Inotiv(US:NOTV)2021-12-21 22:21PART I Business Inotiv, Inc. provides nonclinical and analytical drug discovery and development services, significantly expanding its scope and market position through strategic acquisitions in fiscal year 2021, notably Envigo * Inotiv operates as a contract research organization (CRO) specializing in nonclinical and analytical drug discovery and development services, also selling analytical instruments to the pharmaceutical and research industries9 Fiscal 2021 Segment Revenue | Segment | FY 2021 Revenue (in millions) | | :--- | :--- | | Contract Research Services | $85.8 | | Research Products | $3.8 | * The company pursued an aggressive growth strategy through multiple acquisitions in fiscal 2021, including HistoTox Labs, Bolder BioPATH, BioReliance assets, and Gateway Pharmacology, culminating in the Envigo acquisition closing in November 2021151617 * The transformative acquisition of Envigo, a major provider of research models and services, significantly expanded the company's business scope and market position21102 Acquisition Activity and New Service Offerings In fiscal 2021 and early 2022, Inotiv pursued significant growth through multiple acquisitions, including Envigo, to expand service offerings, alongside internal investments in new service development Key Acquisitions in FY2021 and Early FY2022 | Acquired Company/Assets | Date | Specialization | Consideration Highlights | | :--- | :--- | :--- | :--- | | HistoTox Labs, Inc. | Apr 30, 2021 | Histology, pathology, image analysis | ~$22.4 million cash | | Bolder BioPATH, Inc. | May 3, 2021 | In vivo autoimmune/inflammation models | ~$17.5 million cash, 1.59 million shares, $1.5 million seller notes | | BioReliance Corp. (assets) | Jul 9, 2021 | Genetic toxicology services | $175K cash, 10% royalty on net sales | | Gateway Pharmacology Labs | Aug 2, 2021 | DMPK, in vitro pharmacology/toxicology | ~$1.7 million cash, 45,323 shares | | Envigo RMS Holding Corp. | Nov 5, 2021 | Research models, diets, bedding | ~$271 million cash, 9.04 million shares | | Plato BioPharma, Inc. | Oct 4, 2021 | In vivo pharmacology (cardiovascular, renal, etc.) | ~$10 million cash, 57,587 shares, $3 million notes | * The company significantly invested in new internal service offerings, with spending increasing from $333 thousand in FY2020 to $1,477 thousand in FY2021, covering areas like clinical pathology and biotherapeutics23 Company Services and Products Inotiv operates two segments: Contract Research Services, offering nonclinical and analytical services ($85.8 million in FY2021), and Research Products, selling analytical instruments and in vivo sampling systems ($3.8 million in FY2021) * The Contract Research Services segment provides comprehensive drug development support, including analytical method development, DMPK testing, stability testing, in vivo pharmacology, non-clinical toxicology, and archiving services54 * The Research Products segment expedites preclinical screening via Analytical Products (liquid chromatography and electrochemical instruments) and In vivo Sampling Products (Culex® automated systems)5659 Competition and Government Regulation Inotiv competes with other CROs based on quality and expertise, operating under extensive federal, state, and local regulations including FDA GLP/GMP and USDA Animal Welfare Act, where compliance is critical * Key competitors in the CRO services space include large organizations like Covance (LabCorp), Charles River Laboratories, and WuXi Biologics, with competition based on regulatory record, quality, scientific expertise, and price6869 * The company's operations are heavily regulated by agencies like the FDA and USDA, requiring adherence to standards such as GLP, GMP, and the Animal Welfare Act to ensure data integrity and humane animal treatment737779 * The company manages controlled and hazardous substances, complying with regulations from the DEA, EPA, and DOT, while also adhering to workplace safety standards from OSHA and patient privacy rules under HIPAA838489 Envigo Business Overview Post-acquisition, Envigo operates as a wholly owned subsidiary, providing research models, diets, and services globally, driven by increased R&D spending and demand for specialized models, while adhering to stringent animal welfare regulations * Envigo is a major commercial provider of research models, offering over 130 strains of animals, Teklad brand diets, and associated services to the global research community103104 * Market trends benefiting Envigo include rising biopharmaceutical R&D spending, strong demand for Non-Human Primates (NHPs) for biologics safety testing, and increasing demand for specific, genetically-altered animal models107108109 * Envigo's Research Models and Services (RMS) business comprises Research Models (small and large animals), Diets and Bedding (Teklad), and Research Model Services (surgical modifications, contract breeding)115116123 * As of September 30, 2021, Envigo had approximately 1,200 employees, with 65% in North America, and is committed to animal welfare standards and the '3Rs' (Replacement, Reduction, and Refinement)139147 * The COVID-19 pandemic impacted Envigo's operations, notably disrupting the supply of NHPs from China, though alternative sources have been secured164165 Risk Factors The company faces numerous risks including COVID-19 impacts, industry and client dependence, operational challenges, financial vulnerabilities from increased leverage, and significant integration risks from the Envigo acquisition * The COVID-19 pandemic has adversely affected and may continue to impact business operations, product demand, and financial condition, with a $2.0 million impact from program delays in fiscal 2020181182 * The business is highly dependent on R&D spending by pharmaceutical and biotech companies, with five clients representing 20.5% of total sales in FY2021, posing a material risk if a major client is lost186188 * Operational risks include intense competition in the CRO industry, client contracts terminable on short notice (typically 30 days), and financial exposure from underpricing fixed-price contracts or service errors191192193 * Financial and control risks include significantly increased debt from acquisitions and a material weakness in internal control over financial reporting related to tax accounting for acquisitions, leading to a Q3 2021 financial restatement198203204 * The Envigo acquisition introduces significant integration challenges, increased exposure to animal rights activists, and regulatory scrutiny, with one Envigo facility currently under a formal USDA investigation235240241 Properties As of September 30, 2021, Inotiv operated from multiple owned and leased facilities across the United States, including key sites for executive offices and contract research services, which are deemed adequate for current operations Key Operating Locations as of September 30, 2021 | Location | Key Operations | Ownership Status | | :--- | :--- | :--- | | West Lafayette, IN | Principal executive offices, CRO services, product manufacturing | Partially owned, partially leased | | Evansville, IN | Nonclinical toxicology testing | Owned | | Maryland Heights, MO | CRO services, animal model testing | Owned (purchased May 2021) | | Gaithersburg, MD | CRO services | Leased | | Fort Collins, CO | CRO services (pharma & medical device) | Owned | | Boulder, CO | CRO services | Leased | Legal Proceedings The company is involved in routine claims and proceedings but does not consider itself a party to any material pending legal proceedings as of the report date * As of the report date, the company is not party to any legal proceedings considered material263 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common shares trade on NASDAQ under 'NOTV', with 476 stockholders of record as of December 1, 2021, and no cash dividends paid or anticipated in the foreseeable future * The company's common stock is listed on the NASDAQ Capital Market under the ticker symbol 'NOTV'265 * As of December 1, 2021, there were 476 stockholders of record266 * The company did not pay cash dividends in FY2021 or FY2020 and does not plan to in the foreseeable future267 Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2021, Inotiv's revenue grew 48.2% to $89.6 million, driven by organic growth and acquisitions, leading to a 65.4% increase in gross profit but an operating loss due to higher expenses, while net income was boosted by non-operating gains and cash significantly increased to $156.9 million from convertible notes Results of Operations In FY2021, total revenue grew 48.2% to $89.6 million, driven by Services segment growth and acquisitions, leading to a 65.4% increase in gross profit but a wider operating loss of $5.6 million due to higher expenses, while net income reached $10.9 million primarily from PPP loan forgiveness and convertible note remeasurement gains Consolidated Statement of Operations Summary (FY2021 vs. FY2020) | Metric (in thousands) | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $89,605 | $60,469 | 48.2% | | Gross Profit | $30,156 | $18,237 | 65.4% | | Operating Expenses | $35,774 | $21,300 | 68.0% | | Operating Loss | ($5,618) | ($3,063) | 83.4% | | Net Income (Loss) | $10,895 | ($4,685) | N/A | Revenue by Segment (FY2021 vs. FY2020) | Segment (in thousands) | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Services Revenue | $85,832 | $57,177 | 50.1% | | Products Revenue | $3,773 | $3,292 | 14.6% | * The 78.9% increase in general and administrative expenses to $30.4 million was primarily driven by transaction costs for multiple acquisitions and investments in infrastructure to support growth308 * Other income of $13.4 million in FY2021 was primarily due to an $8.36 million non-cash gain from the fair value remeasurement of convertible senior notes and a $4.85 million gain from PPP loan forgiveness309 Liquidity and Capital Resources As of September 30, 2021, the company's liquidity significantly strengthened, with total cash reaching $156.9 million, primarily from a $140 million convertible senior notes issuance to fund the Envigo acquisition, while operating cash flow improved to $10.7 million and investing activities used $54.1 million for acquisitions and capital expenditures Cash and Liquidity Position (as of Sept 30) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $138,924 | $1,406 | | Restricted cash | $18,000 | $0 | | Total Cash | $156,924 | $1,406 | Cash Flow Summary (Year Ended Sept 30) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from Operating Activities | $10,740 | $1,290 | | Net cash used in Investing Activities | ($54,054) | ($10,131) | | Net cash from Financing Activities | $198,832 | $9,641 | * In September 2021, the company issued $140 million in 3.25% Convertible Senior Notes due 2027 to fund a portion of the Envigo acquisition's cash purchase price329 * In July 2021, the company received forgiveness for $4.85 million of its $5.05 million Paycheck Protection Program (PPP) loan328 Critical Accounting Policies and Significant Judgments and Estimates The company's critical accounting policies involve significant judgment, particularly in revenue recognition for fixed-fee services, annual goodwill impairment testing (with goodwill increasing to $51.9 million in FY2021), and fair value measurement of financial instruments like convertible senior notes * Revenue Recognition: For fixed-fee service contracts, revenue is recognized over time using a cost-to-cost input method, requiring estimation of total direct project costs336 * Goodwill: Goodwill is tested annually for impairment, with its balance increasing from $4.4 million in FY2020 to $51.9 million in FY2021 primarily due to acquisitions, and no impairment was found as of September 30, 2021342344 * Fair Value of Financial Instruments: The conversion feature of the convertible senior notes is treated as an embedded derivative, measured at fair value using a Black-Scholes model, resulting in an $8.36 million non-cash gain in Q4 2021405407 Financial Statements and Supplementary Data This section presents Inotiv, Inc.'s audited consolidated financial statements for fiscal years 2021 and 2020, including balance sheets, statements of operations, cash flows, and detailed notes covering accounting policies, business combinations, debt, and significant subsequent events like the Envigo acquisition Consolidated Financial Statements FY2021 consolidated financial statements reflect significant growth, with total assets reaching $321.9 million and total liabilities $216.7 million due to acquisitions and financing, resulting in a net income of $10.9 million compared to a prior year loss Consolidated Balance Sheet Highlights (as of Sept 30) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $189,019 | $15,300 | | Goodwill | $51,927 | $4,368 | | Total Assets | $321,856 | $61,593 | | Total Current Liabilities | $55,109 | $31,642 | | Long-Term Debt | $154,209 | $18,826 | | Total Liabilities | $216,728 | $53,997 | | Total Shareholders' Equity | $105,128 | $7,596 | Consolidated Statement of Operations Highlights (Year Ended Sept 30) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $89,605 | $60,469 | | Gross Profit | $30,156 | $18,237 | | Operating Loss | ($5,618) | ($3,063) | | Net Income (Loss) | $10,895 | ($4,685) | | Diluted EPS | $0.19 | ($0.43) | Notes to Consolidated Financial Statements The notes detail accounting policies and financial results, including business combinations in FY2021 that increased goodwill, the $140 million convertible senior notes issuance, and significant subsequent events like the transformative Envigo acquisition funded by new debt * Business Combinations (Note 12): Several FY2021 acquisitions, including HistoTox Labs, Bolder BioPATH, and Gateway, resulted in significant goodwill recognition ($9.1 million for HistoTox, $36.2 million for Bolder) and intangible assets from preliminary purchase price allocations490500510 * Debt (Note 7): Total long-term debt substantially increased to $154.2 million as of September 30, 2021, from $18.8 million in 2020, primarily due to the issuance of $140 million in 3.25% Convertible Senior Notes due 2027456467 * Subsequent Events (Note 16): Post-fiscal year-end, the company acquired Plato BioPharma (Oct 2021) and Envigo (Nov 2021), with the Envigo acquisition involving approximately $218 million in cash and 8.25 million Inotiv common shares, financed partly by a new $165 million term loan facility536542549 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of September 30, 2021, due to a material weakness in tax accounting for acquisitions, leading to a Q3 2021 restatement, with a remediation plan outlined * Management determined that disclosure controls and procedures were not effective as of September 30, 2021574 * A material weakness in internal control over financial reporting existed due to an error in accounting for tax attributes of an acquisition, leading to the restatement of Q3 2021 financial statements575 * Management plans to remediate the material weakness by enhancing processes, improving access to accounting literature, increasing communication with third-party professionals, and re-assessing external tax advisors576 PART III Directors, Executive Officers and Corporate Governance This section details the company's executive officers and board of directors, noting the board's expansion and new appointments following the Envigo acquisition, governed by a Shareholders Agreement, and the adoption of a Code of Business Conduct and Ethics * Executive officers include Robert W. Leasure, Jr. (President & CEO), John E. Sagartz (Chief Strategy Officer), and Beth A. Taylor (CFO)167168170 * A Shareholders Agreement, established with the Envigo acquisition, grants certain former Envigo shareholders the right to designate two board nominees, leading to the appointments of Nigel Brown and Scott Cragg590591593 * The company maintains a Code of Business Conduct and Ethics applicable to all directors, officers, and employees, available on its website598 Executive Compensation Fiscal 2021 executive compensation for Named Executive Officers included base salary, non-equity incentives, and stock awards, with CEO Robert W. Leasure, Jr.'s total compensation at $1.31 million, while non-employee directors received cash retainers and stock awards Fiscal 2021 Summary Compensation Table for Named Executive Officers | Name | Position | Salary ($) | Bonus ($) | Nonequity Incentive ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Robert W. Leasure, Jr. | President & CEO | 450,751 | 100,000 | 240,000 | 508,836 | 1,306,233 | | John E. Sagartz | Chief Strategy Officer | 322,674 | 56,000 | - | 88,006 | 474,907 | | Beth A. Taylor | CFO | 273,635 | 56,000 | - | 63,753 | 401,586 | * CEO Robert Leasure's 2021 employment agreement provides for an annual base salary of $480,000 and an annual incentive opportunity of up to 50% of his base salary621 * Non-employee directors receive an annual retainer of $55,000 for board membership, with additional retainers for serving as Chairman or on committees606 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 1, 2021, the company's directors and executive officers collectively owned 10.1% of common shares, with key beneficial owners including P2 Capital Partners, LLC (12.1%), Andrew H. Baker (9.5%), and Peter T. Kissinger, Ph.D., and Candice B. Kissinger (each 5.3%) Security Ownership as of December 1, 2021 | Owner | Percent of Class | | :--- | :--- | | P2 Capital Partners, LLC | 12.1% | | Andrew H. Baker | 9.5% | | Peter T. Kissinger, Ph.D. | 5.3% | | Candice B. Kissinger | 5.3% | | Directors and Officers as a Group (15 persons) | 10.1% | Certain Relationships and Related Transactions, and Director Independence The Board has determined five directors are independent, and the company disclosed related-party transactions including consulting fees paid to a firm managed by the CEO and a facility purchase from an entity owned by executives * The Board of Directors has determined that Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, Nigel Brown, and Scott Cragg are independent directors649 * The company paid consulting fees of $86,000 in fiscal 2021 to LS Associates LLC, a firm partially owned by CEO Robert W. Leasure Jr651 * In May 2021, the company purchased a building for $4.7 million from SWL Properties, LLC, an entity owned by executives including Dr. John E. Sagartz, having previously paid $260,000 in rent to SWL in fiscal 2021652 Principal Accounting Fees and Services The company's independent registered public accounting firm is RSM US LLP, to whom total fees of $929,994 were paid in fiscal year 2021 for audit, audit-related, and tax services, all pre-approved by the Audit Committee Fees Paid to Independent Registered Public Accounting Firm (RSM US LLP) | Fee Type | FY 2021 ($) | FY 2020 ($) | | :--- | :--- | :--- | | Audit Fees | 372,000 | 415,000 | | Audit-Related Fees | 514,589 | 131,000 | | Tax Fees | 43,405 | 0 | | Total Fees | $929,994 | $546,000 | PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K report, including financial statements and an index of all exhibits such as asset purchase agreements, articles of incorporation, and debt agreements * This section contains the index to the consolidated financial statements and a list of all exhibits filed with the annual report660661