costs related to the closure of our Dublin facility and Cumberland facility.
Unallocated Corporate
(in millions, except percentages) | Three Months Ended | |||||||||||
June 30, | ||||||||||||
2022 |
| 2021 | $ Change | % Change | ||||||||
Operating loss | $ | 20.3 | $ | 5.6 | $ | 14.7 | 262.5 | % | ||||
Operating loss % of total revenue | 11.8 | % | 24.5 | % | ||||||||
Unallocated corporate costs consist of selling and general and administrative and other operating expenses that are not directly related or allocated to the reportable segments. The increase in unallocated corporate costs of $14.7 million, compared to the corresponding period in 2021 was primarily related to increased costs associated with increased stock based compensation expense, additional headcount, recruiting and relocation expense, higher compensation expense, and acquisition and integration costs. Costs as a percentage of revenue for the three months ended June 30, 2022 was 11.8% compared to 24.5% for the corresponding period in 2021.
Other Expense
Other expense increased by $7.6 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Interest expense increased $8.0 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 as a result of the additional debt obtained in connection with the acquisitions of Envigo, ILS and OBRC. The increase in interest expense was offset by an increase in other income of $0.4 million for the three months ended June 30, 2022, primarily as a result of a gain on foreign exchange rates. During the three months ended June 30, 2021, the Company was not subject to foreign exchange risk.
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Income Taxes
Our effective income tax rates for the three months ended June 30, 2022 and 2021 were (10.6)% and 221.0%, respectively. The (expense) benefit recorded for each period was $(0.3) million and $4.8 million, respectively. The income tax expense in the three months ended June 30, 2022 relates to an increase in unfavorable permanent items and discrete adjustments. The benefit from income taxes in the three months ended June 30, 2021 related primarily to a discrete change in valuation allowance resulting from the Bolder BioPATH acquisition in the quarter.
Consolidated net (loss) income
As a result of the above described factors, we had a consolidated net loss of $3.6 million for the three months ended June 30, 2022 as compared to consolidated net income of $2.6 million during the three months ended June 30, 2021.
Nine Months Ended June 30, 2022 Compared to Nine Months Ended June 30, 2021
DSA
(in millions, except percentages) | Nine Months Ended | |||||||||||
June 30, | ||||||||||||
| 2022 |
| 2021 | $ Change | % Change | |||||||
Revenue | $ | 121.1 | $ | 59.5 | $ | 61.6 | 103.5 | % | ||||
Cost of revenue | 74.7 | 39.7 | 35.0 | 88.2 | % | |||||||
Operating expenses1 | 19.2 | 7.8 | 11.4 | 146.2 | % | |||||||
Amortization of intangible assets | 4.3 | 0.9 | 3.4 | 377.8 | % | |||||||
Operating income (loss)2 | $ | 23.0 | $ | 11.1 | $ | 11.9 | 107.2 | % | ||||
Operating income (loss) % of total revenue | 5.8 | % | 18.7 | % | ||||||||
1 Operating expenses includes selling, general and administrative and other operating expenses | ||||||||||||
2 Table may not foot due to rounding | ||||||||||||
DSA revenue increased $61.6 million for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021. The acquisitions of HistoTox Labs, Bolder BioPATH, Gateway Laboratories, Plato, ILS and Histion added $24.0 million of incremental service revenue and internal growth generated $37.6 million of additional service revenue in the DSA segment during the nine months ended June 30, 2022.
DSA operating income increased by $11.9 million in the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021 primarily due to higher revenues as a result of favorable pricing and our investments in the DSA business designed to increase margins and capacity to enhance our ability to meet growing customer demand. Additionally, operating expenses increased primarily due to increases in general and administrative expenses from the overall growth in the business as a result of acquisitions and internal growth, which included in startup costs. Amortization of intangibles increased year over year primarily as a result of additional acquired intangible assets since June 30, 2021.
RMS
(in millions, except percentages) | Nine Months Ended | ||
June 30, 2022 | |||
Revenue | $ | 276.1 | |
Cost of revenue | 207.5 | ||
Operating expenses1 | 19.6 | ||
Amortization of intangible assets | 14.4 | ||
Operating income2 | $ | 34.5 | |
Operating income % of total revenue | 8.7 | % | |
1 Operating expenses includes selling, general and administrative and other operating expenses | |||
2 Table may not foot due to rounding | |||
RMS revenue was $276.1 million for the nine months ended June 30, 2022. The acquisitions of Envigo, RSI and OBRC added $209.6 million of incremental revenue based upon the baseline revenue prior to the acquisitions, and internal growth generated
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$66.5 million of additional revenue in the RMS segment during the nine months ended June 30, 2022. RMS revenue in the nine months ended June 30, 2022 reflected one partial and two full quarter contributions from Envigo, which was acquired on November 5, 2021, and one partial and one full quarter of contribution from OBRC, which was acquired on January 27, 2022. Prior to the acquisition of Envigo, we did not have an RMS business.
RMS operating income was $34.5 million in the nine months ended June 30, 2022, which primarily includes cost of revenue, selling and general and administrative expenses for the ongoing business, acquisition costs, integration costs, including change in control charges, and restructuring costs related to the closure of our Dublin facility and Cumberland facility. Furthermore, RMS operating income included improved margins on a favorable mix of sales of research models, but were partially offset by $10.0 million of non-cash inventory step-up amortization in the nine months ended June 30, 2022.
Unallocated Corporate
(in millions, except percentages) | Nine Months Ended | |||||||||||
June 30, | ||||||||||||
2022 |
| 2021 | $ Change | % Change | ||||||||
Operating loss | $ | 78.5 | $ | 13.4 | $ | 65.1 | 485.8 | % | ||||
Operating loss % of total revenue | 19.8 | % | 22.5 | % | ||||||||
Unallocated corporate costs consist of selling and general and administrative and other operating expenses that are not directly related or allocated to the reportable segments. The increase in unallocated corporate costs of $65.1 million, compared to the corresponding period in 2021, was primarily related to increased costs associated with additional headcount, recruiting and relocation expense, higher compensation expense, acquisition and integration costs and post combination non-cash stock compensation expense relating to the adoption of the Envigo Equity Plan recognized in connection with the Envigo acquisition of $23.0 million. Unallocated corporate costs as a percentage of revenue for the nine months ended June 30, 2022 was 19.8%, compared to 22.5% for the corresponding period in 2021.
Other Expense
Other expense increased by $77.3 million for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021. The increase is primarily due to the $56.7 million of fair value remeasurement of the embedded derivative component of the convertible notes issued in September 2021. For additional information, see “Capital Resources – Convertible Senior Notes” below. There was also an increase in interest expense of $19.7 million in the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021 as a result of the increased debt balance as a result of the additional debt obtained in connection with the acquisitions of Envigo, ILS and OBRC.
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Income Taxes
Our effective income tax rates for the nine months ended June 30, 2022 and 2021 were 5.6% and 147.4%, respectively. The benefit recorded for each period was $5.6 million and $4.7 million, respectively. The benefit from income taxes for the nine months ended June 30, 2022 primarily relates to a release of valuation allowance due to deferred tax liabilities established as part of the acquisition of Envigo, as well as, the impact on tax expense of certain permanent book to tax differences on the deductibility of transaction costs, loss on fair value remeasurement of the embedded derivative component of the convertible notes, compensation, and other permanent items. The benefit from income taxes for the nine months ended June 30, 2021 related primarily to a discrete change in valuation allowance resulting from the Bolder BioPATH acquisition on May 3, 2021.
Consolidated net (loss) income
As a result of the above described factors, we had a consolidated net loss of $93.6 million for the nine months ended June 30, 2022 as compared to consolidated net income of $1.5 million during the nine months ended June 30, 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 June 30, 2022, we had cash and cash equivalents of $21.7 million, compared to $138.9 million at September 30, 2021, exclusive of restricted cash.
Net cash used in operating activities was $(5.4) million for the nine months ended June 30, 2022 compared to net cash provided by operating activities of $8.0 million for the nine months ended June 30, 2021. Contributing factors to our cash used in operations in the nine months ended June 30, 2022, were primarily driven by a net loss of $(93.6) million for the nine months ended June 30, 2022 and further decreased due to changes in operating assets and liabilities of $(34.5) million, most notably an increase in trade receivables and contract assets, inventories and prepaid expenses and other current assets, partially offset by increases in fees invoiced in advance and accounts payable. The net decrease in cash from operating activities was partially offset by a net increase in noncash charges of $122.8 million. Changes in noncash charges included, but are not limited to, $56.7 million for loss on fair value remeasurement of the embedded derivative component of the convertible notes, $31.9 million for depreciation and amortization, $22.3 million for non-cash stock compensation expense, changes in deferred taxes of $(8.4) million, amortization of debt issuance costs and original issue discount of $1.9 million, non-cash amortization of inventory fair value step-up of $10.0 million and non-cash restructuring costs related to the exit of the Dublin and Cumberland sites of $3.0 million.
Contributing factors to our cash provided by operations in the first nine months of fiscal 2021 were noncash charges of $4.1 million for depreciation and amortization, $1.0 million for stock compensation expense, a change in deferred taxes of $4.9 million, and a net increase in customer advances of $7.5 million, as a result of increasing orders and the acquisitions of HistoTox Labs and Bolder BioPATH. These items were partially offset by an increase of $1.3 million in accounts payable and an increase of $1.6 million in accrued expenses.
Net cash used in investing activities of $318.1 million in the nine months ended June 30, 2022 was due mainly to $287.1 million paid in the acquisitions of Plato, Envigo RSI, ILS, OBRC and Histion and capital expenditures of $31.3 million. The capital additions during the nine months ended June 30, 2022 primarily consisted of investments in facility improvements, site expansions, enhancements to laboratory technology, and system enhancements to improve the client experience.
Net cash used in investing activities of $49.1 million in the nine months ended June 30, 2021 was due mainly to cash paid in acquisitions of $40.7 million and capital expenditures of $8.4 million, which consisted of the purchase of our St. Louis facility, facility improvements in Ft. Collins and investments in laboratory equipment.
Financing activities provided $189.2 million in the nine months ended June 30, 2022 compared to $64.3 million provided in the nine months ended June 30, 2021. The cash provided in the nine months ended June 30, 2022 included borrowings on the senior term notes of $205.0 million, which consisted of $165.0 million related to the term loan facility used in the Envigo acquisition and
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$40.0 million related to the Amendment (defined below), which was partially used in the OBRC acquisition and partially used to repay the revolving loan facility borrowings, and included the Initial DDTL (defined below) borrowings of $35.0 million, which was used in the ILS acquisition, partially offset by payments of long-term borrowings of $37.8 million and payments of debt issuance costs of $10.1 million.
Financing activities in the first nine months of fiscal 2021 included proceeds from the issuance of common stock of $49.0 million and borrowings on long-term loans of $17.1 million, partially offset by payments of long-term borrowings of $2.6 million, revolving credit facility of $1.3 million and debt issuance costs of $0.4 million.
Capital Resources
Credit Facility
On November 5, 2021, the Company, certain of the subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and Jefferies Finance LLC, as administrative agent, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in the original principal amount of $165.0 million, a delayed draw term loan facility in the original principal amount of $35.0 million (available to be drawn up to 18 months from the date of the Credit Agreement), and a revolving loan facility in the original principal amount of $15.0 million. In addition, the Credit Agreement provides for an aggregate combined increase of the revolving loan facility and the term loan facility of up to $35.0 million, 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 loan 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 interest accrued at 7.82% through June 30, 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 loan 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% 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 and recognized an $0.9 million loss on debt extinguishment.
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%. Actual interest accrued at 7.49% through June 30, 2022.
First Amendment to Credit Agreement
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On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and Jefferies Finance LLC, as administrative agent, entered into a First Amendment (the “Amendment”) to the existing Credit Agreement. The Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $40.0 million (the “Incremental Term Loans”) and a new delayed draw term loan facility in the original principal amount of $35.0 million, which amount is available to be drawn up to 24 months from the date of the Amendment (the “DDTL”). The Incremental Term Loans and any amounts borrowed under the 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 under the 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 7.82% through June 30, 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 its 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.
Long term debt as of June 30, 2022 and September 30, 2021 is detailed in the table below.
(in millions) |
| June 30, 2022 |
| September 30, 2021 | ||
FIB Term Loans | $ | — | $ | 36.2 | ||
Seller Note – Bolder BioPath |
| 0.9 |
| 1.5 | ||
Seller Note – Smithers Avanza |
| — |
| 0.3 | ||
Seller Note – Preclinical Research Services | 0.6 | 0.7 | ||||
Seller Note – Plato BioPharma | 2.1 | — | ||||
Seller Payable - Orient BioResource Center | 3.4 | — | ||||
Seller Note – Histion | 0.4 | — | ||||
Economic Injury Disaster Loan | 0.1 | — | ||||
Convertible Senior Notes | 103.6 | 131.7 | ||||
Term Loan Facility, Initial DDTL and Incremental Term Loans | 238.8 | — | ||||
| 350.1 |
| 170.3 | |||
Less: Current portion |
| (5.0) |
| (9.7) | ||
Less: Debt issue costs not amortized |
| (11.3) |
| (6.5) | ||
Total Long-term debt | $ | 333.8 | $ | 154.1 | ||
Note: Table may not foot due to rounding | ||||||
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 $3.0 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.
47
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 $3.7 million, which the Company determined to have a fair value of $3.3 million 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, LLC (“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.
Convertible Senior Notes
On September 27, 2021, the Company issued $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 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 $15.0 million principal amount of the Notes. The Notes issued on September 27, 2021 included $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.
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. 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 1.7162 common shares per $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.
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 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.
48
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 $20.0 million; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20.0 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.
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 $88.6 million and a loss on remeasurement included in other income (loss) for the nine months ended June 30, 2022 of $56.7 million. The embedded derivative liability of $88.6 million was then reclassified to additional paid-in capital in accordance with ASC 815.
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 June 30, 2022, our debt portfolio was reliant on reference rates. Based on our interest rate exposure at June 30, 2022, assumed debt levels throughout the next 12 months, a one-percentage-point increase in interest rates would result in an estimated $2.4 million pre-tax reduction in net earnings over a one-year period.
49
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.
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 income 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 June 30, 2022 cash balance by approximately $0.8 million and our revenue by approximately $5.6 million for the nine months ended June 30, 2022.
ITEM 4 – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are 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 assurance that information required to be disclosed by the Company in the reports that it files or submits 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 by the SEC's rules and forms. An evaluation of the effectiveness of the design and operation 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 by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures were not effective as of June 30, 2022.
On December 15, 2021, the Company's management and the Audit Committee of the Board of Directors concluded that, due to a failure to properly account for certain tax attributes related to an acquisition that occurred 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 as of June 30, 2021 and concluded that, in light of the error described above, a material weakness existed in the Company’s internal control over financial reporting and that certain of the Company’s disclosure controls and procedures were not effective as 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 its internal control over financial reporting and to provide processes and controls over the research and understanding 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 assurance 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 is in the process of performing testing over these key controls and will continue 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 June 30, 2022.
Changes in Internal Controls
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 third quarter of fiscal 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II
ITEM 1 – LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in Note 15 to our condensed consolidated financial statements included in Part I, Item 1 of this Report and is incorporated herein by reference.
ITEM 1A – RISK FACTORS
You should carefully consider the risks described below and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, 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 contained in our subsequent Quarterly Reports. Except as set forth below, there have been no material changes in 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.
The risk factor in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 entitled “We are subject to periodic inspections by regulatory authorities which could lead to enforcement actions if those authorities determine that our facilities or procedures do not meet applicable requirements” is replaced in its entirety by the following:
We are subject to inspections, investigations and enforcement actions by regulatory authorities, which could lead to penalties, including substantial fines, warning letters, a temporary restraining order or injunction, civil and/or criminal penalties, and/or license suspension or revocation.
We are subject to periodic inspections by regulatory authorities, including the FDA and the USDA. As part of these inspections, the regulatory authorities seek to determine whether our facilities and operations comply with applicable laws and regulations. Adverse findings as a result of these inspections could lead to enforcement actions, including substantial fines, warning letters that require corrective action (including potential facilities improvement requirements), revocation of approvals, exclusion from future participation in government healthcare programs, criminal prosecution and even the denial of the right to conduct business. Envigo RMS’ Cumberland, VA facility has been the subject of inspections by the USDA, a search and seizure warrant executed by the DOJ and federal and state law enforcement agents, and a civil action by the DOJ that was subsequently settled. Further, certain
51
employees also received a grand jury subpoena requested by the USAO-VA. For further information on these and other actions, see Note 15 – Contingencies of the condensed consolidated financial statements.
Inspections, investigations and/or other actions could result in penalties that could include a temporary restraining order or injunction, civil and/or criminal penalties, and/or license suspension or revocation. The imposition of any of these penalties or other restrictions on our business could adversely affect our business reputation and could have a material adverse impact on our financial condition, results of operations and stock price.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 25, 2022, pursuant to an Interest Purchase Agreement among Bronco Research Services, LLC., Inotiv, Inc., Histion, Inc., and the owners of Histion Inc, the Company issued 17,618 common shares to the owners of Histion, 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.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
Not applicable.
ITEM 6 – EXHIBITS
Number |
| Description of Exhibits | |
(3) | 3.1 |
| |
|
|
|
|
| 3.2 |
| |
|
|
|
|
(10) | 10.1 |
| |
(31) | 31.1 |
| Certification of Principal Executive Officer (filed herewith). |
|
|
|
|
| 31.2 |
| Certification of Principal Financial Officer (filed herewith). |
|
|
|
|
(32) | 32.1 |
| |
|
|
|
|
| 32.2 |
| |
|
|
|
|
| 101 |
| Inline XBRL data file (filed herewith) |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||
52
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: August 12, 2022 | INOTIV, INC. | |
| (Registrant) | |
|
| |
| By: | /s/ Robert W. Leasure |
| Robert W. Leasure | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
|
| |
Date: August 12, 2022 | By: | /s/ Beth A. Taylor |
| Beth A. Taylor | |
| Chief Financial Officer and Vice President of Finance (Principal Financial Officer and Accounting Officer) | |
| ||
53
Exhibit 10.1
FIRST AMENDMENT TO
AMENDED AND RESTATED
INOTIV, INC.
2018 EQUITY INCENTIVE PLAN
(As amended through January 25, 2022)
THIS FIRST AMENDMENT to the Inotiv, Inc. 2018 Equity Incentive Plan (As amended through January 2, 2022) (the “Plan”) is effective as of July 26, 2022.
The Plan is hereby amended by adding the following new Section 3.8 immediately following Section 3.7 of the Plan:
“3.8To the extent permitted by applicable law, the Committee may delegate to a committee of one or more members of the Board, or to one or more executive officers of the Company, the authority, subject to the terms, limitations and conditions as the Committee shall determine, to grant awards to eligible recipients under the Plan and related authority and responsibilities under the Plan; provided that the Committee shall not delegate such responsibilities for awards to be granted to an individual who is subject to Section 16 of the Exchange Act.”
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert W. Leasure, Jr., President and Chief Executive Officer, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Inotiv, Inc.;
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Robert W. Leasure, Jr. |
| Robert W. Leasure, Jr. |
Date: August 12, 2022 | President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Beth A. Taylor, Chief Financial Officer and Vice President of Finance, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Inotiv, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Beth A. Taylor |
| Beth A. Taylor |
Date: August 12, 2022 | Chief Financial Officer and Vice President of Finance |
Exhibit 32.1
Certifications of Principal Executive Officer
Pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
The undersigned, the President and Chief Executive Officer of Inotiv, Inc. (the “Company”), hereby certifies that, to the best of his knowledge:
(a) | the Quarterly Report on Form 10-Q of the Company for the three months ended June 30, 2022 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(b) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| | /s/ Robert W. Leasure, Jr. |
| | Robert W. Leasure, Jr. |
| | President and Chief Executive Officer |
| | Date: August 12, 2022 |
Exhibit 32.2
Certifications of Chief Financial Officer
Pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
The undersigned, the Chief Financial Officer and Vice President of Finance of Inotiv, Inc. (the “Company”), hereby certifies that, to the best of her knowledge:
(a) | the Quarterly Report on Form 10-Q of the Company for the three months ended June 30, 2022 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(b) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| By: | /s/ Beth A. Taylor |
| | Beth A. Taylor |
| | Chief Financial Officer and Vice President of Finance |
| | Date: August 12, 2022 |
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