Inotiv(NOTV) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The company presents its unaudited condensed consolidated financial statements, including balance sheets, operations, cash flows, and key accounting notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Total Assets | $868,666 | $962,900 | | Cash and cash equivalents | $24,596 | $18,515 | | Goodwill | $94,286 | $157,825 | | Total Liabilities | $596,031 | $603,134 | | Long-term debt, less current portion | $370,040 | $330,677 | | Total Shareholders' Equity | $272,635 | $359,766 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $151,463 | $140,313 | $274,217 | $224,524 | | Operating (Loss) Income | $(2,125) | $7,868 | $(92,703) | $(25,773) | | Goodwill Impairment Loss | $0 | $0 | $66,367 | $0 | | Consolidated Net Loss | $(9,629) | $(6,664) | $(96,561) | $(90,075) | | Net Loss per Share (Basic & Diluted) | $(0.39) | $(0.24) | $(3.79) | $(3.84) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,426 | $4,027 | | Net cash used in investing activities | $(16,564) | $(303,621) | | Net cash provided by financing activities | $17,224 | $190,531 | | Net increase (decrease) in cash | $7,138 | $(109,455) | Note 1. Description of the Business and Basis of Presentation The company details its CRO operations and the significant liquidity impact from the temporary suspension of Cambodian NHP sales - The company operates through two segments: Discovery and Safety Assessment (DSA) and Research Models and Services (RMS), the latter significantly expanded by the November 2021 acquisition of Envigo[23][24][25] - A November 16, 2022 event involving criminal charges against the company's principal NHP supplier led to a temporary halt in selling Cambodian NHPs, which accounted for approximately $140 million of revenue in fiscal 2022[26][28] - The NHP issue triggered a material adverse event clause in the company's credit agreement, limiting its ability to draw on its revolving credit facility, which was subsequently amended in January 2023[29] - To improve liquidity, the company is executing a site optimization strategy, including the closure of facilities in Cumberland (VA), Dublin (VA), Boyertown (PA), Haslett (MI), and planned closures in Europe[30] Note 3. Segment and Geographic Information This note provides a financial breakdown by segment and geography, highlighting a significant operating loss in the RMS segment Segment Operating Income (Loss) (in thousands) | Segment | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | DSA | $1,924 | $3,752 | $4,296 | $9,794 | | RMS | $12,725 | $22,562 | $(58,547) | $22,642 | | Unallocated Corporate | $(16,774) | $(18,446) | $(38,452) | $(58,209) | | Total Operating (Loss) Income | $(2,125) | $7,868 | $(92,703) | $(25,773) | Revenue by Geography (in thousands) | Region | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | United States | $228,989 | $190,335 | | Netherlands | $26,744 | $18,655 | | Other | $18,484 | $15,534 | | Total | $274,217 | $224,524 | Note 4. Business Combinations The company details several strategic acquisitions, most notably Envigo, which established the RMS reportable segment - The acquisition of Envigo on November 5, 2021, was a transformative deal with aggregate consideration including $217.8 million in cash and 8.25 million common shares valued at $439.6 million, establishing the RMS segment[55] - Several other strategic acquisitions were completed to bolster capabilities, including Plato BioPharma (DSA), Integrated Laboratory Systems (DSA), Robinson Services (RMS), and Orient BioResource Center (RMS)[50][63][67][72] Note 5. Goodwill and Intangible Assets A goodwill impairment loss of $66.4 million was recorded in the RMS segment due to uncertainty surrounding NHP imports - A goodwill impairment loss of $66,367 thousand was recorded in the RMS segment during the six months ended March 31, 2023[89] - The impairment was triggered by the November 16, 2022 event related to Cambodian NHP imports, which created uncertainty and led to a decrease in the company's stock price[89] - As of March 31, 2023, the remaining goodwill balance of $94,286 thousand is entirely allocated to the DSA segment[89] Note 6. Debt The company's debt structure and recent credit agreement amendments, which imposed stricter covenants, are detailed Long-Term Debt Composition (in thousands) | Debt Instrument | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Convertible Senior Notes | $107,729 | $104,965 | | Term Loan Facility, DDTL and Incremental Term Loans | $273,188 | $238,200 | | Seller Notes & Payables | $5,401 | $6,442 | | Total Long-Term Debt (net) | $370,040 | $330,677 | - The company executed the Second and Third Amendments to its Credit Agreement on December 29, 2022, and January 9, 2023, respectively, to address the material adverse event triggered by the NHP issue[96][112][117] - The Third Amendment allows borrowing under the revolver for operational expenses but imposes higher interest rates (e.g., SOFR + 6.75% for term loans) and restricts activities like acquisitions and investments[117][118][120] Note 10. Restructuring and Assets Held for Sale The company outlines its ongoing site optimization plan, including completed and planned facility closures and assets held for sale - The company has an ongoing site consolidation strategy, with closures completed at Cumberland, Dublin, Boyertown, and Haslett facilities[148][150][154] - Future closures are planned for Gannat, Blackthorn, and the RMS St. Louis facilities, expected to be completed by June 2023 and June 2024[153] Assets and Liabilities Held for Sale (in thousands) | Category | March 31, 2023 | | :--- | :--- | | Total assets held for sale | $7,270 | | Total liabilities held for sale | $2,101 | | Net assets held for sale | $5,169 | Note 14. Contingencies Significant legal and regulatory challenges are outlined, including class action lawsuits and government investigations - The company is a defendant in a putative securities class action lawsuit alleging violations of the Securities Exchange Act related to the Envigo acquisition and NHP business[180] - Multiple shareholder derivative lawsuits have been filed, asserting claims for breach of fiduciary duty, gross mismanagement, and waste of corporate assets arising from the same issues[182][183][184] - The company is subject to ongoing government investigations, including grand jury subpoenas from the U.S. Attorney's Office for the Southern District of Florida regarding NHP importation[191][193][194] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, focusing on the impact of the NHP supplier issue and the company's strategic response Results of Operations Revenue grew 22.1% year-over-year, but a significant goodwill impairment led to a consolidated net loss of $96.6 million Six Months Ended March 31, 2023 vs 2022 (in millions) | Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $274.2 | $224.5 | $49.7 | 22.1% | | DSA Revenue | $88.1 | $71.9 | $16.2 | 22.5% | | RMS Revenue | $186.1 | $152.6 | $33.5 | 22.0% | | Consolidated Net Loss | $(96.6) | $(90.1) | $(6.5) | 7.2% | - The RMS segment recorded an operating loss of $(58.5) million for the six months ended March 31, 2023, compared to operating income of $22.6 million in the prior year, primarily due to a $66.4 million non-cash goodwill impairment charge[233][234] - The DSA segment's operating income decreased by 56.1% to $4.3 million for the six-month period, impacted by higher costs from laboratory capacity investments and recruitment of scientists[230][231] Liquidity and Capital Resources The company details its liquidity position and measures taken to ensure sufficient funding for the next twelve months - Cash and cash equivalents stood at $24.6 million at March 31, 2023, compared to $18.5 million at September 30, 2022[240] - The company drew its $35.0 million delayed draw term loan (Additional DDTL) on October 12, 2022, to repay its revolver and fund capital expenditures[251] - Management believes existing cash, cash from operations, and cost-saving measures will be sufficient to fund operations and comply with debt covenants for at least the next twelve months[214] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are identified as interest rate fluctuations and foreign currency exchange rate volatility - 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[298] - A hypothetical 10% change in foreign exchange rates would alter the March 31, 2023 cash balance by approximately $1.0 million and revenue for the six-month period by approximately $4.5 million[301] Item 4. Controls and Procedures Management concluded that disclosure controls were not effective due to material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to existing material weaknesses[303] - Material weaknesses identified include ineffective IT general controls (user access, change management) and an inadequate process for designing and monitoring internal controls over financial reporting[305][306] - Remediation efforts are ongoing, including hiring additional personnel, improving IT procedures, and enhancing the overall control environment[307] PART II OTHER INFORMATION Item 1. Legal Proceedings This section references Note 14 for details on legal matters, including lawsuits and government investigations - Information regarding legal proceedings is incorporated by reference from Note 14 to the condensed consolidated financial statements[310] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since the last Annual Report on Form 10-K - There have been no material changes in the company's risk factors since the filing of its Annual Report on Form 10-K for the fiscal year ended September 30, 2022[311]