Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended December 31, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to _____________.

Commission File Number 000-23357

INOTIV, INC.

(Exact name of the registrant as specified in its charter)



INDIANA (State or other jurisdiction of incorporation or organization)		35-1345024 (I.R.S. Employer Identification No.)

2701 KENT AVENUE WEST LAFAYETTE, INDIANA (Address of principal executive offices)		47906 (Zip code)

(765) 463-4527

(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
Common Shares	NOTV	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ⌧ NO ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ⌧ NO ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ◻	Accelerated filer ◻	Non-accelerated filer ⌧	Smaller Reporting Company ☒	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of February 3, 2023, 25,631,236 of the registrant's common shares were outstanding.

Table of Contents

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION

Item 1	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of December 31, 2022 (Unaudited) and September 30, 2022	4
	Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2022 and 2021 (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended December 31, 2022 and 2021 (Unaudited)	6
	Condensed Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest for the Three Months Ended December 31, 2022 and 2021 (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2022 and 2021 (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4	Controls and Procedures	46

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	47
Item 1A	Risk Factors	47
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3	Defaults Upon Senior Securities	47
Item 4	Mine Safety Disclosures	47
Item 5	Other Information	47
Item 6	Exhibits	47
	Signatures	49

Table of Contents

INOTIV, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


		December 31,		September 30,
	2022		2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	20,820	$	18,515
Restricted cash		—		465
Trade receivables and contract assets, net of allowances for credit losses of $7,292 and $6,268, respectively		74,587		100,073
Inventories, net		75,639		71,441
Prepaid expenses and other current assets		33,922		42,483
Assets held for sale		7,560		—
Total current assets		212,528		232,977

Property and equipment, net		187,952		186,199
Operating lease right-of-use assets, net		34,152		32,489
Goodwill		91,458		157,825
Other intangible assets, net		338,456		345,886
Other assets		6,513		7,524
Total assets	$	871,059	$	962,900

Liabilities, shareholders' equity and noncontrolling interest
Current liabilities:
Accounts payable	$	28,152	$	28,695
Accrued expenses and other liabilities		28,582		35,801
Revolving credit facility		—		15,000
Fees invoiced in advance		60,655		68,642
Current portion of long-term operating lease		8,475		7,982
Current portion of long-term debt		7,553		7,979
Liabilities held for sale		2,710		—
Total current liabilities		136,127		164,099
Long-term operating leases, net		26,240		24,854
Long-term debt, less current portion, net of debt issuance costs		365,643		330,677
Other long-term liabilities		6,073		6,477
Deferred tax liabilities, net		57,169		77,027
Total liabilities		591,252		603,134

Contingencies (Note 14)

Shareholders’ equity and noncontrolling interest:
Common shares, no par value:
Authorized 74,000,000 shares at December 31, 2022 and at September 30, 2022; 25,606,636 issued and outstanding at December 31, 2022 and 25,598,289 at September 30, 2022		6,363		6,362
Additional paid-in capital		709,856		707,787
Accumulated deficit		(435,209)		(348,277)
Accumulated other comprehensive loss		(206)		(5,500)
Total equity attributable to common shareholders		280,804		360,372
Noncontrolling interest		(997)		(606)
Total shareholders’ equity and noncontrolling interest		279,807		359,766
Total liabilities and shareholders’ equity and noncontrolling interest	$	871,059	$	962,900

The accompanying notes are an integral part of the condensed consolidated financial statements

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INOTIV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended
	December 31,
	2022		2021
Service revenue	$	50,048	$	38,176
Product revenue		72,706		46,035
Total revenue	$	122,754		84,211
Costs and expenses:
Cost of services provided (excluding amortization of intangible assets)		35,430		24,209
Cost of products sold (excluding amortization of intangible assets)		65,639		40,677
Selling		4,507		2,738
General and administrative		28,969		13,252
Amortization of intangible assets		8,781		3,396
Other operating expense		3,639		33,580
Goodwill impairment loss		66,367		—
Operating loss	$	(90,578)	$	(33,641)
Other (expense) income:
Interest expense		(10,450)		(4,828)
Other expense		(1,878)		(57,727)
Loss before income taxes	$	(102,906)	$	(96,196)
Income tax benefit		15,974		12,785
Consolidated net loss	$	(86,932)	$	(83,411)
Less: Net income (loss) attributable to noncontrolling interests		391		(364)
Net loss attributable to common shareholders	$	(87,323)	$	(83,047)

Loss per common share
Net loss attributable to common shareholders:
Basic and diluted	$	(3.41)	$	(3.93)

Weighted-average number of common shares outstanding:
Basic and diluted		25,603		21,124

The accompanying notes are an integral part of the condensed consolidated financial statements.

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INOTIV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)


	Three Months Ended
	December 31,
	2022		2021
Consolidated net loss	$	(86,932)	$	(83,411)
Foreign currency translation		5,107		247
Defined benefit plans:
Pension cost amortization		(54)		—
Actuarial gains (losses), net of tax		—		(110)
Foreign currency translation		241		—
Other comprehensive income, net of tax		5,294		137
Consolidated comprehensive loss		(81,638)		(83,274)
Less: Comprehensive income (loss) attributable to non-controlling interests		391		(364)
Comprehensive loss attributable to common stockholders	$	(82,029)	$	(83,638)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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INOTIV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST

(In thousands, except number of shares)

(Unaudited)



								Accumulated
				Additional				Other		Non-		Total
	Common Shares			paid-in		Accumulated		Comprehensive		Controlling		shareholders’
	Number	Amount		capital		deficit		(Loss) Income		Interests		equity
Balance at September 30, 2022	25,598,289	$	6,362	$	707,787	$	(348,277)	$	(5,500)	$	(606)	$	359,766
Consolidated net loss	—		—		—		(86,932)		—		(391)		(87,323)
Issuance of stock under employee stock plans	8,347		1		23		—		—		—		24
Stock-based compensation	—		—		2,046		—		—		—		2,046
Pension cost amortization	—		—		—		—		(54)		—		(54)
Foreign currency translation adjustment	—		—		—		—		5,348		—		5,348
Balance at December 31, 2022	25,606,636	$	6,363	$	709,856	$	(435,209)	$	(206)	$	(997)	$	279,807



								Accumulated
				Additional				Other		Non-		Total
	Common Shares			paid-in		Accumulated		Comprehensive		Controlling		shareholders’
	Number	Amount		capital		deficit		(Loss) Income		Interests		equity
Balance at September 30, 2021	15,931,485	$	3,945	$	112,198	$	(11,015)	$	—	$	—	$	105,128
Consolidated net (loss) income	—		—		—		(83,411)		—		364		(83,047)
Stock issued in acquisitions	8,374,138		2,094		459,289		—		—		—		461,383
Noncontrolling interest related to Envigo acquisition			—		—		—		—		(983)		(983)
Issuance of stock under employee stock plans	42,971		11		38		—		—		—		49
Stock-based compensation	—		—		19,160		—		—		—		19,160
Pension cost amortization	—		—		—		—		(110)		—		(110)
Foreign currency translation adjustment	—		—		—		—		247		—		247
Reclassification of convertible note embedded derivative to equity (Note 6)	—		—		88,576		—		—		—		88,576
Balance at December 31, 2021	24,348,594	$	6,050	$	679,261	$	(94,426)	$	137	$	(619)	$	590,403

The accompanying notes are an integral part of the condensed consolidated financial statements.

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INOTIV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	December 31,
	2022		2021
Operating activities:
Consolidated net loss	$	(86,932)	$	(83,411)
Adjustments to reconcile net loss to net cash used in operating activities, net of acquisitions:
Depreciation and amortization		13,263		6,035
Employee stock compensation expense		2,046		19,159
Changes in deferred taxes		(20,123)		(14,281)
Provision for doubtful accounts		1,078		—
Amortization of debt issuance costs and original issue discount		732		—
Noncash interest and accretion expense		1,446		—
Loss on fair value remeasurement of embedded derivative		—		56,714
Other non-cash operating activities		1,028		1,730
Goodwill impairment loss		66,367		—
Loss on debt extinguishment		—		877
Non-cash amortization of inventory fair value step-up		244		3,668
Changes in operating assets and liabilities:
Trade receivables and contract assets		21,999		1,517
Inventories		(4,204)		(3,393)
Prepaid expenses and other current assets		7,810		(1,432)
Operating lease right-of-use assets and liabilities, net		266		(229)
Accounts payable		1,169		4,491
Accrued expenses and other liabilities		(5,548)		(10,974)
Fees invoiced in advance		(7,796)		10,806
Other asset and liabilities, net		(255)		7,580
Net cash used in operating activities		(7,410)		(1,143)

Investing activities:
Capital expenditures		(8,369)		(5,655)
Proceeds from sale of equipment		211		284
Cash paid in acquisitions		—		(227,022)
Net cash used in investing activities		(8,158)		(232,393)

Financing activities:
Payments of long-term debt		—		(37,747)
Payments of debt issuance costs		—		(7,102)
Payments on promissory notes		(952)		(167)
Payments on revolving credit facility		(15,000)		—
Payments on senior term notes and delayed draw term loans		(688)		—
Borrowings on construction loan		—		1,184
Borrowings on senior term notes and delayed draw term loans		35,000		—
Proceeds from exercise of stock options		24		47
Proceeds from issuance of senior term notes		—		165,000
Payments on capex line of credit		—		(1,749)
Net cash provided by financing activities		18,384		119,466

Effect of exchange rate changes on cash and cash equivalents		593		—

Net increase (decrease) in cash and cash equivalents		3,409		(114,070)
Less: cash, cash equivalents, and restricted cash held for sale		(1,569)		—
Cash, cash equivalents, and restricted cash at beginning of period		18,980		156,924
Cash, cash equivalents, and restricted cash at end of period, net of cash, cash equivalents and restricted cash held for sale	$	20,820	$	42,854

Noncash financing activity:
Seller financed acquisition	$	—	$	3,000

Supplemental disclosure of cash flow information:
Cash paid for interest	$	8,491	$	1,351
Income taxes paid, net	$	2,268	$	163

The accompanying notes are an integral part of the condensed consolidated financial statements.

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INOTIV, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except share amounts, unless otherwise indicated)

(Unaudited)

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Inotiv, Inc. and its subsidiaries (“we,” “our,” “us,” the “Company,” and “Inotiv”) comprise a leading contract research organization (“CRO”) dedicated to providing nonclinical and analytical drug discovery and development services to the pharmaceutical and medical device industries and selling a range of research-quality animals and diets to the same industries as well as academia and government clients. Our products and services focus on bringing new drugs and medical devices through the discovery and preclinical phases of development, all while increasing efficiency, improving data, and reducing the cost of discovering and taking new drugs and medical devices to market. Inotiv is committed to supporting discovery and development objectives as well as helping researchers realize the full potential of their critical research and development projects, all while working together to build a healthier and safer world. We are dedicated to practicing high standards of laboratory animal care and welfare.

As a result of our strategic acquisition of Envigo RMS Holding Corp. (“Envigo”) in November 2021, which added a complementary research model platform, our full spectrum solutions now span two segments: Discovery and Safety Assessment (“DSA”) and Research Models and Services (“RMS”).

Through our DSA segment, we support the discovery, nonclinical development and clinical development needs of researchers and clinicians for primarily small molecule drug candidates, as well as biotherapeutics and biomedical devices. Our scientists have skills in analytical instrumentation development, chemistry, computer software development, histology, pathology, physiology, surgery, analytical chemistry, drug metabolism, pharmacokinetics, and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are companies whose scientists are engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research, from small start-up biotechnology companies to some of the largest global pharmaceutical companies.

Through our RMS segment, we offer access to a wide range of small and large research models for basic research and drug discovery and development, as well as specialized models for specific diseases and therapeutic areas. We combine deep animal husbandry expertise and expanded access to scientists across the discovery and preclinical continuum, which reduces nonclinical lead times and provides enhanced project delivery. In conjunction with our CRO business, we have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and provide access to innovative genetically engineered models and services solutions. Our principal clients include biopharmaceutical companies, CROs, and academic and government organizations.

Temporarily Suspended or Limited Operations

On November 16, 2022, the Company became aware that the U.S. Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) had criminally charged employees of the principal supplier of non-human primates (“NHPs”) to the Company, along with two Cambodian government officials, with conspiring to illegally import NHPs into the U.S. from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021 (the “November 16, 2022 event”). Also as previously disclosed, two of the Company’s subsidiaries, Orient BioResource Center, Inc. (“OBRC”) and Envigo Global Services, Inc. (“EGSI”), companies acquired by the Company on January 27, 2022 and November 5, 2021, respectively, had received grand jury subpoenas from USAO-SDFL requiring the production of documents and information related to their importation of NHPs into the U.S. The Company has been fully cooperating, and will continue to cooperate, with USAO-SDFL.

The Company has not been directed to refrain from selling the Cambodian NHPs in its possession in the U.S. However, due to the allegations contained in the indictment involving the supplier and the Cambodian government officials, the Company believed that it was prudent, at the time and through the date of Form 10-K filed on January 13, 2023, to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts evaluated what additionally could be done to satisfy itself that the NHPs in inventory from Cambodia can be reasonably determined to be purpose-bred. Historically, the Company has relied on the Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”) documentation and related processes and procedures, including release of each import by U.S. Fish and Wildlife Service. The Company has continued to sell NHPs from other suppliers. Subsequent to January 13, 2023, and through the date of this report, and after an internal analysis and review, the Company has shipped a select number of its Cambodian NHP inventory; however, the Company is not currently shipping Cambodian NHPs at the same volumes that it was prior to the November 16, 2022 event. The Company expects to establish new procedures before it will resume Cambodian NHP imports. The Company expects that future imports of NHPs from Cambodia will be dependent on

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working with third parties to establish additional procedures aiming at providing additional assurances that future NHP imports from Cambodia are purpose-bred.

Of the Company’s total revenue of $547,656 in the fiscal year ended September 30, 2022, approximately $140,000 was from NHPs that it had imported from Cambodia. Refer to the Liquidity section below and Note 5 – Goodwill and Intangible Assets for further discussion of impacts to the three months ended December 31, 2022, and expected future impacts.

Liquidity

As of December 31, 2022, the Company had cash and cash equivalents of approximately $20,820. The November 16, 2022 event and subsequent decision to refrain from selling or delivering Cambodian NHPs held in the U.S., triggered a material adverse event clause in our Credit Agreement resulting in, among other things, a limitation of the Company’s ability to draw on its revolving credit facility. The loss of access to the Company’s revolving credit facility and reduced liquidity resulting from the decision to refrain from selling Cambodian NHPs held in the U.S. resulted in reduced forecasted liquidity. As a result of these events, the Company took steps to improve its liquidity, which included negotiating an amendment to its Credit Agreement, which was executed on January 9, 2023, to reinstate its ability to borrow under its revolving credit facility. Without the amendment, the Company was at risk of not having the revolving credit facility available.

During the three months ended December 31, 2022, the Company announced the completion of the closure of the Cumberland and Dublin, Virginia facilities and announced further intended site optimizations plans for 2023 and 2024, including two U.S. facilities, which have been approved, and two non-U.S. facilities, Blackthorn, U.K. and Gannat, France, which were subject to a consultation and approval process in those countries. The site optimization for our Blackthorn, U.K. site remained subject to approval as of December 31, 2022 and through the date of this report. Subsequent to December 31, 2022, we completed the consultation and approval process in Gannat, France and will be relocating the operations of this facility to our recently updated Horst, Netherlands facility, which we expect to be completed by June 30, 2023. Further, the Company has communicated price increases that began in January 2023. The Company also took steps in reducing its 2023 budgeted capital expenditures and certain forecasted expenses, including a reduction of nonessential travel and employee-related expenses, among other efficiency-based reductions. As a result of the above measures, the Company believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and comply with minimum liquidity and financial covenant requirements under its debt covenants under its Credit Agreement, for at least the next twelve months. The forecasted operating cash flows include the shipping of the Company’s existing Cambodian NHP inventory. See Note 6 – Debt and Note 15 – Subsequent Events for further information about the Company’s existing credit facilities and requirements under its debt covenants. The Company’s liquidity needs and compliance with covenants depend, among other things, on the timing of NHP shipments and its ability to generate cash from operations.

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, 2022. In the opinion of management, the condensed consolidated financial statements for the three months ended December 31, 2022 and 2021 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of the Company’s financial position at December 31, 2022. The results of operations for the three months ended December 31, 2022 are not necessarily indicative of the results for the fiscal year ending September 30, 2023. Certain prior year amounts have been reclassified within the statement of cash flows for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgements that may affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. These include, but are not limited to, management estimates in the calculation and timing of revenue recognition, pension liabilities, deferred tax assets and liabilities and the related valuation allowance. Although estimates are based upon management’s best estimate using historical experience, current events, and actions, actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.

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Consolidation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company, including all subsidiaries and a variable interest entity (“VIE”) it consolidates in accordance with GAAP. The Company consolidates a VIE as a result of the Envigo acquisition. The VIE does not materially impact our net assets or net loss.

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.

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 the twelve months ended September 30, 2022.

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 months ended December 31, 2022 and 2021, one customer accounted for 21.7% and 20.7% of sales, respectively. During the the three months ended December 31, 2022 and 2021, no vendors accounted for more than 10% of cost of revenues.

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

DSA

The DSA segment generates service revenue through drug discovery and development services. The DSA segment generates product revenue through internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company’s BASi product line.

RMS

The RMS segment generates products revenue through the commercial production and sale of research models, diets and bedding and bioproducts. The RMS segment generates service revenue through Genetically Engineered Models and Services (GEMS), client-owned animal colony care, and health monitoring and diagnostics services related to research models.

Contract Assets and Liabilities from Contracts with Customers

The timing of revenue recognition, billings and cash collections results in billed receivables (trade receivables), contract assets (unbilled revenue), and contract liabilities (customer deposits and deferred revenue) on the condensed consolidated balance sheets. The following table provides information about contract assets (trade receivables and unbilled revenue, excluding allowances for credit losses), and fees invoiced in advance (customer deposits and deferred revenue):


	Balance at		Balance at
		December 31,	September 30,
	2022		2022
Contract Assets: Trade receivables	$	65,555	$	88,867
Contract Assets: Unbilled revenue		16,324		17,474
Contract liabilities: Customer deposits		30,509		39,222
Contract liabilities: Deferred revenue		30,146		29,420

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When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $2,710 and $2,647 of unpaid advanced client billings from both client receivables and deferred revenue in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2022 and September 30, 2022, respectively.

Changes in the contract asset and the contract liability balances during the three months ended December 31, 2022 include the following:

●

Changes in the time frame for a right for consideration to become unconditional – approximately 45% of unbilled revenue as of September 30, 2022, was billed during the three months ended December, 31 2022

●

Changes in the time frame for a performance obligation to be satisfied – approximately 30% of deferred revenue as of September 30, 2022, was recognized as revenue during the three months ended December 31, 2022.

3.SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information

During the three months ended December 31, 2022 and 2021, the RMS segment reported intersegment revenue of $1,125 and $320 to the DSA segment, respectively. The following tables present revenue and other financial information by reportable segment:


	Three Months Ended
	December 31,
	2022		2021
Revenue
DSA:
Service revenue	$	39,971	$	31,875
Product revenue		1,122		950
RMS:
Service revenue		10,077		6,301
Product revenue		71,584		45,085
	$	122,754	$	84,211

Operating Income (Loss)
DSA	$	2,372	$	6,042
RMS		(71,272)		80
Unallocated Corporate		(21,678)		(39,763)
	$	(90,578)	$	(33,641)

Interest expense		(10,450)		(4,828)
Other expense		(1,878)		(57,727)
Loss before income taxes	$	(102,906)	$	(96,196)


	Three Months Ended
	December 31,
	2022		2021
Depreciation and amortization:
DSA	$	3,980	$	2,544
RMS		9,283		3,491
	$	13,263	$	6,035

Capital expenditures:
DSA	$	3,294	$	2,986
RMS		5,075		2,669
	$	8,369	$	5,655

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Geographic Information

The following represents revenue originating in entities physically located in the identified geographic area:


	Three Months Ended
	December 31,
	2022		2021
United States	$	99,009	$	71,142
Netherlands		15,222		6,536
Other		8,523		6,533
	$	122,754	$	84,211

Long-lived assets shown below include property and equipment, net. The following represents long-lived assets where they are physically located:


	December 31,		September 30,
	2022		2022
United States	$	174,011	$	173,417
Netherlands		6,315		5,824
Other		7,626		6,958
	$	187,952	$	186,199

4.BUSINESS COMBINATIONS

The Company accounts for acquisitions in accordance with ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired, liabilities assumed and non-controlling interests to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense (benefit). ASC 805 requires that any excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.

Plato BioPharma Acquisition

Overview

On October 4, 2021, the Company completed the acquisition of Plato BioPharma, Inc. (“Plato”) to expand its market reach in early-stage drug discovery. Consideration for the Plato acquisition consisted of (i) $10,530 in cash, including working capital and subject to customary purchase price adjustments, (ii) 57,587 of the Company’s common shares valued at $1,776 using the closing price of the Company’s common shares on October 4, 2021 and (iii) seller notes to the former shareholder of Plato in an aggregate principal amount of $3,000. This business is reported as part of our DSA reportable segment.

The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:


	October 4, 2021
Assets acquired and liabilities assumed:
Cash		1,027
Trade receivables and contract assets		853
Prepaid expenses and other assets		133
Property and equipment		1,127
Operating lease right-of-use assets, net		2,272
Goodwill		9,279
Intangible assets		4,800
Accounts payable		(113)
Accrued expenses and other liabilities		(343)
Operating lease liabilities		(2,272)
Deferred tax liabilities		(1,457)
	$	15,306

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Property and equipment is mostly composed of lab equipment, furniture and fixtures, and computer equipment. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.

Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately eight years for customer relationships on a straight-line basis. The fair value of the customer relationships was determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.

Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.

Envigo RMS Holding Corp Acquisition

Overview

On November 5, 2021, the Company completed the acquisition of Envigo by merger of a wholly owned subsidiary of the Company with and into Envigo to expand its market reach in early-stage drug discovery. The aggregate consideration paid to the holders of outstanding capital stock in Envigo in the merger consisted of cash of $217,808, including adjustments for net working capital, and 8,245,918 of the Company’s common shares valued at $439,590 using the opening price of the Company’s common shares on November 5, 2021. In addition, the Company assumed certain outstanding Envigo stock options, including both vested and unvested options, that were converted to the right to purchase 790,620 Company common shares at an exercise price of $9.93 per share. The stock options were valued at $44.80 per option utilizing a Black-Scholes option valuation model with the inputs below. The total value of options issued was $35,418, of which $18,242 was excluded from the purchase price as those options were determined to be post-combination expense. The previously vested stock options are reflected as purchase consideration of approximately $17,176. This business is reported as part of the Company’s RMS reportable segment.


Stock price	$	53.31
Strike price	$	9.93
Volatility		75.93	%
Expected term		3.05
Risk-free rate		0.62	%

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The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:


	November 5, 2021
Assets acquired and liabilities assumed:
Cash		2,488
Restricted cash		435
Trade receivables and contract assets		43,566
Inventories		40,000
Prepaid expenses and other current assets		17,373
Property and equipment		106,338
Operating lease right-of-use assets, net		13,229
Goodwill		282,768
Intangible assets - customer relationships		251,000
Intangible assets - intellectual property		49,000
Other assets		7,676
Accounts payable		(25,832)
Accrued expenses and other liabilities		(11,665)
Fees invoiced in advance		(7,047)
Current portion on long-term operating lease		(4,371)
Long-term operating leases, net		(8,634)
Other liabilities		(5,339)
Deferred tax liabilities		(77,291)
Noncontrolling interest		880
	$	674,574

Inventory is comprised of small and large animal research models, including NHPs, and Teklad diet and bedding. The fair value was determined using a comparative sales methodology, in which the intent is to ensure that the acquirer only recognizes profits associated to value added subsequent to the acquisition date.

Property and equipment is mostly composed of land, buildings and equipment (including lab equipment, furniture and fixtures, caging and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies.

Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired customer relationship intangible assets are being amortized over a weighted-average estimated useful life of approximately 12.5 years on a straight-line basis and the acquired intellectual property associated with the ability to produce and care for the research models is being amortized over a weighted-average estimated useful life of approximately 8.8 years. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, gross margin, EBITDA, customer survival rate and royalty rates), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.

In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Envigo acquisition as a result of book-to-tax differences primarily related to the intangible assets, step up on the fair value of inventory and property and equipment. Within the deferred tax liability, $2,222 of acquired foreign net operating losses are offset by an uncertain tax benefit of $1,861.

Goodwill, which is derived from the expanded client base, the ability to provide products and services for the entirety of discovery and nonclinical development within one organization, and to ensure supply for internal use, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and $50,428 is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.

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Robinson Services, Inc. Acquisition

Overview

On December 29, 2021, the Company completed the acquisition of the rabbit breeding and supply business of Robinson Services, Inc. (“RSI”). The acquisition was another step in Inotiv’s strategic plan for building its RMS business. The aggregate consideration paid in the transaction consisted of cash consideration of $3,250 and 70,633 of the Company’s common shares valued at $2,898 using the closing price of the Company’s common shares on December 29, 2021.

This business is reported as part of the Company’s RMS reportable segment.

The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:


	December 29, 2021
Assets acquired and liabilities assumed:
Customer relationship		4,700
Non-compete agreement		300
Supply agreement		200
Goodwill		948
	$	6,148

Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 7.5 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.

Goodwill, which is derived from the expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.

Integrated Laboratory Systems, LLC Acquisition

Overview

On January 10, 2022, the Company completed the acquisition of Integrated Laboratory Systems, LLC (“ILS”). ILS is a provider of services specializing in nonclinical and analytical drug discovery and development services. Consideration for the ILS acquisition consisted of (i) $38,993 in cash, including adjustments for net working capital, and inclusive of $3,800 being held in escrow for purposes of securing any amounts payable by the selling parties on account of indemnification obligations, purchase price adjustments, and other amounts payable under the merger agreement, (ii) 429,118 of the Company’s common shares valued at $14,466 using the opening price of the Company’s common shares on January 10, 2022 and (iii) the effective settlement of a preexisting relationship of $(15). This business is reported as part of our DSA reportable segment.

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The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:


	January 10, 2022
Assets acquired and liabilities assumed:
Cash		797
Trade receivables, contract assets and other current assets		4,730
Property and equipment		4,436
Operating lease right-of-use assets, net		4,994
Goodwill		25,283
Intangible assets		22,300
Accounts payable		(1,165)
Accrued expenses and other liabilities		(905)
Fees invoiced in advance		(2,472)
Operating lease liabilities		(4,554)
	$	53,444

Property and equipment is mostly composed of equipment (including lab equipment, furniture and fixtures, and computer equipment) and leasehold improvements. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.

Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately nine years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, EBITDA, and customer survival rate), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.

Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.

Orient BioResource Center, Inc. Acquisition

Overview

On January 27, 2022, the Company completed the acquisition of OBRC from Orient Bio, Inc., a preclinical contract research organization and animal model supplier based in Seongnam, South Korea (“Seller”). OBRC is a primate quarantine and holding facility. Consideration for the OBRC acquisition consisted of (i) $26,522 in cash, including certain adjustments, (ii) 677,339 of the Company’s common shares valued at $18,410 using the closing price of the Company’s common shares on January 27, 2022, (iii) the effective settlement of a preexisting relationship of $1,017 and (iv) a payable owed by OBRC to the Seller in the amount of $3,325. The preexisting relationship represents the return of fees invoiced in advance and paid to OBRC by the Company prior to the acquisition offset by the payment of trade receivables by the Company to OBRC. As these were settled at the stated value, no gain or loss was recorded as a result of the settlement of this preexisting relationship. The payable will not bear interest and is required to be paid to the Seller on the date that is 18 months after the closing. The Company will have the right to set off against the payable any amounts that become payable by the Seller on account of indemnification obligations under the purchase agreement. This business is reported as part of our RMS reportable segment.

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The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:


	January 27, 2022
Assets acquired and liabilities assumed:
Cash		5,481
Trade receivables and contract assets		2,025
Inventories		9,400
Prepaid expenses and other current assets		2,609
Property and equipment		8,336
Goodwill		18,624
Intangible assets		13,400
Accounts payable		(552)
Accrued expenses and other liabilities		(285)
Fees invoiced in advance		(6,548)
Deferred tax liabilities		(3,216)
	$	49,274

Inventory is comprised of NHP research models. The fair value was determined using a comparative sales methodology, in which the intent is to ensure that the acquirer only recognizes profits associated to value added subsequent to the acquisition date.

Property and equipment is mostly composed of land, building and equipment. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.

Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 10 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.

Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.

Histion Acquisition

On April 25, 2022, the Company completed the acquisition of Histion, LLC (“Histion”), which is a strategic element of the Company’s expansion of its specialized pathology services. Consideration for the Histion acquisition consisted of (i) $950 in cash, subject to working capital adjustments, (ii) 17,618 of the Company’s common shares valued at $364 using the closing price of the Company’s common shares on April 25, 2022 and (iii) unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433.

Protypia Acquisition

On July 7, 2022, the Company entered into a Stock Purchase Agreement with Protypia, Inc. (“Protypia”), which is a strategic element of the Company’s expansion of its mass spectrometry-based bioanalytical offerings providing for the acquisition by the Company of all of the outstanding stock of Protypia on that date. Consideration for the Protypia stock consisted of $9,460 in cash, subject to certain adjustments, $600 in seller notes and 74,997 common shares having a value of approximately $806 based on the opening stock price of the Company’s common shares as reported by Nasdaq on the closing date.

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The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:


	Preliminary
	Allocation as of
	December 31, 2022
Assets acquired and liabilities assumed:
Other assets, net		50
Goodwill		3,305
Intangible assets		9,600
Deferred tax liabilities		(2,089)
	$	10,866

The preliminary purchase price allocation is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed, including intangible assets, goodwill and deferred tax liabilities. From the date of the acquisition through December 31, 2022, the Company recorded measurement-period adjustments related to the acquisition that resulted in changes to the purchase price allocation. Any additional adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.

Intangible assets primarily relate to customer relationships and technology associated with the ability to perform specialized protein and peptide mass spectrometry analysis. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 8.4 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets is based on preliminary assumptions which are subject to change as we complete our valuation procedures.

Goodwill, which is derived from the enhanced scientific expertise and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.

Pro Forma Results

The Company’s unaudited pro forma results of operations for the three months ended December 31, 2021 assume that the acquisitions had occurred as of October 1, 2021. Pro forma information for the three months ended December 31, 2022, is not presented here, as the statement of operations for the three months ended December 31, 2022, includes all business combinations. The following pro forma amounts are based on available information of the results of operations prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisitions been completed on October 1, 2021.

The unaudited pro forma information is as follows:


	Three Months Ended
	December 31, 2021
Total revenues	$	125,694

Net (loss) income	$	26,744

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5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following is a rollforward of the Company’s goodwill:


	September 30, 2022			Impairment	December 31, 2022
DSA	$	91,458	$	—	$	91,458
RMS		302,372		—		302,372
Gross Carrying Amount		393,830		—		393,830
Accumulated impairment loss - RMS		(236,005)		(66,367)		(302,372)
Goodwill	$	157,825	$	(66,367)	$	91,458

The Company determined that as a result of the November 16, 2022 event, which led to the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S., the uncertainty related to the Company’s ability to import NHPs from Cambodia and the decrease in its stock price, the carrying value of goodwill as of December 31, 2022, was required to be quantitatively evaluated. The carrying value of the Company’s goodwill by reporting unit was determined utilizing the income approach. Based on the Company’s quantitative goodwill impairment test, the fair value of the DSA reporting unit exceeded the reporting unit’s carrying value and, therefore, goodwill was not impaired. However, the fair value of the RMS reporting unit was less than the RMS reporting unit’s carrying value. As a result, a goodwill impairment loss of $66,367 was recorded within the RMS segment. The remaining goodwill balance of $91,458 as of December 31, 2022 is attributed to the DSA segment.

Intangible Assets, Net

The following table displays intangible assets, net by major class:


	December 31, 2022
	Carrying		Accumulated		Carrying
	Amount, Gross		Amortization		Amount, Net
Customer relationships	$	320,203	$	(34,069)	$	286,134
Intellectual property		57,159		(7,445)		49,714
Non-compete agreements		2,410		(986)		1,424
Other		2,396		(1,212)		1,184
	$	382,168	$	(43,712)	$	338,456


	September 30, 2022
	Carrying		Accumulated		Carrying
	Amount, Gross		Amortization		Amount, Net
Customer relationships	$	318,896	$	(26,990)	$	291,906
Intellectual property		56,997		(5,767)		51,230
Non-compete agreements		2,410		(872)		1,538
Other		2,396		(1,184)		1,212
	$	380,699	$	(34,813)	$	345,886

The decrease in intangible assets, net during the three months ended December 31, 2022 related to amortization over the applicable useful lives, offset set by the impact of foreign exchange rates.

6.DEBT

Credit Facility

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revolving credit facility in the original principal amount of $15,000. 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 credit 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%. Interest expense was accrued at an effective rate of 9.84% for the three months ended December 31, 2022.

The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving credit 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 1.00% of their respective original principal amounts. The Company shall also repay the term loan facility on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time with premium or penalty.

The Company is required to maintain an initial Secured Leverage Ratio of not more than 4.25 to 1.00. The maximum permitted Secured Leverage Ratio shall reduce to 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023 and to 3.00 to 1.00 beginning with the Company’s fiscal quarter ending March 31, 2025. The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio shall be 1.00 to 1.00 during the first year of the Credit Agreement and shall be 1.10 to 1.00 from and after the Credit Agreement’s first anniversary.

Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.

Utilizing proceeds from the Credit Agreement on November 5, 2021, the Company repaid all indebtedness and terminated the credit agreement related to the First Internet Bank of Indiana (“FIB”) credit facility and recognized an $877 loss on debt extinguishment during the three months ended December 31, 2021.

On January 7, 2022, the Company drew $35,000 on the delayed draw term loan facility. The delayed draw term loan facility in the original principal amount of $35,000 is referred to herein as the “Initial DDTL”. Amounts outstanding under the Initial DDTL accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Interest expense was accrued at an effective rate of 9.91% for the three months ended December 31, 2022.

First Amendment to Credit Agreement

On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and the Agent entered into a First Amendment (the “First Amendment”) to the existing Credit Agreement. The First Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $40,000 (the “Incremental Term Loans”) and a new delayed draw term loan facility in the original principal amount of $35,000, which amount is available to be drawn up to 24 months from the date of the Amendment (the “Additional DDTL” and together with the Initial DDTL, the “DDTL”). The Incremental Term Loans and any amounts borrowed under the Additional DDTL are referred to herein as the “Additional Term Loans”. On January 27, 2022, the Company borrowed the full amount of the Incremental Term Loans, and on October 12, 2022, the Company borrowed the full $35,000 under the Additional DDTL.

Amounts outstanding under the Additional Term Loans will accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Interest expense was accrued at an effective rate of 9.84% for the three months ended December 31, 2022.

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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.

Second Amendment to Credit Agreement

On December 29, 2022, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement.

The Second Amendment provides for, among other things, an extension of the deadline for the Company to provide to the lenders the audited financial statements for the Company’s fiscal year ended September 30, 2022 and an annual budget for 2023; the Company satisfied these requirements by the extended deadline. The Second Amendment adds a requirement that the Company provide, within 30 days after the end of each month, an unaudited consolidated balance sheet, statement of income and statement of cash flows as of the end of, and for, such month, as well as a “key performance indicator” report. The Second Amendment also requires that, within 10 business days after the end of each month, the Company will provide a rolling 13-week cash flow forecast prepared on a monthly basis. The Second Amendment further provides that, upon the request of the Required Lenders (as defined in the Credit Agreement), the Company will permit a financial advisor designated by the Required Lenders to meet with management of the Company to discuss the affairs, finances, accounts and condition of the Company during the six-month period following the effective date of the Second Amendment. In addition, the Second Amendment requires the Company to deliver an updated organization chart and certain supplemental information regarding the Company’s subsidiaries in connection with each quarterly report required pursuant to the Credit Agreement.

Under the Second Amendment, the Company may elect to borrow on each of the loan facilities at either an adjusted term secured overnight financing rate (“Term SOFR”) rate of interest or an alternate base rate of interest. Adjusted Term SOFR loans shall accrue interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448% and 0.42826%, depending on the term of the loan (“Adjusted Term SOFR”); provided that, Adjusted Term SOFR shall never be less than 1.00%, and (ii) a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). Alternate base rate loans shall accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.5%, (b) the Agent’s prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00% (the “Alternate Base Rate”); provided that, the Alternate Base Rate shall never be less than 2.00%, plus (ii) a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio.

The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement: (i) prior to delivery of the audited financial statements and related compliance certificate for the fiscal year ended September 30, 2022; and (ii) thereafter, if any of the conditions precedent set forth in Section 4.02 of the Credit Agreement cannot be satisfied, including, without limitation, the making of the representation and warranty that as of the date of the most recent audited financial statements delivered to the Agent, no event, change, circumstance, condition, development or occurrence has had, or would reasonably be expected to result in, either individually or in the aggregate, a Material Adverse Effect (as defined in the Credit Agreement).

In addition, the Second Amendment provides that, no later than January 13, 2023 (or such later date as the Required Lenders shall agree in their discretion), the Company shall (i) appoint a financial advisor on terms reasonably acceptable to the Required Lenders and the Company for a term of at least six months, (ii) provide a 13-week budget to the Agent, and (iii) deliver a perfection certificate supplement updating certain information previously provided with respect to each of the Company and the Subsidiary Guarantors, including information regarding certain collateral and other assets owned by such parties. The Company has timely satisfied each of these requirements.

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Long term debt as of December 31, 2022 and September 30, 2022 is detailed in the table below.


	December 31, 2022		September 30, 2022
Seller Note – Bolder BioPath		752		808
Seller Note – Preclinical Research Services		590		615
Seller Note – Plato BioPharma		643		1,470
Seller Payable - Orient BioResource Center		3,553		3,488
Seller Note – Histion		325		369
Seller Note – Protypia		600		600
Economic Injury Disaster Loan		140		140
Convertible Senior Notes		106,346		104,965
Term Loan Facility, DDTL and Incremental Term Loans		272,513		238,200
		385,462		350,655
Less: Current portion		(7,553)		(7,979)
Less: Debt issuance costs not amortized		(12,266)		(11,999)
Total long-term debt	$	365,643	$	330,677

As of December 31, 2022, the Company did not have an outstanding balance on the revolving credit facility.

Acquisition-related Debt

In addition to the indebtedness under the Credit Agreement, certain of the Company’s subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.

As part of the acquisition of Plato, which is a part of the Company’s Inotiv Boulder subsidiary, Inotiv Boulder, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Plato in an aggregate principal amount of $3,000. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023.

As part of the acquisition of OBRC, the Company agreed to leave in place a payable owed by OBRC to the seller in the amount of $3,700, which the Company determined to have a fair value of $3,325 as of January 27, 2022. The payable does not bear interest and is required to be paid to seller on the date that is 18 months after the closing date of January 27, 2022. The Company has the right to set off against the payable any amounts that become payable by the seller on account of indemnification obligations under the purchase agreement.

As part of the acquisition of Histion, which is a part of the Company’s subsidiary, Bronco Research Services, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of April 1, 2025.

As part of the acquisition of Protypia, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Protypia in an aggregate principal amount of $600. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of January 7, 2024.

Convertible Senior Notes

On September 27, 2021, the Company issued $140,000 principal amount of its 3.25% Convertible Senior Notes due 2027 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 27, 2021, among the Company, the Company’s wholly-owned subsidiary, BAS Evansville, Inc., as guarantor (the “Guarantor”), and U.S. Bank National Association, as trustee (the “Indenture”). Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $15,000 principal amount of the Notes. The Notes issued on September 27, 2021 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.

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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 21.7162 common shares per $1 principal amount of Notes, which represents an initial conversion price of approximately $46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

As of December 31, 2022 and September 30, 2022, there were $4,839 and $5,060, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended December 31, 2022, the total interest expense was $2,765, including coupon interest expense of $1,163, accretion expense of $1,381, and the amortization of debt discount and issuance costs of $221. For the three months ended December 31, 2021, the total interest expense was $2,628, including coupon interest expense of $1,163, accretion expense of $1,255, and the amortization of debt discount and issuance costs of $210.

The Notes are redeemable, in whole and not in part, at the Company’s option at any time on or after October 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time.

If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common shares.

The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least $20,000; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes.

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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 12 – Equity), the Note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as of November 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital.

Based upon the above, the Company remeasured the fair value of the embedded derivative as of November 4, 2021, which resulted in a fair value measurement of $88,576 and a loss on remeasurement included in other income (loss) for the three months ended December 31, 2021 of $56,714.

7.SUPPLEMENTAL BALANCE SHEET INFORMATION

Trade receivables and contract assets, net consisted of the following:


	December 31,		September 30,
	2022		2022
Trade receivables	$	65,555	$	88,867
Unbilled revenue		16,324		17,474
Total		81,879		106,341
Less: Allowance for credit losses		(7,292)		(6,268)
Trade receivables and contract assets, net of allowances for credit losses	$	74,587	$	100,073

Inventories, net consisted of the following:


	December 31,		September 30,
	2022		2022
Raw materials	$	2,392	$	1,757
Work in progress		72		186
Finished goods		4,762		4,933
Research Model Inventory		72,631		68,055
Total		79,857		74,931
Less: Obsolescence reserve		(4,218)		(3,490)
Inventories, net	$	75,639	$	71,441

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Prepaid expenses and other current assets consisted of the following:


	December 31,		September 30,
	2022		2022
Advances to suppliers	$	23,249	$	30,292
Income tax receivable		770		366
Prepaid research models		3,248		3,575
Other		6,655		8,250
Prepaid expenses and other current assets	$	33,922	$	42,483

The composition of other assets is as follows:


	December 31,		September 30,
	2022		2022
Long-term advances to suppliers	$	2,250	$	2,894
Finance lease right-of-use assets, net		68		79
Debt issuance costs - revolving credit facility		410		1,411
Funded status of defined benefit plan		2,099		1,573
Other		1,686		1,567
Other assets	$	6,513	$	7,524

Accrued expenses consisted of the following:


	December 31,		September 30,
	2022		2022
Accrued compensation	$	10,425	$	17,460
Non-income taxes		1,663		1,200
Accrued interest		4,959		5,228
Other		11,535		11,913
Accrued expenses and other liabilities	$	28,582	$	35,801

The composition of fees invoiced in advance is as follows:


	December 31,		September 30,
	2022		2022
Customer deposits	$	30,509	$	39,222
Deferred revenue		30,146		29,420
Fees invoiced in advance	$	60,655	$	68,642

8.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, 2023, the Company expects to contribute $1,209 to the Pension Plan. As of December 31, 2022, the funded status of the defined benefit plan obligation of $2,099 is included in other assets (non-current) in the condensed consolidated balance sheets.

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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 statements of operations.


	Three Months Ended
	December 31,
	2022		2021
Components of net periodic (benefit) expense:
Interest cost	$	182	$	58
Expected return on assets		(198)		(109)
Amortization of prior (gain) loss		(38)		161
Net periodic (benefit) expense	$	(54)	$	110

9.OTHER OPERATING EXPENSE

Other operating expense consisted of the following:


	Three Months Ended
	December 31,
	2022		2021
Acquisition and integration costs	$	983	$	8,808
Restructuring costs¹		266		—
Startup costs		1,505		957
Remediation costs		585		439
Other costs		300		362
Acquisition-related stock compensation costs²		—		23,014
	$	3,639	$	33,580
¹Restructuring costs represent costs incurred in connection with the exit of our Dublin and Cumberland facilities. See Note 10 – Restructuring and Assets Held for Sale for additional information.
²Refer to Note 4 - Business Combinations for further discussions around acquisition-related stock compensation costs related to the acquisition of Envigo.

10.RESTRUCTURING AND ASSETS HELD FOR SALE

Restructuring

During June 2022, the Company approved and announced a plan to close its facility in Cumberland, Virginia (“Cumberland facility”) and to close and relocate its operations in Dublin, Virginia (“Dublin facility”) into its other existing facilities, as a part of the Company’s ongoing restructuring and site optimization plan. The Cumberland facility exit was also a part of the transfer plan settlement, as further described in Note 14 – Contingencies. The operations at both the Cumberland facility and the Dublin facility were within the RMS segment. The Cumberland facility exit was complete by September 2022. The Dublin facility transition was completed in November 2022.

For the three months ended December 31, 2022, the Company incurred immaterial expenses that qualify as exit and disposal costs under GAAP, and does not expect further material charges as a result of the closures of the Cumberland facility and Dublin facility. Exit and disposal costs were charged to other operating expense.

As of December 31, 2022, the liability balance for exit and disposal costs that qualify as employee-related exit and disposal costs is $571.

Assets Held for Sale

Prior to the Envigo acquisition, Envigo management signed a Stock Purchase Agreement dated October 6, 2021, to sell its ownership interest in its Israel RMS and Israel CRS businesses (the “Israeli Businesses”) to the management team of the Israel Businesses for $6,650. The sale includes the Company’s 100% ownership in Israel RMS and Israel RMS’s 62.5% ownership interest in Israel CRS. The management team currently owns the 37.5% non-controlling ownership position in Israel CRS. In October 2022, the Company’s Board of Directors approved the sale of the Israeli Businesses. As a result of this approval, and in consideration of the remaining assets held for sale criteria under ASC 360 – Property, Plant and Equipment, it was determined that the net assets and liabilities of the Israeli Businesses met the criteria for assets held for sale as of December 31, 2022. This sale is expected to close by the end of

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the fiscal year ended September 30, 2023 and will be reflected in the RMS reportable segment. The combined loss before taxes of the Israeli Businesses for the three months ended December 31, 2022 was $1,904.

The assets and liabilities, and the resulting net assets held for sale, of the Israeli Businesses are as follows:


	December 31,
	2022
Assets
Current assets:
Cash and cash equivalents	$	1,097
Restricted cash		472
Trade receivables and contract assets, net of allowances for credit losses		3,095
Inventories, net		760
Prepaid expenses and other current assets		1,065
Total current assets	$	6,489

Property and equipment, net		1,071
Total assets	$	7,560

Liabilities
Current liabilities:
Accounts payable	$	317
Accrued expenses and other liabilities		1,902
Fees invoiced in advance		491
Total liabilities	$	2,710

Net assets held for sale	$	4,850

11.LEASES

The Company records a right-of-use (“ROU”) asset and lease liability for substantially all leases for which it is a lessee, in accordance with ASU 842. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. The Company recognizes lease expense for the leases on a straight-line basis over the lease term. At inception of a contract, the Company considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration.

The Company has various operating and finance leases for facilities and equipment. Facilities leases provide office, laboratory, warehouse, or land that the Company uses to conduct its operations. Facilities leases range in duration from two to ten years, with either renewal options for additional terms as the initial lease term expires, or purchase options. Facilities leases are considered as either operating or financing leases.

Equipment leases provide for office equipment, laboratory equipment or services the Company uses to conduct its operations. Equipment leases range in duration from 30 to 60 months, with either subsequent annual renewals, additional terms as the initial lease term expires, or purchase options.

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ROU lease assets and lease liabilities that are reported in the Company’s condensed consolidated balance sheets are as follows:


	December 31, 2022		September 30, 2022

Operating ROU assets, net	$	34,152	$	32,489

Current portion of operating lease liabilities		8,475		7,982
Long-term operating lease liabilities		26,240		24,854
Total operating lease liabilities	$	34,715	$	32,836

Finance ROU assets, net	$	68	$	79

Current portion of finance lease liabilities		39		43
Long-term finance lease liabilities		35		41
Total finance lease liabilities	$	74	$	84

During the three months ended December 31, 2022 and 2021, the Company had operating lease amortization of $1,936 and $1,083, respectively.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s leases for the three months ended December 31, 2022 and December 31, 2021 were:


	Three Months Ended
	December 31,
	2022		2021
Operating lease costs:
Fixed operating lease costs	$	2,592	$	1,083
Short-term lease costs		12		25
Lease income		(674)		(177)
Finance lease costs:
Amortization of ROU asset expense		11		6
Interest on finance lease liability		1		1
Total lease cost	$	1,942	$	938

The Company serves as lessor to a lessee in five facilities. The gross rental income and underlying lease expense are presented net in the Company’s condensed consolidated statements of operations. The gross rent receivables and underlying lease liabilities are presented gross in the Company’s condensed consolidated balance sheets.

Supplemental cash flow information related to leases was as follows:


	Three Months Ended
	December 31,
	2022		2021
Cash flows included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,351	$	1,096
Operating cash flows from finance leases		11		1
Finance cash flows from finance leases		1		6

Non-cash lease activity:
ROU assets obtained in exchange for new operating lease liabilities	$	3,567	$	17,036
ROU assets obtained in exchange for new finance lease liabilities		—		—

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The weighted average remaining lease term and discount rate for the Company’s operating and finance leases as of December 31, 2022 and 2021 were:


	December 31, 2022		December 31, 2021
Weighted-average remaining lease term (in years)
Operating lease	5.97		6.18
Finance lease	2.35		2.90
Weighted-average discount rate (in percentages)
Operating lease	6.97	%	5.10	%
Finance lease	4.86	%	4.86	%

Lease duration was determined utilizing renewal options that the Company is reasonably certain to execute.

As of December 31, 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
2023 (remainder of fiscal year)	$	8,351	$	40
2024		8,263		31
2025		6,975		5
2026		5,667		1
2027		3,803		—
Thereafter		10,597		—
Total minimum future lease payments		43,656		77
Less interest		(8,941)		(3)
Total lease liability		34,715		74

12.EQUITY, STOCK-BASED COMPENSATION AND LOSS PER SHARE

Increase in Authorized Shares and Equity Plan Reserve

On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s Second Amended and Restated Articles of Incorporation to increase the number of authorized shares from 20,000,000 shares, consisting of 19,000,000 common shares and 1,000,000 preferred shares, to 75,000,000 shares, consisting of 74,000,000 common shares and 1,000,000 preferred shares. Approval of this matter by the Inotiv shareholders was a condition to the closing of the Envigo acquisition. The amendment was effective on November 4, 2021. On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s 2018 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares available for awards thereunder by 1,500,000 shares and to make certain corresponding changes to certain limitations in the Equity Plan. At December 31, 2022, 951,535 shares remained available for grants under the Equity Plan.

Stock Issued in Connection with Acquisitions

During the three months ended December 31, 2022 and 2021, 0 and 8,374,138 common shares, respectively, were issued in relation to acquisitions. See Note 4 – Business Combinations for further discussion of consideration for each acquisition.

Stock-Based Compensation

The Company expenses the estimated fair value of stock options, restricted stock and restricted stock units over the vesting periods of the grants. The Company recognizes expense for awards subject to graded vesting using the straight-line attribution method and forfeitures, as they are incurred. Stock based compensation expense for the three months ended December 31, 2022 and 2021, was $2,046 and $23,932, respectively. Of the $23,932 stock based compensation expense in the three months ended December 31, 2021, $23,014 related to post-combination expense recognized in connection with the Envigo transaction (see Note 4 – Business Combinations), which was inclusive of $4,772 of stock based compensation settled in cash.

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Net Loss per Share

The Company computes basic loss per share using the weighted average number of common shares outstanding. The Company computes diluted loss per share using the if-converted method for preferred shares and convertible debt, if any, and the treasury stock method for stock options and restricted stock units. Shares issuable upon exercise of 1,779,406 options and shares issuable upon vesting of 549,833 restricted stock units were not considered in computing diluted loss per share for the three months ended December 31, 2022 because they were anti-dilutive. Shares issuable upon exercise of 1,654,270 options were not considered in computing diluted loss per share for the three months ended December 31, 2021 because they were anti-dilutive. Additionally, there are 3,040,268 shares of common stock issuable upon conversion in connection with the convertible debt entered into on September 27, 2021, which were not considered in computing diluted loss per share for the three months ended December 31, 2022 and 2021 because they were anti-dilutive.

The following table reconciles the computation of basic net loss per share to diluted net loss per share:


	Three Months Ended
	December 31,
	2022		2021
Basic and diluted net loss per share:
Net loss applicable to common shareholders	$	(87,323)	$	(83,047)
Weighted average common shares outstanding (in thousands)
Basic and diluted:		25,603		21,124

Basic and diluted net loss per share	$	(3.41)	$	(3.93)

13.INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes.  The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. The Company records valuation allowances based on a determination of the expected realization of tax assets.

The difference between the enacted federal statutory rate of 21% and the Company’s effective tax rate of 15.5% for the three months ended December 31, 2022 was primarily related to the impact on tax expense of certain book to tax differences on the deductibility of goodwill impairment and other permanent items.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The Company measures the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability basis that it believes is more likely than not to be realized upon settlement of the position. As of December 31, 2022, the Company’s only uncertain tax position was derived from a business combination in fiscal year 2022.

The Company records interest and penalties accrued in relation to the uncertain income tax position as a component of income tax expense (benefit). Any changes in the liability for the uncertain tax position would impact the effective tax rate. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and foreign jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by federal, state, local and foreign taxing authorities. State and other income tax returns are generally subject to examination for a period of three to five years after the filing of the respective returns. The Company is no longer subject to U.S. federal tax examinations for years before 2018 or state and local tax examinations for years before 2017, with limited exceptions. For federal purposes, the tax attributes carried forward could be adjusted through the examination process and are subject to examination three years from the date of utilization.

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14.CONTINGENCIES

Litigation

Envigo RMS, LLC (“Envigo RMS”) is a defendant in a purported class action and a related action under California’s Private Attorney General Act of 2004 (“PAGA”) brought by Jacob Greenwell, a former employee of Envigo RMS, on June 25, 2021 in the Superior Court of California, Alameda County. The complaints allege that Envigo RMS violated certain wage and hour requirements under the California Labor Code. PAGA authorizes private attorneys to bring claims on behalf of the State of California and aggrieved employees for violations of California’s wage and hour laws. The class action complaint seeks certification of a class of similarly situated employees and the award of actual, consequential and incidental losses and damages for the alleged violations. The PAGA complaint seeks civil penalties pursuant to the California Labor Code and attorney’s fees. The Company intends to continue to vigorously defend these claims.

On June 23, 2022, a putative securities class action lawsuit was filed in the United States District Court for the Northern District of Indiana, naming the Company and Robert W. Leasure and Beth A. Taylor as defendants, captioned Grobler v. Inotiv, Inc., et al., Case No. 4:22-cv-00045 (N.D. Ind.). The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Act”), as amended, and Rule 10b-5 promulgated thereunder, based on alleged false and misleading statements and material omissions regarding the Company’s acquisition of Envigo RMS and its regulatory compliance. On September 12, 2022, Oklahoma Police Pension and Retirement System was appointed by the Court as lead plaintiff. Thereafter, on November 14, 2022, the lead plaintiff filed an amended complaint against the same defendants, in addition to John E. Sagartz and Carmen Wilbourn, that asserted the same claims along with a claim under Section 14(a) of the Act. On November 23, 2022, the lead plaintiff filed a further amended complaint against the aforementioned defendants asserting the same claims as the amended complaint and further alleging that false and misleading statements and material omissions were made concerning the Company’s non-human primate business. The purported class in the operative complaint includes all persons who purchased or otherwise acquired the Company’s common stock between September 21, 2021 and November 16, 2022, and the complaint seeks an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief. While the Company cannot predict the outcome of this matter, the Company believes the class action to be without merit and plans to vigorously defend itself.

On September 9, 2022, a purported shareholder derivative lawsuit was filed in the United States District Court for the Northern District of Indiana, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Grobler v. Robert W. Leasure, et al., Case No. 4:22-cv-00064 (N.D. Ind.). The derivative action asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of Section 14(a) of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance. On November 15, 2022, the Court entered an order staying the derivative action pending a resolution of a motion to dismiss in the securities class action.

On January 4, 2023, an additional shareholder derivative lawsuit was filed in the United States District Court for the Northern District of Indiana, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Burkhart v. Robert W. Leasure, et al., Case No 4:23-cv-00003 (N.D. Ind.). The derivative action asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of Section 10(b), 21D and 14(a) of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance.

While the Company cannot predict the outcome of these matters, the Company believes the derivative actions to be without merit and plans to vigorously defend itself.

The Company is party to certain other legal actions arising out of the normal course of its business. In management's opinion, none of these actions will have a material effect on the Company's operations, financial condition or liquidity.

Government Investigations and Actions

During the period from July 2021 through March 2022, 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.

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On May 18, 2022, the U.S. Department of Justice ("DOJ"), together with federal and state law enforcement agents, executed a search and seizure warrant on the Cumberland facility. The warrant was issued by the U.S. District Court for the Western District of Virginia on May 13, 2022. Certain employees and former employees also received a grand jury subpoena requested by the U.S. Attorney’s Office for the Western District of Virginia (“USAO-VA”). On December 8, 2022, EGSI and Inotiv received additional subpoenas from the USAO-VA, on documents, records or materials required to be maintained to comply with the Clean Water Act (the “CWA”), the Virginia State Water Control Law or local pretreatment requirements, from January 2017 to present. Certain employees and former employees also received a grand jury subpoena requested by the USAO-VA regarding the Cumberland facility’s compliance with the CWA, the Virginia State Water Control Law or local pretreatment requirements. Consistent with Company policy, the Company is cooperating with DOJ and USAO-VA and other involved authorities.

On May 19, 2022, a civil complaint was filed against Envigo RMS in the U.S. District Court for the Western District of Virginia. The 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 did not require that Envigo RMS pay any fines or penalties to any governmental agencies. In addition, it is expressly stated that the settlement was not an admission of liability or wrongdoing by Envigo RMS with regard to its past operation of the Cumberland facility. The settlement incorporated the transfer plan that was mutually agreed to by the DOJ and Envigo RMS on July 1, 2022 (the “Transfer Plan”), and it concluded all related civil and administrative complaints related to the Cumberland facility. The Transfer Plan execution was finalized by the parties on September 1, 2022. As per required in settlement, the DOJ and USDA moved to dismiss the civil and administrative complaints with prejudice on September 14, 2022, and such dismissal was granted by the court on September 14, 2022. In accordance with the settlement, Envigo RMS is refraining from any operations requiring a USDA license at the Cumberland facility. In addition, as priorly disclosed by the Company, the Company vacated the Cumberland facility, and it is currently available for sale.

On June 15, 2021, 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 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.

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 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.

On November 16, 2022 the Company disclosed that employees of the principal supplier of NHPs to the Company, along with two Cambodian government officials, have been criminally charged by the USAO-FL with conspiring to illegally import NHPs into the United States from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021. As of the filing date of this Report, the Company has not received any additional subpoenas related to this matter.

15.SUBSEQUENT EVENTS

On January 9, 2023, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Third Amendment (“Third Amendment”) to the Credit Agreement. The Third Amendment provides that, among other things, during the period beginning on January 9, 2023 and, subject to the terms of the Credit Agreement, ending on the date on which financial statements for the Company’s fiscal quarter ending March 31, 2024 are delivered or are required to be delivered, as long as no event of default has occurred (the “Amendment Relief Period”):

●

the Cambodian NHP-related matters, to the extent existing and disclosed to the lenders prior to December 29, 2022, shall not constitute a material adverse effect under the Credit Agreement and will not restrict the Company’s ability to request credit extensions under the revolving credit facility;

●

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payments or purchases with respect to any indebtedness, bonuses or executive compensation, or judgments, fines or settlements; and

●

additional limitations are imposed on the Company under the Credit Agreement, including restrictions on permitted asset sales, a prohibition on making permitted acquisitions, and significant limitations on the ability to incur additional debt, make investments and make restricted payments.

The Third Amendment provides that from and after the date thereof, no incremental facilities under the Credit Agreement may be established or incurred. The Third Amendment also provides for additional mandatory prepayments of borrowed amounts following the receipt by the Company of certain cash receipts, including proceeds from certain equity issuances and cash received by the Company not in the ordinary course of business. Under the Third Amendment, after any draw on the revolving credit facility, the Company’s cash and cash equivalents held on hand domestically within the U.S. cannot exceed $10 million.

The fee consideration payable by the Company for each consenting lender party to the Third Amendment is: (i) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender; (ii) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in cash upon the occurrence of certain prepayments of the term loan under the Credit Agreement; and (iii) 7.00% of the aggregate amount of the revolving commitments held by each consenting revolving lender, to be paid in cash upon the occurrence with certain permanent reductions of the revolving loans under the Credit Agreement.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our services and products; (iii) trends in the industries that consume our services and products; (iv) our ability to develop or acquire new services and products; (v) our ability to source animal research models from Asia; (vi) our ability to make capital expenditures and finance operations; (vii) global economic conditions, especially as they impact our markets; (viii) our cash position; (ix) our ability to successfully integrate the operations and personnel related to recent acquisitions; (x) our ability to effectively manage current expansion efforts or any future expansion or acquisition initiatives undertaken by us; (xi) our ability to develop and build infrastructure and teams to manage growth and projects; (xii) our ability to continue to retain and hire key talent; (xiii) our ability to market our services and products under our corporate name and relevant brand names; (xiv) our ability to service our outstanding indebtedness; (xv) our expectations regarding the volume of new bookings, pricing, gross margins and liquidity; (xvi) our ability to manage recurring and non-recurring costs; (xvii) our ability to execute on our restructuring and site optimization plans; and (xviii) the impact of public health emergencies, including COVID-19, on the economy, demand for our services and products and our operations, including the measures taken by governmental authorities to address such public health emergencies, which may precipitate or exacerbate other risks and/or uncertainties, and additional risks set forth in our filings with the Securities and Exchange Commission (the “SEC”). Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to those discussed in Part I, Item 1A, Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, and in subsequent filings with the SEC, many of which are beyond our control.

In addition, we have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the assumptions on which the forward-looking statements contained herein are based on are reasonable, any of those assumptions could prove inaccurate and, as a result, the forward-looking statements based upon those assumptions could be significantly different from actual results. In light of the uncertainties inherent in any forward-looking statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. We do not undertake any obligation to update any forward-looking statement, except as required by law. Our actual results could differ materially from those discussed in the forward-looking statements.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Report.

Recent Developments and Executive Summary

During recent periods, we have undertaken significant internal and external growth initiatives. Our growth initiatives include (1) acquisitions, (2) expansion of existing and acquired businesses, and (3) startup of new services. Previously, our growth initiatives focused on discovery and safety assement services, and, as a result of our strategic acquisition of Envigo RMS Holding Corp. (“Envigo”) in November 2021, which added a complementary research model platform, our full spectrum solutions now span two segments:

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Discovery and Safety Assessment (“DSA”) and Research Models and Services (“RMS”). In addition to growth initiatives previously announced, we have initiated site optimization plans in the U.S. and France, and are consulting with employee respresentatives for a proposed consolidation of a U.K. site, in order to enhance margins.

Update on Expansions of Facilities and Businesses

During the twelve months ended September 30, 2022, we initiated a facility expansion to our facility in Boulder, Colorado (“Boulder facility”), which was completed in December 2022; we invested in infrastructure, equipment and facility upgrades to increase revenue capacity at our facility in Morrisville, North Carolina (“Morrisville facility”), which was complete in December 2022; and we invested in a buildout of a newly leased 48,000 square foot facility in Rockville, Maryland (“Rockville facility”) to support biotherapeutics and genetic toxicology growth, which is expected to be complete by March 2023. In addition, we made significant investments in upgrading facilities and equipment across the facilities that serve the RMS segment in order to implement planned and proposed site optimizations and enhance animal welfare. Further, we have filled critical leadership and scientific positions.

Update on New Service Offerings

We announced new service offerings which we are building internally and startup operations, including mechanistic pharmacology and toxicology, safety pharmacology, juvenile toxicology, SEND (Standard for the Exchange of Nonclinical Data) data reporting; clinical pathology; biotherapeutics; histopathology for devices; genetic toxicology; and cardiovascular safety pharmacology. In the three months ended December 31, 2022 and 2021, we incurred start up costs of $1.5 million and $1.0 million, respectively.

Update on Restructurings and Site Optimization Plans

Prior to our acquisition of Envigo, the relocation of our operations in Haslett, Michigan and Boyertown, Pennsylvania to our newly refurbished facility in Denver, Pennsylvania was announced. We expect the Haslett and Boyertown facility closures to be completed by March 2023. Further, we announced in June 2022 that we were closing a purpose-bred canine facility in Cumberland, Virgina and a rodent breeding facility in Dublin, Virginia as part of restructuring activities. The rodent breeding operations were consolidated into an existing, recently renovated site. The Cumberland facility closure was completed in September 2022 and the Dublin facility closure was completed in November 2022.

On November 29, 2022, we announced additional site consolidation plans in the U.S., intent to consult with employee representatives for a proposed consolidation of our facilities in Gannat, France, and Blackthorn, Bicester U.K., and provided an update on site optimization plans in process. The site optimization plans are intended to allow us to reduce overhead and create efficiencies through scale. Subsequent to December 31, 2022, we completed the consultation and approval process in Gannat, France and will be relocating the operations of this facility to our recently updated Horst, Netherlands facility, which we expect to be completed by June 30, 2023. The site optimization for our Blackthorn, U.K. site remained subject to approval as of December 31, 2022 and through the date of this report.

Over the last year, we have continued to improve our infrastructure and platform to support future growth and additional potential acquisitions. These improvements included investments in our information technology platforms, building program management functions to enhance management and communication with clients and multi-site programs, further enhancing client services and improving the client experience. We believe the actions taken and investments made in recent periods form a solid foundation upon which we can continue to build.

Business Overview

Inotiv is a leading contract research organization (“CRO”) dedicated to providing nonclinical and analytical drug discovery and development services to the pharmaceutical and medical device industries and selling a range of research-quality animals and diets to the same industries as well as academia and government clients. Our products and services focus on bringing new drugs and medical devices through the discovery and preclinical phases of development, all while increasing efficiency, improving data, and reducing the cost of discovering and taking new drugs 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. We are dedicated to practicing high standards of laboratory animal care and welfare.

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drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research from small start-up biotechnology companies to some of the largest global pharmaceutical companies.

Through our RMS segment, we offer access to a wide range of high-quality small and large research models for basic research and drug discovery and development, as well as specialized models for specific diseases and therapeutic areas. We combine deep animal husbandry expertise and expanded access to scientists across the discovery and preclinical continuum, which reduces nonclinical lead times and provides enhanced project delivery. In conjunction with our CRO business, we have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and access to innovative genetically engineered models and services solutions. Our principal clients include biopharmaceutical companies, CROs, and academic and government organizations.

Temporarily Suspended or Limited Operations

On November 16, 2022, the Company became aware that the U.S. Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) had criminally charged employees of the principal supplier of non-human primates (“NHPs”) to the Company, along with two Cambodian government officials, with conspiring to illegally import NHPs into the U.S. from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021 (“November 16, 2022 event”). Also as previously disclosed, two of the Company’s subsidiaries, Orient BioResource Center, Inc. (“OBRC”) and Envigo Global Services, Inc. (“EGSI”), companies acquired by the Company on January 27, 2022 and November 5, 2021, respectively, had received grand jury subpoenas from USAO-SDFL requiring the production of documents and information related to their importation of NHPs into the U.S. The Company has been fully cooperating, and will continue to cooperate, with USAO-SDFL.

Of the Company’s total revenue of $547.7 million in the fiscal year ended September 30, 2022, approximately $140.0 million was from NHPs that it had imported from Cambodia. Refer to the Liquidity section below and Note 5 – Goodwill and Intangible Assets for further discussion of impacts to the three months ended December 31, 2022, and expected future impacts.

Liquidity

As of December 31, 2022, the Company has cash and cash equivalents of $20.8 million. The November 16, 2022 event and subsequent decision to refrain from selling or delivering Cambodian NHPs held in the U.S., triggered a material adverse event clause in our Credit Agreement resulting in, among other things a limitation of our ability to draw on our revolving credit facility. The loss of access to our revolving credit facility and reduced liquidity resulting from the decision to refrain from selling Cambodian NHPs held in the U.S. resulted in reduced forecasted liquidity. As a result of these events, the Company took steps to improve its liquidity, which included negotiating an amendment to its Credit Agreement, which was executed on January 9, 2023, to reinstate its ability to borrow under its revolving credit facility. Without the amendment, the Company was at risk of not having the revolving credit facility available.

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believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and comply with minimum liquidity and financial covenant requirements under its debt covenants under its Credit Agreement for at least the next twelve months. The forecasted operating cash flows include the shipping of the Company’s existing Cambodian NHP inventory. See Note 6 – Debt and Note 15 – Subsequent Events for further information about the Company’s existing credit facilities and requirements under its debt covenants. The Company’s liquidity needs and compliance with covenants depend, among other things, on the timing of NHP shipments and its ability to generate cash from operations.

Financial Highlights During Three Months Ended December 31, 2022

●

Revenue grew to $122.8 million in three months ended December 31, 2022 from $84.2 million during the three months ended December 31, 2021, driven by a $8.3 million rise in DSA segment revenue and a $30.3 million rise in RMS segment revenue. Growth resulted primarily from acquisitions, favorable pricing for both segments, and increased customer demand at DSA that produced revenue exceeding acquisition contributions.

●

Consolidated net loss for the three months ended December 31, 2022 was $(86.9) million, or (70.8)% of total revenue, compared to consolidated net loss of $(83.4) million, or 99.1% of total revenue, in the three months ended December 31, 2021. The consolidated net loss in the three months ended December 31, 2022 included a $66.4 million non-cash goodwill impairment charge related to our RMS segment. The remaining consolidated net loss was primarily driven by the impact on revenue and gross margin from the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts can reasonably determine that the NHPs in inventory from Cambodia are purpose-bred.

·Book-to-bill ratio was 1.02x for the DSA services business.

●	DSA backlog was $147.9 million at December 31, 2022, up from $147.2 million at September 30, 2022 and $104.6 million at December 31, 2021.

Events Subsequent to December 31, 2022

●	On January 9, 2023, the Company entered into a Third Amendment to the Credit Agreement, as described below under “Liquidity and Capital Resources – Third Amendment to Credit Agreement.”

Results of Operations

Three Months Ended December 31, 2022 Compared to Three Months Ended December 31, 2021

DSA


(in millions, except percentages)	Three Months Ended
	December 31,
	2022			2021				$ Change	% Change
Revenue	$	41.1		$	32.8		$	8.3	25.3	%
Cost of revenue¹		28.0			20.6			7.4	35.9	%
Operating expenses²		8.8			5.2			3.6	69.2	%
Amortization of intangible assets		1.9			1.0			0.9	90.0	%
Operating income (loss)^{2, 3, 4}	$	2.4		$	6.0		$	(3.6)	(60.0)	%
Operating income (loss) % of total revenue		1.9	%		7.2	%
¹ Cost of revenue excludes amortization of intangible assets, which is separately stated
² Operating expenses includes selling, general and administrative and other operating expenses
³Goodwill impairment loss shown on the consolidated statement of operations only impact the RMS Segment
⁴ Table may not foot due to rounding

DSA revenue increased $8.3 million in the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase in the DSA revenue was primarily driven by revenue generated from Integrated Laboratory Systems, LLC (“ILS”), which was acquired on January 10, 2022. The remaining increase was primarily driven by an increase in general toxicology services.

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DSA operating income decreased by $3.6 million in the three months ended Decemner 31, 2022 compared to the three months ended December 31, 2021, primarily due to higher operating expenses. Operating expenses increased due to increases in selling costs, primarily due to increased revenue, and general and administrative expenses (“G&A”) reflecting various acquisitions, as well as strategic investments in G&A expense to support additional future revenue growth, which included additional headcount and higher compensation expense, among other costs. Amortization of intangibles increased year over year primarily as a result of additional acquired intangible assets since December 31, 2021.

RMS


(in millions, except percentages)	Three Months Ended
	December 31,
	2022			2021				$ Change	% Change
Revenue	$	81.7		$	51.4		$	30.3	58.9	%
Cost of revenue¹		73.1			44.3			28.8	65.0	%
Operating expenses²		6.6			4.6			2.0	43.5	%
Amortization of intangible assets		6.9			2.4			4.5	187.5	%
Goodwill impairment loss^3,4		66.4			-			66.4	100.0	%
Operating (loss) income ^{2, 3, 4}	$	(71.3)		$	0.1		$	(71.4)	NM
Operating (loss) income % of total revenue		(58.1)	%		0.0	%
¹ Cost of revenue excludes amortization of intangible assets, which is separately stated
² Operating expenses includes selling, general and administrative and other operating expenses
³Goodwill impairment loss shown on the consolidated statement of operations only impact the RMS Segment
⁴ Table may not foot due to rounding, % change of operating (loss) income is not meaningful ("NM")

RMS revenue increased $30.3 million in the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase in the RMS revenue was due primarily to the timing of contributions from the acquisitions of Envigo, RSI and OBRC. Envigo was acquired on November 5, 2021, RSI was acquired on December 29, 2021, and OBRC was acquired on January 27, 2022.

RMS operating loss was $71.3 million in the three months ended December 31, 2022, a decrease of $71.4 million compared to the three months ended December 31, 2021, primarily due to a $66.4 million non-cash goodwill impairment charge related to our RMS segment. The Company determined that as a result of the November 16, 2022 event, which led to the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S., the uncertainty related to the Company’s ability to import NHPs from Cambodia and the decrease in its stock price, the carrying value of our goodwill as of December 31, 2022, must be quantitatively evaluated. The carrying value of the Company’s goodwill by reporting unit was determined utilizing the income approach. Based on the Company’s quantitative goodwill impairment test, the fair value of the DSA reporting unit exceeded the reporting unit’s carrying value and, therefore, goodwill was not impaired. However, the fair value of the RMS reporting unit was less than the RMS reporting unit’s carrying value. As a result, a goodwill impairment loss of $66.4 million was recorded within the RMS segment.

Additionally, operating expenses increased primarily due to increases in selling costs, primarily due to increased revenue, and G&A expenses reflecting various acquisitions, as well as strategic investments in G&A expense to support additional future revenue growth, which included additional headcount, higher compensation expense and higher legal expense, among other costs. Amortization of intangibles increased year-over-year, primarily as a result of additional acquired intangible assets since December 31, 2021.

Unallocated Corporate


(in millions, except percentages)	Three Months Ended
	December 31,
	2022			2021				$ Change	% Change
Operating (loss)¹	$	(21.7)		$	(39.8)		$	18.1	(45.5)	%
Operating (loss) % of total revenue		(17.7)	%		(47.2)	%
¹ Operating (loss) includes selling, general and administrative and other operating expenses

Unallocated corporate costs consist of selling and general and administrative and other operating expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $18.1 million, compared to the corresponding period in 2021 was primarily related to a decrease in stock-based compensation expense. Unallocated corporate costs for the three months ended December 31, 2021 included a one-time charge of $23.0 million for post combination stock compensation expense relating to the adoption of the Envigo Equity Plan. Offsetting the decrease in stock compensation expense was an increase in

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unallocated corporate costs due to general and administrative expenses reflecting various acquisitions, as well as strategic investments in G&A expense to support additional future revenue growth, which included additional headcount, higher compensation expense and higher legal expense, amongst other costs. Additionally, for the three months ended December 31, 2022, unallocated corporate costs included $1.3 million for legal, consulting and audit fees incurred in connection with the impact of the Company’s decision to refrain from selling or delivering Cambodian NHPs held in the U.S. Costs as a percentage of revenue for the three months ended December 31, 2022 was 17.7% compared to 47.2% for the corresponding period in 2021.

Other Expense

Other expense decreased by $50.2 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The decrease in other expense was primarily due to a decrease of $55.8 million in other expense for the three months ended December 31, 2022, primarily as a result of one-time charges of $56.7 million during the three months ended December 31, 2021 of fair value remeasurement of the embedded derivative component of the convertible notes issued in September 2021, partially offset by an increase in interest expense of $5.6 million in the three months ended December 31, 2022 compared to the three months ended December 31, 2021, as a result of the additional debt obtained in connection with various acquisitions.

Income Taxes

Our effective income tax rates for the three months ended December 31, 2022 and 2021 were 15.5% and 13.3%, respectively. The benefit recorded for each period was $16.0 million and $12.8 million, respectively. The income tax benefit in the three months ended December 31, 2022 related to deferred tax benefits on the pre-tax loss, partially offset by the impact on tax expense of non-deductible goodwill impairment and other permanent items. The benefit from income taxes in the three months ended December 31, 2021 related primarily to deferred tax liabilities established as part of the acquisition of Envigo, which resulted in a release of valuation allowance, as well as the impact on tax expense of certain book to tax differences on the deductibility of certain transaction costs and non-deductibility of the loss on fair value remeasurement of the embedded derivative component of the convertible notes.

Consolidated net loss

As a result of the above described factors, we had a consolidated net loss of $86.9 million for the three months ended December 31, 2022 as compared to consolidated net loss of $83.4 million during the three months ended December 31, 2021.

Liquidity and Capital Resources

Comparative Cash Flow Analysis

At December 31, 2022, we had cash and cash equivalents of $20.8 million, compared to $18.5 million at September 30, 2022.

Net cash used in operating activities was $(7.4) million for the three months ended December 31, 2022 compared to net cash used by operating activities of $(1.1) million for the three months ended December 31, 2021. Net cash used in operations in the three months ended December 31, 2022, was primarily driven by a net loss of $(86.9) million for the three months ended December 31, 2022, partially offset by a net increase in operating assets and liabilities of $13.4 million and a net increase in noncash charges of $66.1 million. Changes in noncash charges included, but are not limited to, $66.4 million for goodwill impairment loss, $13.3 million for depreciation and amortization, $2.0 million for non-cash stock compensation expense, non-cash interest and accretion of $1.4 million, amortization of debt issuance costs and original issue discount of $0.7 million and non-cash amortization of inventory fair value step-up of $0.2 million, partially offset by changes in deferred taxes of $(20.1) million.

Contributing factors to our cash used by operations in the first three months of fiscal 2021 were noncash charges of $56.7 million for loss on fair value measurement of convertible senior notes, $19.2 million for non-cash stock compensation expense, changes in deferred taxes of $14.3 million, a net increase due to changes in operating assets and liabilities of $8.4 million, $6.0 million for depreciation and amortization, and non-cash amortization of inventory fair value step-up of $3.7 million.

Net cash used in investing activities of $8.2 million in the three months ended December 31, 2022 was due mainly to capital expenditures of $8.4 million. The capital additions during the three months ended December 31, 2022 primarily consisted of investments in facility improvements, site expansions, enhancements to laboratory technology, and system enhancements to improve the client experience.

Investing activities used $232.4 million in the three months ended December 31, 2021 due mainly to cash paid in the acquisition of Plato, Envigo and RSI and capital expenditures of $5.7 million. The capital additions during the three months ended December 30,

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2021 consisted of the renovation and expansion of the Denver, Pennsylvania facility and continued construction of our St. Louis facility, as well as purchases of certain lab equipment.

Financing activities provided $18.4 million in the three months ended December 31, 2022. The cash provided in the three months ended December 31, 2022 primarily included borrowings on the delayed draw term loan of $35.0 million, partially offset by the repayment on the revolving loan facility of $15.0 million.

Financing activities provided $119.5 million in the three months ended December 31, 2021. The cash provided in the first three months of fiscal 2022 included borrowings on a senior term loan of $165.0 million and borrowings on construction loans of $1.2 million, partially offset by payments of long-term borrowings of $37.8 million, debt issuance costs of $7.1 million and repayment of our previous capex line of credit of $1.7 million.

Capital Resources

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 (the “Agent”), entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in the original principal amount of $165.0 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 credit facility in the original principal amount of $15.0 million. On November 5, 2021, the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the delayed draw term loan facility or the revolving credit facility.

On January 7, 2022, the Company drew $35.0 million on the delayed draw term loan facility. The delayed draw term loan facility in the original principal amount of $35.0 million is referred to herein as the “Initial DDTL”. Amounts outstanding under the Initial DDTL accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Interest expense was accrued at an effective rate of 9.91% for the three months ended December 31, 2022.

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First Amendment to Credit Agreement

On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and the Agent, as administrative agent, entered into a First Amendment (the “First Amendment”) to the existing Credit Agreement. The First Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $40.0 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 “Additional DDTL” and together with the Initial DDTL, the “DDTL”). The Incremental Term Loans and any amounts borrowed under the Additional DDTL are referred to herein as the “Additional Term Loans”. On January 27, 2022, the Company borrowed the full amount of the Incremental Term Loans, and October 12, 2022, the Company borrowed the full $35.0 million of the Additional DDTL.

Amounts outstanding under the Additional Term Loans will accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Actual interest accrued at 9.84% for the three months ended December 31, 2022.

The Additional Term Loans require annual principal payments in an amount equal to 1.0% of the original principal amount. Voluntary prepayments of the Additional Term Loans will be subject to a 2% prepayment premium if made on or prior to November 5, 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.

The Additional Term Loans will mature on November 5, 2026.

Second Amendment to Credit Agreement

On December 29, 2022, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement.

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Long term debt as of December 31, 2022 and September 30, 2022 is detailed in the table below.


	As of:
(in millions)	December 31, 2022		September 30, 2022
Seller Note – Bolder BioPath		0.8		0.8
Seller Note – Preclinical Research Services		0.6		0.6
Seller Note – Plato BioPharma		0.6		1.5
Seller Payable - Orient BioResource Center		3.6		3.5
Seller Note – Histion		0.3		0.4
Seller Note – Protypia		0.6		0.6
Economic Injury Disaster Loan		0.1		0.1
Convertible Senior Notes		106.3		105.0
Term Loan Facility, DDTL and Incremental Term Loans		272.5		238.2
		385.5		350.7
Less: Current portion		(7.6)		(8.0)
Less: Debt issuance costs not amortized		(12.3)		(12.0)
Total long-term debt	$	365.6	$	330.7
Note: Table may not foot due to rounding

As of December 31, 2022, the Company did not have an outstanding balance on the revolving credit facility.

Third Amendment to Credit Agreement

●

the use of borrowings under the revolving credit facility is limited to funding operational expenses of the Company in the ordinary course and cannot be used for the making or funding of investments, permitted acquisitions or restricted payments, payments or purchases with respect to any indebtedness, bonuses or executive compensation, or judgments, fines or settlements; and

●

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the receipt by the Company of certain cash receipts, including proceeds from certain equity issuances and cash received by the Company not in the ordinary course of business. Under the Third Amendment, after any draw on the revolving credit facility, the Company’s cash and cash equivalents held on hand domestically within the U.S. cannot exceed $10 million.

Acquisition-related Debt

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.

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, which is a part of the Company’s subsidiary, Bronco Research Services, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $0.4 million. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of April 1, 2025.

As part of the acquisition of Protypia, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Protypia in an aggregate principal amount of $0.6 million. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of January 7, 2024.

Convertible Senior Notes

On September 27, 2021, the Company issued $140.0 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 $15.0 million principal amount of the Notes issued pursuant to the full exercise by the initial purchaser of such option. The Company used the net proceeds from the offering of the Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of the Envigo acquisition and related fees and expenses.

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Before April 15, 2027, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 15, 2027, noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company’s election. The initial conversion rate is 21.7162 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.

As of December 31, 2022 and September 30, 2022, there were $4.8 million and $5.1 million, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended December 31, 2022, the total interest expense was $2.8 million, including coupon interest expense of $1.2 million, accretion expense of $1.4 million, and the amortization of debt discount and issuance costs of $0.2 million.

The Notes 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.

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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 three months ended December 31, 2021 of $56.7 million.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of December 31, 2022, our debt portfolio was reliant on reference rates. Based on our interest rate exposure at December 31, 2022, assumed debt levels throughout the next 12 months, 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.

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 loss 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 December 31, 2022 cash balance by approximately $0.9 million and our revenue by approximately $2.4 million for the three months ended December 31, 2022.

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ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, including those designed to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to the Company’s management, including our President and Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2022 because of the material weaknesses in internal control over financial reporting described below.

Previously Identified Material Weaknesses

We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

As of September 30, 2022, management identified the following material weaknesses in internal controls, which continued to exist as of December 31, 2022:

a) Management did not design and maintain effective controls over information technology general controls (ITGCs) for all applications that are relevant to the preparation of the consolidated financial statements throughout the year ended September 30, 2022, which resulted in ineffective business process controls (automated and IT-dependent manual controls) that could result in misstatements potentially impacting all of the financial statement accounts and disclosures. Specifically, management did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; and program change management controls to ensure that information technology (IT) program and data changes affecting financial information technology applications and underlying accounting records are authorized, tested, and implemented appropriately. As a result, business process controls (automated and IT-dependent manual controls) that are dependent on the ineffective ITGCs, or that use data produced from systems impacted by the ineffective ITGCs were deemed ineffective at September 30, 2022; and

b) Management did not have an adequate process in place to design and test the operating effectiveness of internal control over financial reporting in a timely manner or an adequate process in place to monitor and provide oversight over the completion of its assessment of internal controls over financial reporting. As such, we determined that management did not effectively design and implement components of the COSO framework to address all relevant risks of material misstatement, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to: (i) providing sufficient and timely management oversight and ownership over the internal control evaluation process; (ii) hiring and training sufficient personnel to timely support the Company’s internal control objectives; and (iii) performing timely monitoring and oversight to ascertain whether the components of internal control are present and functioning effectively. As a result, controls relevant to all business processes and related controls (including relevant entity level controls) were deemed ineffective at September 30, 2022.

Additionally, management determined that the material weakness previously identified and disclosed related to the accounting for the tax impacts of acquisitions that qualify as stock transactions for tax purposes existing as of September 30, 2021 continued to exist as of December 31, 2022 without remediation and is included and appropriately resides within the COSO related material weakness identified above.

Our management continues to re-assess the design of controls and modifying processes designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including but not limited to, (a) hiring additional accounting and IT personnel with appropriate technical skillsets, (b) improving consistency in ITGCs supported by standard operating procedures to govern the authorization, testing and approval of changes to information technology systems supporting all of

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the Company’s internal control processes, (c) enhancing design and implementation of our control environment, including the expansion of formal accounting and IT policies and procedures and financial reporting controls, and (d) implementing appropriate timely review and oversight responsibilities within the accounting and financial reporting functions.

The material weaknesses cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Controls

Except for the changes in connection with our remediation activities as described above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the first quarter of fiscal 2023 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 14 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 in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, including those disclosed under the heading “Risk Factors” appearing in Item 1A of Part I of the Form 10-K. 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.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

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	Second Amended and Restated Articles of Incorporation of Inotiv, Inc. as amended through November 4, 2021 (incorporated by reference to Exhibit 3.1 to Form 8-K filed November 5, 2021).

	3.2	Third Amended and Restated Bylaws of Inotiv, Inc. as amended through November 2, 2022 (incorporated by reference to Exhibit 3.2 to Form 10-K filed January 13, 2023).

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	10.1	Second Amendment to Credit Agreement, dated as of December 29, 2022, among Inotiv, Inc., certain subsidiaries of Inotiv, Inc., the lenders party thereto, and Jefferies Finance LLC (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 5, 2023).

	10.2	Third Amendment to Credit Agreement, dated as of January 9, 2023, by and among Inotiv, Inc., certain subsidiaries of Inotiv, Inc., the lenders party thereto and Jefferies Finance LLC (incorporated by reference to Exhibit 10.27 to Form 10-K filed January 13, 2023).

(31)	31.1	Certification of Principal Executive Officer (filed herewith).

	31.2	Certification of Principal Financial Officer (filed herewith).

(32)	32.1	Written Statement of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith).

	32.2	Written Statement of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith).

	101	Inline XBRL data file (filed herewith)
	104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:


Date: February 14, 2023	INOTIV, INC.
	(Registrant)

	By:	/s/ Robert W. Leasure
	Robert W. Leasure
	President and Chief Executive Officer
	(Principal Executive Officer)



Date: February 14, 2023	By:	/s/ Beth A. Taylor
	Beth A. Taylor
	Chief Financial Officer and Senior Vice President of Finance (Principal Financial Officer)



Date: February 14, 2023	By:	/s/ Brennan Freeman
	Brennan Freeman
	Vice President of Finance and Corporate Controller (Principal Accounting Officer)

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