Inotiv(NOTV) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1 - Unaudited Condensed Consolidated Financial Statements This section presents Inotiv's unaudited condensed consolidated financial statements and related notes for recent periods Condensed Consolidated Balance Sheets Total assets decreased to $774,588 thousand by June 2024, while liabilities increased due to debt reclassification, and equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :--------------------------------------- | :------------ | :----------------- | | Total Assets | $774,588 | $856,530 | | Total Current Assets | $149,233 | $213,803 | | Cash and Cash Equivalents | $14,434 | $35,492 | | Trade Receivables and Contract Assets, net | $63,867 | $87,383 | | Inventories, net | $38,684 | $56,102 | | Total Liabilities | $592,481 | $588,040 | | Total Current Liabilities | $485,073 | $132,194 | | Current Portion of Long-Term Debt | $378,550 | $7,950 | | Total Shareholders' Equity | $182,107 | $268,490 | Condensed Consolidated Statements of Operations Total revenue decreased to $105,786 thousand for Q2 2024, resulting in a $26,087 thousand net loss Condensed Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Revenue | $105,786 | $157,468 | $360,322 | $431,685 | | Operating (Loss) Income | $(20,752) | $8,783 | $(73,239) | $(83,920) | | Loss Before Income Taxes | $(32,950) | $(2,015) | $(106,715) | $(117,016) | | Consolidated Net (Loss) Income | $(26,087) | $365 | $(89,994) | $(96,196) | | Net (Loss) Income Attributable to Common Shareholders | $(26,087) | $1,840 | $(89,554) | $(95,477) | | Basic (Loss) Income per Common Share | $(1.00) | $0.07 | $(3.46) | $(3.72) | | Diluted (Loss) Income per Common Share | $(1.00) | $0.07 | $(3.46) | $(3.72) | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a consolidated comprehensive loss of $26,400 thousand for Q2 2024, a significant decline from the prior year Consolidated Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :------------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Consolidated Net (Loss) Income | $(26,087) | $365 | $(89,994) | $(96,196) | | Foreign Currency Translation | $(284) | $(392) | $133 | $5,651 | | Defined Benefit Plan: Pension Cost Amortization | $47 | $(55) | $140 | $(163) | | Defined Benefit Plan: Foreign Currency Translation | $(76) | $137 | $(146) | $404 | | Other Comprehensive (Loss) Income, net of tax | $(313) | $(310) | $127 | $5,892 | | Consolidated Comprehensive (Loss) Income | $(26,400) | $55 | $(89,867) | $(90,304) | | Comprehensive (Loss) Income Attributable to Common Stockholders | $(26,400) | $1,530 | $(89,427) | $(89,585) | Condensed Consolidated Statements of Shareholders' Equity and Noncontrolling Interest Total shareholders' equity decreased to $182,107 thousand by June 2024, primarily due to accumulated deficit from net losses Shareholders' Equity and Noncontrolling Interest Highlights (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :------------------------------------------------------- | :------------ | :----------------- | | Common Shares (Amount) | $6,463 | $6,406 | | Additional Paid-in Capital | $718,459 | $715,696 | | Accumulated Deficit | $(543,272) | $(453,278) | | Accumulated Other Comprehensive Income | $457 | $330 | | Total Equity Attributable to Common Shareholders | $182,107 | $269,154 | | Noncontrolling Interest | — | $(664) | | Total Shareholders' Equity and Noncontrolling Interest | $182,107 | $268,490 | Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2024, the company experienced a net decrease in cash of $21,058 thousand, shifting to net cash used in operating activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :------------------------------------------------------- | :--------------------------- | :--------------------------- | | Consolidated Net Loss | $(89,994) | $(96,196) | | Net Cash (Used in) Provided by Operating Activities | $(4,433) | $9,120 | | Net Cash Used in Investing Activities | $(11,583) | $(21,056) | | Net Cash (Used in) Provided by Financing Activities | $(4,889) | $16,182 | | Effect of Exchange Rate Changes on Cash and Cash Equivalents | $(153) | $753 | | Net (Decrease) Increase in Cash and Cash Equivalents | $(21,058) | $4,999 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $14,434 | $22,220 | Notes to Unaudited Condensed Consolidated Financial Statements This section details the company's business, accounting policies, financial instruments, and recent events, highlighting current financial challenges and strategic responses 1. Description of the Business and Basis of Presentation Inotiv, Inc. operates as a CRO providing nonclinical and analytical drug discovery services and research models, facing going concern doubts due to recent legal settlements and NHP supply issues - Inotiv, Inc. is a leading contract research organization (CRO) offering nonclinical and analytical drug discovery and development services, and research-quality animals and diets, with operations divided into Discovery and Safety Assessment (DSA) and Research Models and Services (RMS) segments[24][25] - On June 3, 2024, Inotiv resolved a criminal investigation with the U.S. Department of Justice (DOJ) regarding its former canine breeding facility, with Envigo RMS pleading guilty to violating the Animal Welfare Act and Envigo Global Services, Inc. (EGSI) to violating the Clean Water Act[28] - The resolution includes $22,000 thousand in fines, $3,000 thousand to animal welfare organizations, $3,500 thousand for environmental projects, and at least $7,000 thousand for animal welfare improvements, along with a Compliance Monitor for up to five years[29][30] - For the nine months ended June 30, 2024, the company expensed $28,500 thousand related to the Resolution and Plea Agreements, with $6,500 thousand paid in Q3 2024 and $22,000 thousand expected over multiple years, impacting the RMS segment's operating loss[31] - Disruptions in non-human primate (NHP) supply due to criminal charges against a principal supplier and Cambodian government officials led to a temporary halt in Cambodian NHP sales, increasing pricing and shifting some studies outside the U.S[32][34][35] - RMS revenue decreased by $49,143 thousand (44.4%) in the three months ended June 30, 2024, primarily due to a $45,667 thousand reduction in NHP-related product and service revenue[35] - Decreases in biotech funding during 2022 and 2023 reduced demand for preclinical studies, and despite an increase in U.S. biotech funding in early 2024, the company has not yet seen a meaningful increase in demand[36] - As of June 30, 2024, the company had $14,434 thousand in cash and cash equivalents and access to a $15,000 thousand revolver, but its ability to continue as a going concern is subject to substantial doubt due to potential non-compliance with financial covenants[38][43][44] - The company has implemented site optimization plans, workforce reductions, and new strategies for transportation efficiency, including in-house integration of North American transportation operations, to reduce operating costs and improve liquidity[39][40][41] 2. Revenue from Contracts with Customers Revenue is generated from DSA and RMS segments, managing contract assets and liabilities, with most deferred revenue recognized within twelve months - The DSA segment generates service revenue from drug discovery and development and product revenue from internally-manufactured scientific instruments (BASi product line)[55] - The RMS segment generates product revenue from research models, diets, bedding, and bioproducts, and service revenue from Genetically Engineered Models and Services (GEMS), client-owned animal colony care, and health monitoring[56] Contract Assets and Liabilities (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :---------------------------- | :------------ | :----------------- | | Trade Receivables | $53,737 | $77,618 | | Unbilled Revenue | $15,910 | $17,211 | | Customer Deposits | $22,374 | $36,689 | | Deferred Revenue | $16,321 | $18,933 | - Approximately 79.0% of unbilled revenue and 75.0% of deferred revenue as of September 30, 2023, were recognized or billed during the nine months ended June 30, 2024[61] 3. Segment and Geographic Information Both DSA and RMS segments experienced revenue declines for the three and nine months ended June 30, 2024, with RMS showing a significant operating loss, primarily in the United States Revenue by Segment (in thousands) | Segment | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | DSA Service Revenue | $43,086 | $45,197 | $131,951 | $131,313 | | DSA Product Revenue | $1,133 | $1,561 | $3,597 | $3,561 | | RMS Service Revenue | $11,278 | $11,098 | $33,237 | $33,782 | | RMS Product Revenue | $50,289 | $99,612 | $191,537 | $263,029 | | Total Revenue | $105,786 | $157,468 | $360,322 | $431,685 | Operating Income (Loss) by Segment (in thousands) | Segment | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | DSA | $2,325 | $4,182 | $6,771 | $8,478 | | RMS | $(7,447) | $21,886 | $(32,973) | $(36,661) | | Unallocated Corporate | $(15,630) | $(17,285) | $(47,037) | $(55,737) | | Total Operating (Loss) Income | $(20,752) | $8,783 | $(73,239) | $(83,920) | Revenue by Geographic Area (in thousands) | Geographic Area | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | United States | $89,707 | $132,265 | $303,905 | $361,254 | | Netherlands | $8,545 | $15,682 | $36,331 | $42,426 | | Other | $7,534 | $9,521 | $20,086 | $28,005 | | Total Revenue | $105,786 | $157,468 | $360,322 | $431,685 | 4. Business Combinations The company accounts for acquisitions using ASC 805, with recent purchases like Histion and Protypia resulting in significant goodwill and intangible assets for the DSA segment - On April 25, 2022, Inotiv acquired Histion, LLC for $950 thousand in cash, 17,618 common shares ($364 thousand), and $433 thousand in promissory notes, expanding its specialized pathology services[68][69] - On July 7, 2022, Inotiv acquired Protypia, Inc. for $9,460 thousand in cash, 74,997 common shares ($806 thousand), and $600 thousand in seller notes, enhancing its mass spectrometry-based bioanalytical offerings[70] - The Protypia acquisition resulted in $6,002 thousand in goodwill and $5,600 thousand in intangible assets (client relationships, technology), allocated to the DSA segment[70][71] 5. Intangible Assets The company's net intangible assets decreased to $282,540 thousand by June 2024, primarily due to amortization, with client relationships being the largest component Intangible Assets, Net by Major Class (in thousands) | Major Class | June 30, 2024 (Net) | September 30, 2023 (Net) | | :------------------ | :------------------ | :----------------------- | | Client Relationships | $241,441 | $262,109 | | Intellectual Property | $39,285 | $44,103 | | Other | $1,814 | $2,216 | | Total Intangible Assets, Net | $282,540 | $308,428 | - The decrease in intangible assets, net, during the nine months ended June 30, 2024, was primarily due to amortization over their useful lives, partially offset by foreign exchange rate impacts[73] 6. Debt Total debt, net, was $382,447 thousand at June 30, 2024, with a significant portion reclassified to current liabilities due to potential covenant non-compliance, leading to multiple credit agreement amendments Long-Term Debt (in thousands) | Debt Type | June 30, 2024 | September 30, 2023 | | :------------------------------------------ | :------------ | :----------------- | | Seller Note – Bolder BioPath | $432 | $602 | | Seller Note – Preclinical Research Services | $484 | $541 | | Seller Payable - Orient BioResource Center | $3,690 | $3,649 | | Seller Note – Histion | $120 | $229 | | Seller Note – Protypia | — | $400 | | Economic Injury Disaster Loan | — | $140 | | Convertible Senior Notes | $115,296 | $110,651 | | Term Loan Facility, DDTL and Incremental Term Loans | $274,048 | $272,930 | | Total Debt before Unamortized Debt Issuance Costs | $394,070 | $389,142 | | Less: Debt Issuance Costs Not Amortized | $(11,623) | $(11,397) | | Total Debt, Net of Unamortized Debt Issuance Costs | $382,447 | $377,745 | | Less: Current Portion | $(378,550) | $(7,950) | | Total Long-Term Debt | $3,897 | $369,795 | - Due to decreased revenue and potential non-compliance with financial covenants, the Term Loan Facility, DDTL, Incremental Term Loans, and Convertible Senior Notes are classified as current liabilities as of June 30, 2024[79][220] - The Sixth Amendment to the Credit Agreement, effective August 7, 2024, waives financial covenant tests for June 30, 2024, and establishes new weekly liquidity reporting and minimum liquidity requirements[75][162][326] - The Fifth Amendment (June 2, 2024) permits adding back up to $28,500 thousand in charges related to the Resolution and Plea Agreements to Consolidated EBITDA for financial covenant purposes[101][245] - The Convertible Senior Notes (3.25% due 2027) have a principal amount of $140,000 thousand, accrue interest semi-annually, and are convertible into cash, common shares, or a combination at the company's election, with total interest expense for the nine months ended June 30, 2024, at $8,755 thousand[107][109][110][252][254][255] 7. Supplemental Balance Sheet Information Trade receivables and inventories decreased, while accrued expenses and other long-term liabilities significantly increased due to accruals for the Resolution and Plea Agreements Trade Receivables and Contract Assets, Net (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :------------------------------------------------------- | :------------ | :----------------- | | Trade Receivables | $53,737 | $77,618 | | Unbilled Revenue | $15,910 | $17,211 | | Total | $69,647 | $94,829 | | Less: Allowance for Credit Losses | $(5,780) | $(7,446) | | Trade Receivables and Contract Assets, Net | $63,867 | $87,383 | Inventories, Net (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :--------------------- | :------------ | :----------------- | | Raw Materials | $2,071 | $2,259 | | Work in Progress | $78 | $124 | | Finished Goods | $4,483 | $4,439 | | Research Model Inventory | $34,866 | $52,524 | | Total | $41,498 | $59,346 | | Less: Obsolescence Reserve | $(2,814) | $(3,244) | | Inventories, Net | $38,684 | $56,102 | Accrued Expenses and Other Current Liabilities (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :--------------------------------------- | :------------ | :----------------- | | Accrued Compensation | $7,552 | $12,966 | | Non-Income Taxes | $5,268 | $4,596 | | Accrued Interest | $2,488 | $2,975 | | Other | $7,756 | $5,239 | | Resolution and Plea Agreements (Note 1) | $5,000 | — | | Total Accrued Expenses and Other Current Liabilities | $28,064 | $25,776 | Other Long-Term Liabilities (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :------------------------------------------ | :------------ | :----------------- | | Long-Term Client Deposits | $17,000 | $5,250 | | Other | $912 | $1,123 | | Resolution and Plea Agreements (Note 1) | $17,000 | — | | Total Other Liabilities | $34,912 | $6,373 | 8. Defined Benefit Plan The company operates a curtailed defined benefit pension plan in the U.K., with a funded status of $3,181 thousand included in other non-current assets as of June 30, 2024 - The company has a curtailed defined benefit plan in the U.K., the Harlan Laboratories UK Limited Occupational Pension Scheme, which ceased benefit accumulation in April 2012[123] - As of June 30, 2024, the funded status of the defined benefit plan obligation was $3,181 thousand, included in other non-current assets[123] Components of Net Periodic Benefit Expense (in thousands) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest Cost | $185 | $187 | $551 | $551 | | Expected Return on Assets | $(196) | $(203) | $(585) | $(600) | | Amortization of Prior Loss | $(36) | $(39) | $(106) | $(114) | | Net Periodic Expense | $(47) | $(55) | $(140) | $(163) | 9. Other Operating Expense Other operating expense significantly increased to $39,661 thousand for the nine months ended June 30, 2024, primarily due to a $28,500 thousand charge for the Resolution and Plea Agreements Other Operating Expense (in thousands) | Expense Type | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :---------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Acquisition and Integration Costs | $105 | $70 | $1,193 | $1,193 | | Restructuring Costs | $1,303 | $2,859 | $3,309 | $3,309 | | Startup Costs | $1,781 | $2,569 | $5,567 | $5,567 | | Remediation Costs | $857 | $883 | $1,997 | $1,997 | | Other Costs | $2,442 | $2,215 | $4,780 | $2,646 | | Resolution and Plea Agreements | $2,000 | — | $28,500 | — | | Total Other Operating Expense | $5,902 | $6,261 | $39,661 | $14,712 | - The $28,500 thousand charge related to the Resolution and Plea Agreements was a primary driver of the increase in other operating expense for the nine months ended June 30, 2024[125] 10. Restructuring and Assets Held for Sale Inotiv has undertaken significant restructuring and site optimization initiatives, including the closure and sale of several facilities in the U.S. and Europe, to reduce overhead and improve efficiency - The company approved a plan in June 2022 to close its Cumberland, Virginia facility and relocate operations from Dublin, Virginia, as part of its restructuring and site optimization plan, with both facilities sold in 2024[126][127] - Other sites identified for relocation or closure include Gannat, France (sold Dec 2023), Blackthorn, U.K. (sold Feb 2024, leased back), Spain (sold Nov 2023), RMS St. Louis (closed June 2023), Boyertown (sold Sep 2023), and Haslett (sold Apr 2024)[128][129] - In August 2023, the company sold its Israeli businesses, previously part of the RMS segment, for $1,000 thousand cash, a $316 thousand cash adjustment, real property valued at $3,700 thousand, and a $2,453 thousand promissory note[130] 11. Leases The company records ROU assets and lease liabilities for most leases, with operating ROU assets, net, at $45,216 thousand and total operating lease liabilities at $47,338 thousand as of June 30, 2024 - The company records ROU assets and lease liabilities for substantially all leases, recognizing lease expense on a straight-line basis over the lease term[132] ROU Lease Assets and Operating Lease Liabilities (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :--------------------------------------- | :------------ | :----------------- | | Operating ROU Assets, Net | $45,216 | $38,866 | | Current Portion of Operating Lease Liabilities | $11,439 | $10,282 | | Long-Term Operating Lease Liabilities | $35,899 | $29,614 | | Total Operating Lease Liabilities | $47,338 | $39,896 | Weighted Average Lease Term and Discount Rate | Metric | June 30, 2024 | June 30, 2023 | | :--------------------------------------- | :------------ | :------------ | | Weighted-Average Remaining Lease Term (in years) | 8.83 | 6.26 | | Weighted-Average Discount Rate (in percentages) | 11.92% | 7.98% | 12. Equity, Stock-Based Compensation and Earnings (Loss) Per Share Shareholders approved the 2024 Equity Incentive Plan, authorizing 1,500,000 common shares, with stock-based compensation expense at $5,118 thousand and a basic and diluted loss per share of $(3.46) for the nine months ended June 30, 2024 - On March 14, 2024, shareholders approved the Inotiv, Inc. 2024 Equity Incentive Plan, providing for the issuance of up to 1,500,000 common shares, with 1,798,668 shares remaining available for grants as of June 30, 2024[139] Stock-Based Compensation Expense (in thousands) | Period | Stock-Based Compensation Expense | | :--------------------------- | :------------------------------- | | 3 Months Ended June 30, 2024 | $1,337 | | 3 Months Ended June 30, 2023 | $2,029 | | 9 Months Ended June 30, 2024 | $5,118 | | 9 Months Ended June 30, 2023 | $5,856 | Loss Per Share (Basic and Diluted) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | | :------------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (Loss) Income Attributable to Common Shareholders | $(26,087) | $1,840 | $(89,554) | $(95,477) | | Basic (Loss) Income per Common Share | $(1.00) | $0.07 | $(3.46) | $(3.72) | | Diluted (Loss) Income per Common Share | $(1.00) | $0.07 | $(3.46) | $(3.72) | | Weighted-Average Shares Outstanding - Basic (in thousands) | 25,993 | 25,726 | 25,862 | 25,690 | | Weighted-Average Shares Outstanding - Diluted | 25,993 | 26,021 | 25,862 | 25,690 | 13. Income Taxes The effective tax rate for Q2 2024 was 20.8% (vs. 118.1% in 2023), and 15.7% for the nine months (vs. 17.8% in 2023), influenced by forecasted loss, permanent items from legal agreements, and valuation allowance adjustments - The effective tax rate for the three months ended June 30, 2024, was 20.8%, compared to 118.1% in the prior year, driven by changes in forecasted loss before income taxes[143] - For the nine months ended June 30, 2024, the effective tax rate was 15.7%, compared to 17.8% in the prior year, primarily due to unfavorable permanent items related to the Resolution and Plea Agreements and valuation allowance adjustments[143] - As of June 30, 2024, the company had no material liability for uncertain tax positions and does not expect significant changes in unrecognized tax benefits in the next twelve months[144][145] 14. Contingencies Inotiv is involved in various legal proceedings, including class action and derivative lawsuits, and recently resolved a criminal investigation with the DOJ, while an SEC investigation regarding NHP importation practices is ongoing - Envigo RMS is a defendant in a purported class action and a related PAGA action alleging wage and hour violations in California, with an intent to settle for $795 thousand[147] - The company and certain officers/directors are defendants in a putative securities class action and consolidated shareholder derivative lawsuits alleging violations of the Exchange Act related to the Envigo acquisition and NHP business, which the company believes are without merit[148][150][151][152] - On June 3, 2024, the company resolved a criminal investigation by the DOJ regarding its former canine breeding facility, with Envigo RMS pleading guilty to violating the Animal Welfare Act and EGSI to violating the Clean Water Act, incurring fines and compliance obligations[156] - On July 23, 2024, the U.S. Attorney's Office for the Southern District of Florida informed the company it was no longer investigating Inotiv or its subsidiaries regarding NHP procurement or importation practices[160] - An SEC investigation, initiated in May 2023 and formalized in March 2024, is ongoing regarding the company's NHP importation practices and compliance with the U.S. Foreign Corrupt Practices Act[161] 15. Subsequent Events On August 7, 2024, the company entered into the Sixth Amendment to its Credit Agreement, waiving financial covenant tests for Q2 2024 and establishing new weekly liquidity requirements - On August 7, 2024, the company entered into the Sixth Amendment to the Credit Agreement, which waives financial covenant tests for the fiscal quarter ended June 30, 2024[162] - The Sixth Amendment establishes new weekly liquidity reporting requirements and minimum weekly liquidity requirements: $7,000 thousand for weeks ending August 16, 23, and 30, 2024; $17,500 thousand for weeks ending October 11, 18, and 25, 2024; and $10,000 thousand for all other weeks thereafter[162] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Inotiv's financial condition and operational results for the three and nine months ended June 30, 2024, detailing segment performance, NHP supply issues, legal settlements, and liquidity challenges Business Overview Inotiv, Inc. is a CRO focused on nonclinical and analytical drug discovery and development, operating through DSA and RMS segments, facing challenges from NHP market disruptions and a recent criminal investigation settlement - Inotiv is a leading contract research organization (CRO) providing nonclinical and analytical drug discovery and development services, and research-quality animals and diets[166] - The company operates two segments: Discovery and Safety Assessment (DSA) and Research Models and Services (RMS), following the strategic acquisition of Envigo RMS Holding Corp. in November 2021[167] - DSA segment focus for the nine months ended June 30, 2024, included maximizing integration of prior acquisitions, building additional service capabilities and capacity, and completing expansion activities at Fort Collins, Colorado[168] - RMS segment focus included navigating the global non-human primate (NHP) market and executing site optimization plans, including the sale of Blackthorn, Dublin, Haslett, and Cumberland facilities[169] - In December 2023, the company partnered with Vanguard Supply Chain Solutions LLC to integrate North American transportation operations in-house, completed in Q2 fiscal 2024, to achieve efficiencies and cost reductions[170] - On June 3, 2024, Inotiv announced an agreement with the DOJ to resolve a criminal investigation into its former canine breeding facility, with Envigo RMS pleading guilty to Animal Welfare Act violations and EGSI to Clean Water Act violations[171][172] - The resolution involves payments totaling $22,000 thousand in fines, $6,500 thousand in immediate payments, and at least $7,000 thousand for animal welfare improvements, along with the appointment of a Compliance Monitor[173] - The company expensed $28,500 thousand related to the Resolution and Plea Agreements for the nine months ended June 30, 2024, impacting the RMS segment's operating loss[174] - Operational challenges include disruptions in NHP supply due to criminal charges against a principal supplier, leading to a significant decrease in NHP-related product and service revenue for the RMS segment[175][176][178] - Decreases in biotech funding during 2022 and 2023 have reduced demand for preclinical studies, negatively impacting the company's DSA segment[179] Financial Highlights For Q2 2024, total revenue decreased by 32.8% year-over-year, resulting in a $26,087 thousand net loss, with the DSA services book-to-bill ratio at 0.94x for the quarter Financial Highlights (in thousands, except percentages) | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change ($) | Change (%) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total Revenue | $105,786 | $157,468 | $(51,682) | (32.8)% | | RMS Revenue | $61,567 | $110,710 | $(49,143) | (44.4)% | | DSA Revenue | $44,219 | $46,758 | $(2,539) | (5.4)% | | Consolidated Net (Loss) Income | $(26,087) | $365 | $(26,452) | (7247.1)% | | Book-to-Bill Ratio (DSA Services) | 0.94x | N/A | N/A | N/A | | DSA Backlog | $139,384 | $149,148 | $(9,764) | (6.5)% | Financial Highlights (9 Months Ended June 30, in thousands, except percentages) | Metric | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | Change ($) | Change (%) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total Revenue | $360,322 | $431,685 | $(71,363) | (16.5)% | | RMS Revenue | $224,774 | $296,811 | $(72,037) | (24.3)% | | Consolidated Net Loss | $(89,994) | $(96,196) | $6,202 | (6.4)% | | Book-to-Bill Ratio (DSA Services) | 1.06x | N/A | N/A | N/A | - Consolidated net loss for the nine months ended June 30, 2024, included a $28,500 thousand charge related to the Resolution and Plea Agreements, while the prior year's net loss included a $66,367 thousand non-cash goodwill impairment charge related to the RMS segment[180] - On July 23, 2024, the U.S. Attorney's Office for the Southern District of Florida informed the Company that it was no longer investigating the Company or its subsidiaries with respect to their procurement of NHPs from foreign suppliers or NHP importation practices[182] - On August 7, 2024, the company entered into the Sixth Amendment to the Credit Agreement, waiving financial covenant tests for the fiscal quarter ended June 30, 2024, and establishing new weekly liquidity requirements[182] Results of Operations For Q2 2024, DSA revenue decreased by 5.4% and RMS revenue plummeted by 44.4% due to reduced NHP sales, leading to a significant RMS operating loss, while for the nine months, RMS revenue declined by 24.3% despite a reduced operating loss due to non-recurring goodwill impairment DSA Segment Performance (3 Months Ended June 30, in thousands, except percentages) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue | $44,219 | $46,758 | $(2,539) | (5.4)% | | Cost of Revenue | $32,597 | $27,935 | $4,662 | 16.7% | | Operating Expenses | $4,809 | $10,406 | $(5,597) | (53.8)% | | Depreciation and Amortization | $4,488 | $4,235 | $253 | 6.0% | | Operating Income | $2,325 | $4,182 | $(1,857) | (44.4)% | - DSA revenue decreased primarily due to a $1,766 thousand decrease in safety assessment service revenue and lower DSA products and discovery services revenue, partially offset by increases in genetic toxicology and biotherapeutic analysis revenue[183] RMS Segment Performance (3 Months Ended June 30, in thousands, except percentages) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue | $61,567 | $110,710 | $(49,143) | (44.4)% | | Cost of Revenue | $52,108 | $70,140 | $(18,032) | (25.7)% | | Operating Expenses | $7,505 | $9,055 | $(1,550) | (17.1)% | | Depreciation and Amortization | $9,401 | $9,629 | $(228) | (2.4)% | | Operating (Loss) Income | $(7,447) | $21,886 | $(29,333) | (134.0)% | - RMS revenue decreased primarily due to a $45,667 thousand reduction in NHP-related product and service revenue and a $2,956 thousand decrease from the sale of Israeli businesses[186] - RMS operating loss increased due to decreased revenue, partially offset by lower NHP-related cost of revenue and a $2,000 thousand charge related to the Resolution and Plea Agreements[187] DSA Segment Performance (9 Months Ended June 30, in thousands, except percentages) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue | $135,548 | $134,874 | $674 | 0.5% | | Cost of Revenue | $96,210 | $85,110 | $11,100 | 13.0% | | Operating Expenses | $19,307 | $29,460 | $(10,153) | (34.5)% | | Depreciation and Amortization | $13,260 | $11,826 | $1,434 | 12.1% | | Operating Income | $6,771 | $8,478 | $(1,707) | (20.1)% | - DSA revenue increased slightly due to higher safety assessment service revenue, particularly from genetic toxicology and biotherapeutic analysis, partially offset by a decrease in discovery services revenue due to declining biotech funding[193] RMS Segment Performance (9 Months Ended June 30, in thousands, except percentages) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue | $224,774 | $296,811 | $(72,037) | (24.3)% | | Cost of Revenue | $182,880 | $212,958 | $(30,078) | (14.1)% | | Operating Expenses | $46,086 | $25,856 | $20,230 | 78.2% | | Depreciation and Amortization | $28,781 | $28,291 | $490 | 1.7% | | Goodwill Impairment Loss | — | $66,367 | $(66,367) | (100.0)% | | Operating (Loss) Income | $(32,973) | $(36,661) | $3,688 | (10.1)% | - RMS revenue decreased due to lower NHP sales ($58,161 thousand) and the sale of Israeli businesses ($8,890 thousand), with the operating loss decreasing due to the non-recurrence of a $66,367 thousand goodwill impairment charge in the prior year, despite a $28,500 thousand charge for the Resolution and Plea Agreements[196][197] Liquidity and Capital Resources Inotiv's liquidity is challenged, with cash at $14,434 thousand as of June 30, 2024, raising substantial doubt about its going concern ability due to potential debt covenant non-compliance, necessitating cost optimization and credit agreement amendments - As of June 30, 2024, the company had $14,434 thousand in cash and cash equivalents and access to a $15,000 thousand revolving credit facility, with a $12,000 thousand balance outstanding as of the report date[205] - The company's ability to continue as a going concern is subject to substantial doubt due to potential non-compliance with financial covenants under its Credit Agreement, particularly if revenue and operating margins do not increase for the remainder of fiscal 2024[209][210] - Net cash used in operating activities was $4,433 thousand for the nine months ended June 30, 2024, a shift from $9,120 thousand provided in the prior year, driven by net loss and changes in operating assets and liabilities[213] - Net cash used in investing activities was $11,583 thousand, primarily for capital expenditures ($17,015 thousand) in facility improvements, site expansions, and technology, partially offset by $5,432 thousand from asset sales[215] - Net cash used in financing activities was $4,889 thousand, mainly due to principal payments on senior term notes and delayed draw term loans[217] - The company has entered into multiple amendments (First, Second, Third, Fourth, Fifth, and Sixth) to its Credit Agreement to manage liquidity, address NHP-related issues, and adjust financial covenants[222][223][240][244][245][326] - The Sixth Amendment (August 7, 2024) waives financial covenant tests for June 30, 2024, and sets new weekly minimum liquidity requirements[326] Item 3 - Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate risk, with a one-percentage-point increase estimated to reduce net earnings by $2.7 million pre-tax, and foreign currency exchange rate risk, where a 10% change could impact cash by $0.5 million and revenue by $5.6 million - A one-percentage-point increase in interest rates would result in an estimated $2.7 million pre-tax reduction in net earnings over a one-year period[261] - The company has exposure to foreign currency exchange rate fluctuations, with principal functional currencies being the Euro, British Pound, and Israeli Shekel (in fiscal year 2023)[262] - A hypothetical 10% change in foreign exchange rates would change the June 30, 2024 cash balance by approximately $0.5 million and revenue by approximately $5.6 million for the nine months ended June 30, 2024[263] Item 4 - Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of June 30, 2024, due to material weaknesses in internal control over financial reporting, including ineffective ITGCs and inadequate control design and testing processes, with ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of June 30, 2024, due to material weaknesses in internal control over financial reporting[265] - Material weaknesses include ineffective ITGCs for relevant financial applications (user access, segregation of duties, program change management) and an inadequate process for designing and testing internal control operating effectiveness, including insufficient management oversight and personnel[267] - Remediation efforts include hiring additional accounting and IT personnel, implementing an internal team for control oversight, improving ITGC consistency, and enhancing formal accounting and IT policies and procedures[268] - The material weaknesses are not considered remediated until applicable controls operate for a sufficient period and are tested as effective[269] PART II - OTHER INFORMATION Item 1 - Legal Proceedings This section incorporates by reference the detailed information on legal proceedings from Note 14 of the unaudited condensed consolidated financial statements - Information pertaining to legal proceedings is incorporated by reference from Note 14 to the unaudited condensed consolidated financial statements[271] Item 1A - Risk Factors The company faces significant risks, including substantial doubt about its going concern ability due to financial covenant non-compliance and decreased NHP sales, high indebtedness, restrictive credit agreement covenants, dependence on key clients, reliance on volatile pharmaceutical and biotechnology industries, and ongoing legal and regulatory challenges - The company has identified conditions that raise substantial doubt about its ability to continue as a going concern, primarily due to potential non-compliance with financial covenants under its Credit Agreement[274][276][278] - The RMS segment's revenue decreased by $49,143 thousand in the three months ended June 30, 2024, primarily due to lower NHP-related product and service revenue, adversely affecting financial condition[280] - Significant additional indebtedness may impair the company's ability to raise further capital or service its debt, with potential for acceleration of loans if financial covenants are not met[282][283][287][290][294] - Dependence on NHP imports from outside the U.S., particularly from Southeast Asia, and related legal issues, have adversely affected the business, leading to supply constraints, increased pricing, and reduced sales volumes[298][299][300][301] - The company relies on a limited number of key clients, and the loss of one or more could materially and adversely affect operating results, as most clients do not have long-term contracts[312][313][314] - The business is substantially dependent on the pharmaceutical and biotechnology industries, whose research and development expenditures and funding levels directly impact demand for the company's products and services[315][316][317][318] - The company is involved in legal proceedings (e.g., class action, derivative lawsuits) and subject to regulatory inspections and enforcement actions (e.g., FDA, USDA, SEC), which could lead to penalties, fines, and harm to reputation[302][304][305][306][307][308][309][310][311] - The company's share price has been and may continue to be volatile due to various factors, including financial performance, regulatory compliance, market conditions, and ongoing litigation[320][321] Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - This item is not applicable[322] Item 3 - Defaults Upon Senior Securities This item is not applicable for the reporting period - This item is not applicable[323] Item 4 - Mine Safety Disclosures This item is not applicable for the reporting period - This item is not applicable[323] Item 5 - Other Information This section details recent equity awards granted to executive officers and non-employee directors under the 2024 Equity Incentive Plan, effective August 10, 2024, and further discloses the Sixth Amendment to the Credit Agreement - No directors or officers adopted or terminated Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2024[323] - Equity awards were approved under the 2024 Equity Incentive Plan, to be granted on August 10, 2024, including Restricted Stock Units (RSUs) and stock options for Robert W. Leasure, Jr. (CEO), Beth A. Taylor (CFO), John E. Sagartz (CSO), non-employee directors, and other employees[324][325] - The Sixth Amendment to the Credit Agreement, entered into on August 7, 2024, waives financial covenant tests for the fiscal quarter ended June 30, 2024, and establishes new weekly liquidity reporting and minimum liquidity requirements[326] Item 6 - Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including amendments to agreements, articles of incorporation, bylaws, resolution and plea agreements, credit agreement amendments, equity award agreements, and certifications - The exhibits include Amendment No. 1 to Stock Purchase Agreement, Second Amended and Restated Articles of Incorporation, Third Amended and Restated Bylaws, Resolution Agreement, Plea Agreement, Fourth, Fifth, and Sixth Amendments to Credit Agreement, various equity award agreements, and certifications of principal executive and financial officers[330] Signatures The report is duly signed on behalf of Inotiv, Inc. by Robert W. Leasure (President and Chief Executive Officer), Beth A. Taylor (Chief Financial Officer and Senior Vice President - Finance), and Brennan Freeman (Vice President of Finance and Corporate Controller) on August 8, 2024 - The report is signed by Robert W. Leasure (President and Chief Executive Officer), Beth A. Taylor (Chief Financial Officer and Senior Vice President - Finance), and Brennan Freeman (Vice President of Finance and Corporate Controller) on August 8, 2024[331]