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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2023
| OR |
| o | 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, IN (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 x No o
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 x No o
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 o | Accelerated filer o | Non-accelerated filer x | Smaller Reporting Company x | Emerging growth company o

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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 28, 2023, 25,782,742 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 June 30, 2023 (Unaudited) and September 30, 2022 | 5
| Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2023 and 2022 (Unaudited) | 6
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2023 and 2022 (Unaudited) | 7
| Condensed Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest for the Three and Nine Months Ended June 30, 2023 and 2022 (Unaudited) | 8
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2023 and 2022 (Unaudited) | 10
| Notes to Condensed Consolidated Financial Statements | 12
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 43
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 57
Item 4 | Controls and Procedures | 58
PART II | OTHER INFORMATION |
Item 1 | Legal Proceedings | 59
Item 1A | Risk Factors | 59
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 59
Item 3 | Defaults Upon Senior Securities | 59
Item 4 | Mine Safety Disclosures | 59
Item 5 | Other Information | 59
Item 6 | Exhibits | 60
| Signatures | 61

3

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Index to Consolidated Financial Statements

| Page
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 12
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION | 12
2. REVENUE FROM CONTRACTS WITH CUSTOMERS | 14
3. SEGMENT AND GEOGRAPHIC INFORMATION | 15
4. BUSINESS COMBINATIONS | 17
5. GOODWILL AND INTANGIBLE ASSETS | 24
6. DEBT | 25
7. SUPPLEMENTAL BALANCE SHEET INFORMATION | 31
8. DEFINED BENEFIT PLAN | 32
9. OTHER OPERATING EXPENSE | 33
10. RESTRUCTURING AND ASSETS HELD FOR SALE | 33
11. LEASES | 35
12. EQUITY, STOCK-BASED COMPENSATION AND E ARNING S (LOSS) PER SHARE | 37
13. INCOME TAXES | 38
14. CONTINGENCIES | 39
15. SUBSEQUENT EVENTS | 42

4

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INOTIV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

| June 30, |  | September 30,
| 2023 |  | 2022
| (Unaudited) |  |
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 22,220 |  |  | $ | 18,515 |
Restricted cash | — |  |  | 465 |
Trade receivables and contract assets, net of allowances for credit losses of $8,365 and $6,268, respectively | 82,771 |  |  | 100,073 |
Inventories, net | 53,920 |  |  | 71,441 |
Prepaid expenses and other current assets | 35,519 |  |  | 42,483 |
Assets held for sale | 8,708 |  |  | — |
Total current assets | 203,138 |  |  | 232,977 |
Property and equipment, net | 189,089 |  |  | 186,199 |
Operating lease right-of-use assets, net | 41,426 |  |  | 32,489 |
Goodwill | 94,286 |  |  | 157,825 |
Other intangible assets, net | 317,553 |  |  | 345,886 |
Other assets | 9,342 |  |  | 7,524 |
Total assets | $ | 854,834 |  |  | $ | 962,900 |
Liabilities, shareholders' equity and noncontrolling interest |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 30,499 |  |  | $ | 28,695 |
Accrued expenses and other liabilities | 23,450 |  |  | 35,801 |
Revolving credit facility | — |  |  | 15,000 |
Fees invoiced in advance | 50,443 |  |  | 68,642 |
Current portion of long-term operating lease | 10,755 |  |  | 7,982 |
Current portion of long-term debt | 3,810 |  |  | 7,979 |
Liabilities held for sale | 2,271 |  |  | — |
Total current liabilities | 121,228 |  |  | 164,099 |
Long-term operating leases, net | 31,795 |  |  | 24,854 |
Long-term debt, less current portion, net of debt issuance costs | 371,752 |  |  | 330,677 |
Other long-term liabilities | 5,913 |  |  | 6,477 |
Deferred tax liabilities, net | 48,816 |  |  | 77,027 |
Total liabilities | 579,504 |  |  | 603,134 |
Contingencies (Note 14) |  |  |
Shareholders’ equity and noncontrolling interest: |  |  |
Common shares, no par value: |  |  |
Authorized 74,000,000 shares at June 30, 2023 and at September 30, 2022; 25,782,742 issued and outstanding at June 30, 2023 and 25,598,289 at September 30, 2022 | 6,513 |  |  | 6,362 |
Additional paid-in capital | 713,601 |  |  | 707,787 |
Accumulated deficit | (444,443) |  |  | (348,277) |
Accumulated other comprehensive income (loss) | 392 |  |  | (5,500) |
Total equity attributable to common shareholders | 276,063 |  |  | 360,372 |
Noncontrolling interest | (733) |  |  | (606) |
Total shareholders’ equity and noncontrolling interest | 275,330 |  |  | 359,766 |
Total liabilities and shareholders’ equity and noncontrolling interest | $ | 854,834 |  |  | $ | 962,900 |

The accompanying notes are an integral part of the condensed consolidated financial statements
5

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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Service revenue | $ | 56,295 |  |  | $ | 60,119 |  |  | $ | 165,095 |  |  | $ | 147,879 |
Product revenue | 101,173 |  |  | 112,547 |  |  | 266,590 |  |  | 249,311 |
Total revenue | $ | 157,468 |  |  | 172,666 |  |  | $ | 431,685 |  |  | $ | 397,190 |
Costs and expenses: |  |  |  |  |  |  |
Cost of services provided (excluding amortization of intangible assets) | 39,115 |  |  | 34,477 |  |  | 112,688 |  |  | 91,991 |
Cost of products sold (excluding amortization of intangible assets) | 63,229 |  |  | 87,253 |  |  | 197,255 |  |  | 190,212 |
Selling | 4,793 |  |  | 4,802 |  |  | 14,058 |  |  | 12,187 |
General and administrative | 26,570 |  |  | 21,652 |  |  | 84,574 |  |  | 56,251 |
Amortization of intangible assets | 8,717 |  |  | 8,854 |  |  | 25,951 |  |  | 18,664 |
Other operating expense | 6,261 |  |  | 10,841 |  |  | 14,712 |  |  | 48,871 |
Goodwill impairment loss | — |  |  | — |  |  | 66,367 |  |  | — |
Operating income (loss) | $ | 8,783 |  |  | $ | 4,787 |  |  | $ | (83,920) |  |  | $ | (20,986) |
Other (expense) income: |  |  |  |  |  |  |
Interest expense | (10,786) |  |  | (8,441) |  |  | (31,751) |  |  | (20,816) |
Other (expense) income | (12) |  |  | 440 |  |  | (1,345) |  |  | (57,426) |
Loss before income taxes | $ | (2,015) |  |  | $ | (3,214) |  |  | $ | (117,016) |  |  | $ | (99,228) |
Income tax benefit (expense) | 2,380 |  |  | (342) |  |  | 20,820 |  |  | 5,597 |
Consolidated net income (loss) | $ | 365 |  |  | $ | (3,556) |  |  | $ | (96,196) |  |  | $ | (93,631) |
Less: Net (loss) income attributable to noncontrolling interests | (1,475) |  |  | 172 |  |  | (719) |  |  | (769) |
Net income (loss) attributable to common shareholders | $ | 1,840 |  |  | $ | (3,728) |  |  | $ | (95,477) |  |  | $ | (92,862) |
Income (loss) per common share |  |  |  |  |  |  |
Net income (loss) attributable to common shareholders: |  |  |  |  |  |  |
Basic | $ | 0.07 |  |  | $ | (0.15) |  |  | $ | (3.72) |  |  | $ | (3.88) |
Diluted | $ | 0.07 |  |  | $ | (0.15) |  |  | $ | (3.72) |  |  | $ | (3.88) |
Weighted-average number of common shares outstanding: |  |  |  |  |  |  |
Basic | 25,726 |  | 25,510 |  | 25,690 |  | 23,938
Diluted | 26,021 |  | 25,510 |  | 25,690 |  | 23,938

The accompanying notes are an integral part of the condensed consolidated financial statements.
6

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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Consolidated net income (loss) | $ | 365 |  |  | $ | (3,556) |  |  | $ | (96,196) |  |  | $ | (93,631) |
Foreign currency translation | (392) |  |  | (2,851) |  |  | 5,651 |  |  | (3,718) |
Defined benefit plans: |  |  |  |  |  |  |
Pension cost amortization | (55) |  |  | 173 |  |  | (163) |  |  | 403 |
Foreign currency translation | 137 |  |  | — |  |  | 404 |  |  | — |
Other comprehensive (loss) income, net of tax | (310) |  |  | (2,678) |  |  | 5,892 |  |  | (3,315) |
Consolidated comprehensive income (loss) | 55 |  |  | (6,234) |  |  | (90,304) |  |  | (96,946) |
Less: Comprehensive (loss) income attributable to non-controlling interests | (1,475) |  |  | 172 |  |  | (719) |  |  | (769) |
Comprehensive income (loss) attributable to common stockholders | $ | 1,530 |  |  | $ | (6,406) |  |  | $ | (89,585) |  |  | $ | (96,177) |

The accompanying notes are an integral part of the condensed consolidated financial statements.
7

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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(In thousands, except number of shares)
(Unaudited)

| Common Shares |  | Additional paid-in capital |  | Accumulated deficit |  | Accumulated Other Comprehensive (Loss) Income |  | Non- Controlling Interests |  | Total shareholders’ equity
| Number |  | Amount |  |  |  |  |
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 |
Consolidated net loss | — |  | — |  |  | — |  |  | (9,629) |  |  | — |  |  | (365) |  |  | (9,994) |
Issuance of stock under employee stock plans | 152,471 |  | 128 |  |  | (46) |  |  | — |  |  | — |  |  | — |  |  | 82 |
Stock-based compensation | — |  | — |  |  | 1,781 |  |  | — |  |  | — |  |  | — |  |  | 1,781 |
Pension cost amortization | — |  | — |  |  | — |  |  | — |  |  | (54) |  |  | — |  |  | (54) |
Foreign currency translation adjustment | — |  | — |  |  | — |  |  | — |  |  | 962 |  |  | — |  |  | 962 |
Other | — |  | — |  |  | — |  |  | — |  |  | — |  |  | 51 |  |  | 51 |
Balance at March 31, 2023 | 25,759,107 |  | $ | 6,491 |  |  | $ | 711,591 |  |  | $ | (444,838) |  |  | $ | 702 |  |  | $ | (1,311) |  |  | $ | 272,635 |
Consolidated net income | — |  | — |  |  | — |  |  | 365 |  |  | — |  |  | 1,475 |  |  | 1,840 |
Issuance of stock under employee stock plans | 23,635 |  | 22 |  |  | (19) |  |  | — |  |  | — |  |  | — |  |  | 3 |
Noncontrolling interest related to Envigo acquisition | — |  | — |  |  | — |  |  | — |  |  | — |  |  | (961) |  |  | (961) |
Stock-based compensation | — |  | — |  |  | 2,029 |  |  | — |  |  | — |  |  | — |  |  | 2,029 |
Pension cost amortization | — |  | — |  |  | — |  |  | — |  |  | (55) |  |  | — |  |  | (55) |
Foreign currency translation adjustment | — |  | — |  |  | — |  |  | — |  |  | (255) |  |  | — |  |  | (255) |
Other | — |  | — |  |  | — |  |  | 30 |  |  | — |  |  | 64 |  |  | 94 |
Balance June 30, 2023 | 25,782,742 |  | $ | 6,513 |  |  | $ | 713,601 |  |  | $ | (444,443) |  |  | $ | 392 |  |  | $ | (733) |  |  | $ | 275,330 |

8

Table of Contents

| Common Shares |  | Additional paid-in capital |  | Accumulated deficit |  | Accumulated Other Comprehensive (Loss) Income |  | Non- Controlling Interests |  | Total shareholders’ equity
| Number |  | Amount |  |  |  |  |
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 | — |  | — |  |  | 88,576 |  |  | — |  |  | — |  |  | — |  |  | 88,576 |
Balance at December 31, 2021 | 24,348,594 |  | $ | 6,050 |  |  | $ | 679,261 |  |  | $ | (94,426) |  |  | $ | 137 |  |  | $ | (619) |  |  | $ | 590,403 |
Consolidated net (loss) income | — |  | — |  |  | — |  |  | (6,664) |  |  | — |  |  | 577 |  |  | (6,087) |
Stock issued in acquisitions | 1,106,457 |  | 276 |  |  | 32,599 |  |  | — |  |  | — |  |  | — |  |  | 32,875 |
Noncontrolling interest related to Envigo acquisition | — |  | — |  |  | — |  |  | — |  |  | — |  |  | (191) |  |  | (191) |
Issuance of stock under employee stock plans | 40,650 |  | 10 |  |  | 36 |  |  | — |  |  | — |  |  | — |  |  | 46 |
Stock-based compensation | — |  | — |  |  | 1,138 |  |  | — |  |  | — |  |  | — |  |  | 1,138 |
Pension cost amortization | — |  | — |  |  | — |  |  | — |  |  | 340 |  |  | — |  |  | 340 |
Foreign currency translation adjustment | — |  | — |  |  | — |  |  | — |  |  | (1,105) |  |  | (9) |  |  | (1,114) |
Balance at March 31, 2022 | 25,495,701 |  | $ | 6,336 |  |  | $ | 713,034 |  |  | $ | (101,090) |  |  | $ | (628) |  |  | $ | (242) |  |  | $ | 617,410 |
Consolidated net loss | — |  | — |  |  | — |  |  | (3,556) |  |  | — |  |  | (172) |  |  | (3,728) |
Stock issued in acquisitions | 17,618 |  | 4 |  |  | 360 |  |  | — |  |  | — |  |  | — |  |  | 364 |
Noncontrolling interest related to Envigo acquisition | — |  | — |  |  | — |  |  | — |  |  | — |  |  | 271 |  |  | 271 |
Issuance of stock under employee stock plans | 2,472 |  | 1 |  |  | 6 |  |  | — |  |  | — |  |  | — |  |  | 7 |
Stock-based compensation | — |  | — |  |  | 1,987 |  |  | — |  |  | — |  |  | — |  |  | 1,987 |
Pension cost amortization | — |  | — |  |  | — |  |  | — |  |  | 173 |  |  | — |  |  | 173 |
Foreign currency translation adjustment | — |  | — |  |  | — |  |  | — |  |  | (2,851) |  |  | — |  |  | (2,851) |
Balance at June 30, 2022 | 25,515,791 |  | $ | 6,341 |  |  | $ | 715,387 |  |  | $ | (104,646) |  |  | $ | (3,306) |  |  | $ | (143) |  |  | $ | 613,633 |

The accompanying notes are an integral part of the condensed consolidated financial statements.
9

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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

| Nine Months Ended June 30,
| 2023 |  | 2022
Operating activities: |  |  |
Consolidated net loss | $ | (96,196) |  |  | $ | (93,631) |
Adjustments to reconcile net loss to net cash used in operating activities, net of acquisitions: |  |  |
Depreciation and amortization | 40,117 |  |  | 31,867 |
Employee stock compensation expense | 5,856 |  |  | 22,285 |
Changes in deferred taxes | (27,114) |  |  | (8,385) |
Provision for expected credit losses | 2,175 |  |  | 661 |
Amortization of debt issuance costs and original issue discount | 2,339 |  |  | 1,907 |
Non-cash interest and accretion expense | 4,608 |  |  | 3,906 |
Loss on fair value remeasurement of embedded derivative | — |  |  | 56,714 |
Other non-cash operating activities | 1,034 |  |  | (94) |
Goodwill impairment loss | 66,367 |  |  | — |
Loss on debt extinguishment | — |  |  | 877 |
Non-cash amortization of inventory fair value step-up | 563 |  |  | 10,039 |
Non-cash restructuring costs | 889 |  |  | 2,990 |
Changes in operating assets and liabilities: |  |  |
Trade receivables and contract assets | 13,047 |  |  | (30,565) |
Inventories | 16,550 |  |  | (26,589) |
Prepaid expenses and other current assets | 6,272 |  |  | (14,743) |
Operating lease right-of-use assets and liabilities, net | 779 |  |  | 447 |
Accounts payable | 4,128 |  |  | 8,129 |
Accrued expenses and other liabilities | (11,048) |  |  | (3,327) |
Fees invoiced in advance | (18,098) |  |  | 32,789 |
Other asset and liabilities, net | (3,148) |  |  | (665) |
Net cash provided by (used in) operating activities | 9,120 |  |  | (5,388) |
Investing activities: |  |  |
Capital expenditures | (21,324) |  |  | (31,275) |
Proceeds from sale of equipment | 268 |  |  | 277 |
Cash paid in acquisitions | — |  |  | (287,129) |
Net cash used in investing activities | (21,056) |  |  | (318,127) |
Financing activities: |  |  |
Payments of long-term debt | — |  |  | (36,777) |
Payments of debt issuance costs | (77) |  |  | (10,067) |
Payments on promissory notes | (1,780) |  |  | (1,362) |
Payments on revolving credit facility | (21,000) |  |  | (19,000) |
Payments on senior term notes and delayed draw term loans | (2,070) |  |  | (1,200) |
Borrowings on revolving loan facility | 6,000 |  |  | 19,000 |
Borrowings on delayed draw term loan | 35,000 |  |  | 35,000 |
Proceeds from exercise of stock options | 109 |  |  | 102 |
Proceeds from issuance of senior term notes | — |  |  | 205,000 |
Other, net | — |  |  | (1,534) |
Net cash provided by financing activities | 16,182 |  |  | 189,162 |
Effect of exchange rate changes on cash and cash equivalents | 753 |  |  | (852) |

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Net increase (decrease) in cash and cash equivalents | 4,999 |  |  | (135,205) |
Less: cash, cash equivalents, and restricted cash held for sale | (1,759) |  |  | — |
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 | $ | 22,220 |  |  | $ | 21,719 |
Non-cash financing activity: |  |  |
Seller financed acquisition | $ | — |  |  | $ | 6,288 |
Paid in kind debt issuance costs | $ | 1,363 |  |  | $ | — |
Supplemental disclosure of cash flow information: |  |  |
Cash paid for interest | $ | 26,889 |  |  | $ | 11,914 |
Income taxes paid, net | $ | 5,979 |  |  | $ | 666 |

The accompanying notes are an integral part of the condensed consolidated financial statements.
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INOTIV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share amounts, unless otherwise indicated)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Inotiv, Inc. and its subsidiaries (“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 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,
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2023, and through the date of this report, and after an internal analysis and review, the Company has shipped a 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 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 nine months ended June 30, 2023, and expected future impacts.
Liquidity
As of June 30, 2023, the Company had cash and cash equivalents of approximately $22,220. 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 (as defined in Note 6 – Debt) 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.
As a result of the Company's site optimization strategy, the Company announced the completion of the closure of the Cumberland, Virginia (“Cumberland”) facility during the first quarter of fiscal year 2023. Further, the Dublin, Virginia (“Dublin”) facility transition was completed in November 2022, the exits of the Boyertown, Pennsylvania (“Boyertown”) and Haslett, Michigan (“Haslett”) facilities were completed in March 2023 and the relocation of operations for Gannat, France (“Gannat”) and St. Louis, Missouri (“RMS St. Louis”) were completed in June 2023. In addition to the completed closures and consolidations, the facility in Blackthorn, U.K. (“Blackthorn”) is expected to be complete by the end of June 2024. Refer to Note 10 – Restructuring and Assets Held for Sale for further information regarding the site optimization plan.
Further, the Company has executed 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 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 and nine months ended June 30, 2023 and 2022 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of the Company’s financial position at June 30, 2023. The results of operations for the three and nine months ended June 30, 2023 are not necessarily indicative of the results for the fiscal year ending September 30, 2023. Certain prior year amounts have been reclassified within the statements of cash flows for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
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Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. These include, but are not limited to, management estimates in the calculation and timing of revenue recognition, pension liabilities, deferred tax assets and liabilities and the related valuation allowance. Although estimates are based upon management’s best estimate using historical experience, current events, and actions, actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Consolidation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company, including all subsidiaries and a 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 income (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, and there have been no material changes to those significant accounting policies.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables from customers in the biopharmaceutical, contract research, academic, and governmental sectors. The Company believes its exposure to credit risk is minimal, as the majority of the customers are predominantly well established and viable. Additionally, the Company maintains allowances for potential credit losses. The Company’s exposure to credit loss in the event that payment is not received for revenue recognized equals the outstanding trade receivables and contract assets less fees invoiced in advance.
During the three and nine months ended June 30, 2023, one customer accounted for 19.7% and 22.5% of sales, respectively. During the three and nine months ended June 30, 2022, one customer accounted for 30.9% and 28.9% of sales, respectively. During the three and nine months ended June 30, 2023, no vendors accounted for more than 10% of cost of revenues. During the three and nine ended June 30, 2022, one vendor accounted for 13.0% and 13.7% of cost of revenues, respectively.
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 product revenue through the commercial production, procurement 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.
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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 June 30, 2023 |  | Balance at September 30, 2022
Contract assets: Trade receivables | $ | 74,492 |  |  | $ | 88,867 |
Contract assets: Unbilled revenue | 16,644 |  |  | 17,474 |
Contract liabilities: Customer deposits | 32,409 |  |  | 39,222 |
Contract liabilities: Deferred revenue | 18,034 |  |  | 29,420

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 approxima tely $15,737 and $2,647 of unpaid advanced client billings from both client receivables and deferred revenue as of June 30, 2023 and September 30, 2022, respectively.
Changes in the contract asset and the contract liability balances during the nine months ended June 30, 2023 include the following:
•Changes in the time frame for a right for consideration to become unconditional – approximately 94.0% of unbilled revenue as of September 30, 2022, was billed during the nine months ended June 30, 2023; and
•Changes in the time frame for a performance obligation to be satisfied – approximately 75.7% of deferred revenue as of September 30, 2022, was recognized as revenue during the nine months ended June 30, 2023.
3. SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information
During the three and nine months ended June 30, 2023, the RMS segment reported intersegment revenue of $3,471 and $7,858 to the DSA segment, respectively. During the three and nine months ended June 30, 2022, the RMS segment reported intersegment revenue of $2,257 and $4,574 to the DSA segment, respectively. The following tables present revenue and other financial information by reportable segment:
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| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Revenue |  |  |  |  |  |  |
DSA: |  |  |  |  |  |  |
Service revenue | $ | 45,197 |  |  | $ | 48,217 |  |  | $ | 131,313 |  |  | $ | 118,154 |
Product revenue | 1,561 |  |  | 1,007 |  |  | 3,561 |  |  | 2,949 |
RMS: |  |  |  |  |  |  |
Service revenue | 11,098 |  |  | 11,902 |  |  | 33,782 |  |  | 29,725 |
Product revenue | 99,612 |  |  | 111,540 |  |  | 263,029 |  |  | 246,362 |
| $ | 157,468 |  |  | $ | 172,666 |  |  | $ | 431,685 |  |  | $ | 397,190 |
Operating Income (Loss) |  |  |  |  |  |  |
DSA | $ | 4,182 |  |  | $ | 13,171 |  |  | $ | 8,478 |  |  | $ | 22,965 |
RMS | 21,886 |  |  | 11,902 |  |  | (36,661) |  |  | 34,544 |
Unallocated Corporate | (17,285) |  |  | (20,286) |  |  | (55,737) |  |  | (78,495) |
| $ | 8,783 |  |  | $ | 4,787 |  |  | $ | (83,920) |  |  | $ | (20,986) |
Interest expense | (10,786) |  |  | (8,441) |  |  | (31,751) |  |  | (20,816) |
Other (expense) income | (12) |  |  | 440 |  |  | (1,345) |  |  | (57,426) |
Loss before income taxes | $ | (2,015) |  |  | $ | (3,214) |  |  | $ | (117,016) |  |  | $ | (99,228) |

| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Depreciation and amortization: |  |  |  |  |  |  |
DSA | $ | 4,235 |  |  | $ | 3,438 |  |  | $ | 11,826 |  |  | $ | 9,396 |
RMS | 9,629 |  |  | 12,563 |  |  | 28,291 |  |  | 22,471 |
| $ | 13,864 |  |  | $ | 16,001 |  |  | $ | 40,117 |  |  | $ | 31,867 |
Capital expenditures: |  |  |  |  |  |  |
DSA | $ | 2,403 |  |  | 7,614 |  |  | $ | 9,667 |  |  | $ | 14,031 |
RMS | 2,081 |  |  | 8,459 |  |  | 11,657 |  |  | 17,244 |
| $ | 4,484 |  |  | $ | 16,073 |  |  | $ | 21,324 |  |  | $ | 31,275 |

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

| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
United States | $ | 132,265 |  |  | $ | 150,540 |  |  | $ | 361,254 |  |  | $ | 340,875 |
Netherlands | 15,682 |  |  | 12,894 |  |  | 42,426 |  |  | 31,549 |
Other | 9,521 |  |  | 9,232 |  |  | 28,005 |  |  | 24,766 |
| $ | 157,468 |  |  | $ | 172,666 |  |  | $ | 431,685 |  |  | $ | 397,190 |

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

| June 30, |  | September 30,
| 2023 |  | 2022
United States | $ | 175,451 |  |  | $ | 173,417 |
Netherlands | 6,625 |  |  | 5,824 |
Other | 7,803 |  |  | 6,958 |
| $ | 189,879 |  |  | $ | 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
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 |

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
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straight-line basis. The estimated 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.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Plato acquisition as a result of book-to-tax differences primarily related to the intangible assets.
Envigo RMS Holding Corp Acquisition
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.
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Goodwill, which is derived from the expanded client base, the ability to provide products and services for the entirety of discovery and nonclinical development within one organization, and to ensure supply for internal use, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and $50,428 is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Robinson Services, Inc. Acquisition
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
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
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 does not bear interest and is required to be paid to the Seller on the date that is 18 months after the closing. On April 4, 2023, the Company extended by one year the maturity of the seller payable pursuant to the stock purchase agreement (“SPA”) with the Seller of OBRC. Refer to Note 6 – Debt for further information related to amendments of the terms of the payable due to the Seller. 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.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the OBRC acquisition as a result of book-to-tax differences primarily related to the intangible assets and property and equipment.
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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 10.1 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.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the OBRC acquisition as a result of book-to-tax differences primarily related to the intangible assets and step up on the fair value of inventory.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and 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.
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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.
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:

| July 7, 2022
Assets acquired and liabilities assumed: |
Goodwill | 6,002 |
Intangible assets | 5,600 |
Other liabilities, net | (84) |
Deferred tax liabilities | (652) |
| $ | 10,866 |

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 8.1 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.
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 Protypia acquisition as a result of book-to-tax differences primarily related to the intangible assets.
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 and nine months ended June 30, 2022, assume that the acquisitions had occurred as of October 1, 2021. Pro forma information for the three and nine months ended June 30, 2023, is not presented here, as the statement of operations for the three and nine months ended June 30, 2023, 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.
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The unaudited pro forma information is as follows:

| Three Months Ended June 30, 2022 |  | Nine Months Ended June 30, 2022
Total revenues | $ | 173,395 |  |  | $ | 443,116 |
Net loss | $ | (3,578) |  |  | $ | (102,053) |

5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following is a rollforward of the Company’s goodwill:

| September 30, 2022 |  | Acquisitions |  | Impairment |  | June 30, 2023
DSA | $ | 91,458 |  |  | $ | 2,828 |  |  | $ | — |  |  | $ | 94,286 |
RMS | 302,372 |  |  | — |  |  | — |  |  | 302,372 |
Gross Carrying Amount | 393,830 |  |  | 2,828 |  |  | — |  |  | 396,658 |
Accumulated impairment loss - RMS | (236,005) |  |  | — |  |  | (66,367) |  |  | (302,372) |
Goodwill | $ | 157,825 |  |  | $ | 2,828 |  |  | $ | (66,367) |  |  | $ | 94,286 |

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 as of June 30, 2023 is attributed to the DSA segment. Further, certain measurement period adjustments related to the acquisitions of Histion and Protypia were identified during the nine months ended June 30, 2023, which are reflected as changes in goodwill due to acquisitions within the Company’s DSA reportable segment.
Intangible Assets, Net
The following table displays intangible assets, net by major class:

| June 30, 2023
| Carrying Amount, Gross |  | Accumulated Amortization |  | Carrying Amount, Net
Customer relationships | $ | 317,272 |  |  | $ | (47,771) |  |  | $ | 269,501 |
Intellectual property | 56,393 |  |  | (10,667) |  |  | 45,726 |
Non-compete agreements | 2,410 |  |  | (1,214) |  |  | 1,196 |
Other | 2,396 |  |  | (1,266) |  |  | 1,130 |
| $ | 378,471 |  |  | $ | (60,918) |  |  | $ | 317,553 |

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| September 30, 2022
| Carrying Amount, Gross |  | Accumulated Amortization |  | Carrying 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 nine months ended June 30, 2023 related to measurement period adjustments to intangible assets for the Protypia acquisition, partially offset by amortization over the applicable useful lives and by the impact of foreign exchange rates.
6. DEBT
Long term debt as of June 30, 2023 and September 30, 2022 is detailed in the table below.

| June 30, 2023 |  | September 30, 2022
Seller Note – Bolder BioPath | $ | 658 |  |  | $ | 808 |
Seller Note – Preclinical Research Services | 560 |  |  | 615 |
Seller Note – Plato BioPharma | — |  |  | 1,470 |
Seller Payable - Orient BioResource Center | 3,633 |  |  | 3,488 |
Seller Note – Histion | 265 |  |  | 369 |
Seller Note – Protypia | 600 |  |  | 600 |
Economic Injury Disaster Loan | 140 |  |  | 140 |
Convertible Senior Notes | 109,165 |  |  | 104,965 |
Term Loan Facility, DDTL and Incremental Term Loans | 272,755 |  |  | 238,200 |
| $ | 387,776 |  |  | $ | 350,655 |
Less: Current portion | (3,810) |  |  | (7,979) |
Less: Debt issuance costs not amortized | (12,214) |  |  | (11,999) |
Total long-term debt | $ | 371,752 |  |  | $ | 330,677 |

Revolving Credit Facility
As of June 30, 2023 and September 30, 2022, the Company had a $0 and $15,000 outstanding balance on the revolving credit facility. Refer to the statements of cash flows for information related to borrowings and paydowns of the revolving credit facility during the nine months ended June 30, 2023.
Significant Transactions
On October 12, 2022, the Company drew its $35,000 delayed draw term loan (the “Additional DDTL”) allowed under the First Amendment to the Credit Agreement (“First Amendment”). A portion of the proceeds were used to repay the $15,000 balance on the Company’s revolving credit facility, while the remaining was drawn to fund a portion of the Company’s capital expenditures in fiscal year 2022 and those planned for fiscal year 2023.
On December 29, 2022 and January 9, 2023, the Company, the lenders party thereto, and Jefferies Finance LLC, as administrative agent (the “Agent”), entered into the Second and Third Amendments, respectively, to the Credit Agreement. Refer below for further information related to those amendments.
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Term Loan Facility, DDTL and Incremental Term Loans
Credit Agreement
On November 5, 2021, the Company, certain subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and 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 $165,000, a delayed draw term loan facility in the original principal amount of $35,000 (available to be drawn up to 18 months from the date of the Credit Agreement) (the “Initial DDTL” and together with the Additional DDTL, the “DDTL”) and a 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 could have elected 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 accrued 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 had to be a minimum of 1.00%. The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%. Adjusted prime rate loans 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 was the prime rate plus 5.25%. For the term loan facility, interest expense was accrued at an effective rate of 10.25% and 10.29% for the three and nine months ended June 30, 2023, respectively.
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. Voluntary prepayments will be subject to a 1.0% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
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 nine months ended June 30, 2022.
On January 7, 2022, the Company drew $35,000 on the Initial DDTL. Amounts outstanding under the Initial DDTL accrued 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 was the LIBOR rate plus 6.25%. For the Initial DDTL, interest expense was accrued at an effective rate of 10.22% and 10.31% for the three and nine months ended June 30, 2023, respectively.
First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and the Agent entered into the First Amendment to the existing Credit Agreement. The First Amendment provides for, among other things, an increase
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to the existing term loan facility in the amount of $40,000 (the “Incremental Term Loans”) and the Additional DDTL in the original principal amount of $35,000, which amount is available to be drawn up to 24 months from the date of the First Amendment. 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 accrued 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 was the LIBOR rate plus 6.25%. For the Additional DDTL, interest expense was accrued at an effective rate of 10.35% and 10.47% for the three and nine months ended June 30, 2023, respectively.
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 1.0% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
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 could have elected 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. Term SOFR loans accrued 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 could 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 could 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 “Second Amendment Alternate Base Rate”); provided that, the Second Amendment Alternate Base Rate could 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.
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The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement, 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 timely satisfied each of these requirements.
Third Amendment to Credit Agreement
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;
•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
•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 $10,000.
Under the Third Amendment, the Company may elect to borrow on each of the loan facilities accruing interest at either an adjusted secured overnight financing rate (“Term SOFR”) or an alternate base rate of interest. 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, the Adjusted Term SOFR shall never be less than 1.00% per annum, plus (ii) an applicable margin of 6.75% per annum for term loans maintained as SOFR loans or 9.50% per annum for revolving loans maintained as SOFR loans. 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 0.50%, (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 is subject to a floor of 2.00% per annum plus (ii) an applicable margin of 5.75% per annum for term loans maintained as Alternate Base Rate loans or 8.50% per annum for revolving loans maintained as Alternate Base Rate loans.
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
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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
Acquisition-related Debt (Seller Notes)
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 was originally required to be paid to the 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. On April 4, 2023, the Company and the Seller entered into a First Amendment to extend the maturity date of the payable to July 27, 2024. This extension did not affect the rights and remedies of any party to the SPA, nor alter, modify or amend or in any way affect any of the terms and conditions, obligations, covenants or agreements contained in the SPA.
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 interest payments and principal payments on July 7, 2023, and on the maturity date, 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.
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
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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 June 30, 2023 and September 30, 2022, there were $4,402 and $5,060, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended June 30, 2023, the total interest expense was $2,726, including coupon interest expense of $1,071, accretion expense of $1,436, and the amortization of debt discount and issuance costs of $219. During the three months ended June 30, 2022, the total interest expense was $2,665, including coupon interest expense of $1,150, accretion expense of $1,302, and the amortization of debt discount and issuance costs of $213. For the nine months ended June 30, 2023, the total interest expense was $8,229, including coupon interest expense of $3,371, accretion expense of $4,200, and the amortization of debt discount and issuance costs of $658. During the nine months ended June 30, 2022, the total interest expense was $7,895, including coupon interest expense of $3,450, accretion expense of $3,814, and the amortization of debt discount and issuance costs of $631.
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.
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
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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, Stock-Based Compensation and Earnings (Loss) Per Share), 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 nine months ended June 30, 2022 of $56,714.
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
Trade receivables and contract assets, net consisted of the following:

| June 30, |  | September 30,
| 2023 |  | 2022
Trade receivables | $ | 74,492 |  |  | $ | 88,867 |
Unbilled revenue | 16,644 |  |  | 17,474 |
Total | 91,136 |  |  | 106,341 |
Less: Allowance for credit losses | (8,365) |  |  | (6,268) |
Trade receivables and contract assets, net of allowances for credit losses | $ | 82,771 |  |  | $ | 100,073 |

Inventories, net consisted of the following:

| June 30, |  | September 30,
| 2023 |  | 2022
Raw materials | $ | 2,094 |  |  | $ | 1,757 |
Work in progress | 126 |  |  | 186 |
Finished goods | 4,805 |  |  | 4,933 |
Research Model Inventory | 50,481 |  |  | 68,055 |
Total | 57,506 |  |  | 74,931 |
Less: Obsolescence reserve | (3,586) |  |  | (3,490) |
Inventories, net | $ | 53,920 |  |  | $ | 71,441 |

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Prepaid expenses and other current assets consisted of the following:

| June 30, |  | September 30,
| 2023 |  | 2022
Advances to suppliers | $ | 23,828 |  |  | $ | 30,292 |
Prepaid research models | 2,906 |  |  | 3,575 |
Income tax receivable | 1,935 |  |  | 366 |
Other | 6,850 |  |  | 8,250 |
Prepaid expenses and other current assets | $ | 35,519 |  |  | $ | 42,483 |

The composition of other assets is as follows:

| June 30, |  | September 30,
| 2023 |  | 2022
Long-term advances to suppliers | $ | 4,250 |  |  | $ | 2,894 |
Funded status of defined benefit plan | 3,019 |  |  | 1,573 |
Debt issuance costs - revolving credit facility | 341 |  |  | 1,411 |
Finance lease right-of-use assets, net | 47 |  |  | 79 |
Other | 1,685 |  |  | 1,567 |
Other assets | $ | 9,342 |  |  | $ | 7,524 |

Accrued expenses consisted of the following:

| June 30, |  | September 30,
| 2023 |  | 2022
Accrued compensation | $ | 8,285 |  |  | $ | 17,460 |
Non-income taxes | 3,413 |  |  | 1,200 |
Accrued interest | 2,967 |  |  | 5,228 |
Accrued professional fees | 2,717 |  |  | 4,366 |
Other | 6,068 |  |  | 7,547 |
Accrued expenses and other liabilities | $ | 23,450 |  |  | $ | 35,801 |

The composition of fees invoiced in advance is as follows:

| June 30, |  | September 30,
| 2023 |  | 2022
Customer deposits | $ | 32,409 |  |  | $ | 39,222 |
Deferred revenue | 18,034 |  |  | 29,420 |
Fees invoiced in advance | $ | 50,443 |  |  | $ | 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 $1,266 to the Pension Plan. As of June 30, 2023, the funded status of the defined benefit plan obligation of $3,019 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 June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Components of net periodic (benefit) expense: |  |  |  |  |  |  |
Interest cost | $ | 187 |  |  | $ | 207 |  |  | $ | 551 |  |  | $ | 344 |
Expected return on assets | (203) |  |  | (352) |  |  | (600) |  |  | (681) |
Amortization of prior (gain) loss | (39) |  |  | 177 |  |  | (114) |  |  | 454 |
Net periodic (benefit) expense | $ | (55) |  |  | $ | 32 |  |  | $ | (163) |  |  | $ | 117 |

9. OTHER OPERATING EXPENSE
Other operating expense consisted of the following:

| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Acquisition and integration costs | $ | 105 |  |  | $ | 3,682 |  |  | $ | 1,193 |  |  | $ | 14,575 |
Restructuring costs 1 | 1,303 |  |  | 4,861 |  |  | 3,309 |  |  | 4,861 |
Startup costs | 1,781 |  |  | 1,731 |  |  | 5,567 |  |  | 4,162 |
Remediation costs | 857 |  |  | 364 |  |  | 1,997 |  |  | 1,310 |
Other costs | 2,215 |  |  | 203 |  |  | 2,646 |  |  | 949 |
Acquisition-related stock compensation costs 2 | — |  |  | — |  |  | — |  |  | 23,014 |
| $ | 6,261 |  |  | $ | 10,841 |  |  | $ | 14,712 |  |  | $ | 48,871 |
1 Restructuring costs represent costs incurred in connection with the exit of the facilities discussed in Note 10 – Restructuring and Assets Held for Sale.
2 Refer 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
During June 2022, the Company approved and announced a plan to close its facility in Cumberland. Further, the Company’s site consolidation strategy includes the following sites, which have been identified for relocation of operations: Dublin, Gannat, Blackthorn, RMS St. Louis, Boyertown and Haslett.
For the three and nine months ended June 30, 2023, 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 and planned site consolidations. Exit and disposal costs were charged to other operating expense. Further, as of June 30, 2023, the liability balance for exit and disposal costs that qualify as employee-related exit and disposal costs was $654.
Cumberland and Dublin
The Cumberland facility exit was a part of the transfer plan settlement, as further described in Note 14 – Contingencies. The Cumberland facility exit was completed in September 2022. The real property of the Cumberland facility initially met the criteria for assets held for sale as of March 31, 2023. Further, in connection with this conclusion, the Company determined that the carrying value exceeded the fair value of the real property at the Cumberland facility less costs to sell. As a result, asset impairment charges of $213 and $891 were recorded within the RMS reportable segment during the three and nine months ended June 30, 2023, respectively. The real property of the Cumberland facility continued to meet the criteria for assets held for sale as of June 30, 2023. The Dublin facility transition was completed in November 2022. The operations at both the Cumberland facility and the Dublin facility were within the RMS reporting segment.
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Gannat, Blackthorn and RMS St. Louis
During the nine months ended June 30, 2023, the Company completed its consultation with employee representatives at the Gannat and Blackthorn facilities and the closures of both facilities were approved. The consolidation of operations at Gannat with the operations in Horst, the Netherlands was completed in June 2023, and the consolidation of the operations at the Blackthorn facility with the operations in Hillcrest, U.K. is expected to be complete by the end of June 2024. As of June 30, 2023, the real property of the Gannat and Blackthorn facilities met the criteria for assets held for sale. The RMS St. Louis facility closed in June 2023 and the GEMS operations at the RMS St. Louis facility were relocated to the DSA St. Louis facility and other operational facilities. The operations at the Gannat, Blackthorn and RMS St. Louis facilities are within the RMS reportable segment.
Boyertown and Haslett
Prior to the acquisition of Envigo, the Boyertown and Haslett facilities were identified for relocation of operations to the Denver, Pennsylvania facility. The exits of the Boyertown and Haslett facilities were completed in March 2023. Further, it was determined that the assets of the Boyertown and Haslett facilities initially met the criteria for assets held for sale as of March 31, 2023 and continues to be held for sale as of June 30, 2023.
Israel
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, the net assets and liabilities of the Israeli Businesses met the criteria for assets held for sale as of March 31, 2023 and continues to be held for sale as of June 30, 2023. This sale is expected to close by the end of the fiscal year ending September 30, 2023 and will be reflected in the RMS reportable segment. The combined income (loss) before taxes of the Israeli Businesses for the three and nine months ended June 30, 2023 was $670 and $(424), respectively.
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Assets Held for Sale
The assets and liabilities, and the resulting net assets held for sale, of the Israeli Businesses and the Boyertown, Haslett, Cumberland, Gannat and Blackthorn facilities are as follows:

| June 30, 2023
Assets |
Current assets: |
Cash and cash equivalents | $ | 1,305 |
Restricted cash | 454 |
Trade receivables and contract assets, net of allowances for credit losses | 2,686 |
Inventories, net | 673 |
Prepaid expenses and other current assets | 1,190 |
Total current assets | $ | 6,308 |
Property and equipment, net | 2,400 |
Total assets | $ | 8,708 |
Liabilities |
Current liabilities: |
Accounts payable | $ | 207 |
Accrued expenses and other liabilities | 1,566 |
Fees invoiced in advance | 498 |
Total liabilities | $ | 2,271 |
Net assets held for sale | $ | 6,437 |

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 eleven 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 21 to 84 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:

| June 30, 2023 |  | September 30, 2022
Operating ROU assets, net | $ | 41,426 |  |  | $ | 32,489 |
Current portion of operating lease liabilities | 10,755 |  |  | 7,982 |
Long-term operating lease liabilities | 31,795 |  |  | 24,854 |
Total operating lease liabilities | $ | 42,550 |  |  | $ | 32,836 |
Finance ROU assets, net | $ | 47 |  |  | $ | 79 |
Current portion of finance lease liabilities | 31 |  |  | 43 |
Long-term finance lease liabilities | 19 |  |  | 41 |
Total finance lease liabilities | $ | 50 |  |  | $ | 84 |

During the three and nine months ended June 30, 2023, the Company had operating lease amortization of $2,067 and $6,469, respectively. During the three and nine months ended June 30, 2022, the Company had operating lease amortization of $2,421 and $4,989, 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 and nine months ended June 30, 2023 were:

| Three Months Ended June 30, |  | Nine Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Operating lease costs: |  |  |  |  |  |  |
Fixed operating lease costs | $ | 2,800 |  |  | $ | 2,187 |  |  | $ | 8,714 |  |  | $ | 5,882 |
Short-term lease costs | 41 |  |  | 11 |  |  | 103 |  |  | 56 |
Lease income | (794) |  |  | (566) |  |  | (2,278) |  |  | (1,732) |
Finance lease costs: |  |  |  |  |  |  |
Amortization of ROU asset expense | 10 |  |  | 6 |  |  | 31 |  |  | 18 |
Interest on finance lease liability | 1 |  |  | 1 |  |  | 2 |  |  | 2 |
Total lease cost | $ | 2,058 |  |  | $ | 1,639 |  |  | $ | 6,572 |  |  | $ | 4,226 |

The Company serves as lessor to a lessee in six 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.
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Supplemental cash flow information related to leases was as follows:

| Nine Months Ended June 30,
| 2023 |  | 2022
Cash flows included in the measurement of lease liabilities: |  |  |
Operating cash flows from operating leases | $ | 8,397 |  |  | $ | 2,205 |
Operating cash flows from finance leases | 34 |  |  | 5 |
Financing cash flows from finance leases | 2 |  |  | 1 |
Non-cash lease activity: |  |  |
ROU assets obtained in exchange for new operating lease liabilities | $ | 15,938 |  |  | $ | 7,658 |

The weighted average remaining lease term and discount rate for the Company’s operating and finance leases as of June 30, 2023 and 2022 were:

| June 30, 2023 |  | June 30, 2022
Weighted-average remaining lease term (in years) |  |  |
Operating lease | 6.26 |  | 5.60
Finance lease | 1.62 |  | 2.79
Weighted-average discount rate (in percentages) |  |  |
Operating lease | 7.98 | % |  | 5.45 | %
Finance lease | 4.86 | % |  | 4.86 | %

Lease duration was determined utilizing renewal options that the Company is reasonably certain to execute.
As of June 30, 2023, 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) | $ | 2,935 |  |  | $ | 9 |
2024 | 10,863 |  |  | 31 |
2025 | 9,097 |  |  | 10 |
2026 | 7,787 |  |  | 2 |
2027 | 5,833 |  |  | — |
Thereafter | 19,193 |  |  | — |
Total minimum future lease payments | 55,708 |  |  | 52 |
Less interest | (13,158) |  |  | (2) |
Total lease liability | 42,550 |  |  | 50 |

12. EQUITY, STOCK-BASED COMPENSATION AND EARNINGS (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
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certain limitations in the Equity Plan. At June 30, 2023, 374,953 shares remained available for grants under the Equity Plan.
Stock Issued in Connection with Acquisitions
During the three and nine months ended June 30, 2023, no common shares were issued in relation to acquisitions. During the three and nine months ended June 30, 2022, 17,618 and 9,498,213 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 June 30, 2023 and 2022, was $2,029 and $1,987, respectively. Stock based compensation expense for the nine months ended June 30, 2023 and 2022, was $5,856 and $27,057, respectively. Of the $27,057 stock based compensation expense during the nine months ended June 30, 2022, $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.
Earnings (Loss) per Share
The Company computes basic earnings (loss) per share using the weighted average number of common shares outstanding. The Company computes diluted earnings (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.
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share:

| Three Months Ended June 30, |  | Nine Months Ended June 30, |  |  |  |  |  |  |  |  |  |  |
| 2023 |  | 2022 |  | 2023 |  | 2022 |  |  |  |  |  |  |  |  |  |  |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated net income (loss) | $ | 365 |  |  | $ | (3,556) |  |  | $ | (96,196) |  |  | $ | (93,631) |  |  |  |  |  |  |  |  |  |  |  |
Less: Net (loss) income attributable to noncontrolling interests | (1,475) |  |  | 172 |  |  | (719) |  |  | (769) |  |  |  |  |  |  |  |  |  |  |  |
Net income (loss) attributable to common shareholders | 1,840 |  |  | (3,728) |  |  | (95,477) |  |  | (92,862) |  |  |  |  |  |  |  |  |  |  |  |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Weighted-average shares outstanding - Basic | 25,726 |  | 25,510 |  | 25,690 |  | 23,938 |  |  |  |  |  |  |  |  |  |  |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock options, restricted stock units and restricted stock awards | 295 |  | — |  | — |  | — |  |  |  |  |  |  |  |  |  |  |
Weighted-average shares outstanding - Diluted | 26,021 |  | 25,510 |  | 25,690 |  | 23,938 |  |  |  |  |  |  |  |  |  |  |
Anti-dilutive common share equivalents (1) | 5,494 |  | 5,549 |  | 5,790 |  | 5,549 |  |  |  |  |  |  |  |  |  |  |
(1) Anti-dilutive common share equivalents are comprised of stock options, restricted stock units, restricted stock awards and 3,040,268 shares of common stock issuable upon conversion in connection with the convertible debt entered into on September 27, 2021.These common share equivalents were outstanding for the periods presented, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect. |  |  |  |  |  |  |  |  |  |  |

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
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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 Company’s effective tax rates for the three months ended June 30, 2023 and 2022 were 118.1% and (10.6)%, respectively. For the three months ended June 30, 2023, the Company’s effective tax rate was primarily driven by a change in the Company's forecasted loss before income taxes, resulting in a catch up adjustment. For the three months ended June 30, 2022, the Company’s effective tax rate was driven by an increase in unfavorable permanent items and discrete adjustments.
The Company’s effective tax rates for the nine months ended June 30, 2023 and 2022 were 17.8% and 5.6%, respectively. For the nine months ended June 30, 2023, the Company’s effective tax rate was primarily related to the impact of non-deductible goodwill impairment and other discrete adjustments. For the nine months ended June 30, 2022, the Company’s effective tax rate was primarily related to a release of valuation allowance due to deferred tax liabilities established as part of the acquisition of Envigo, as well as the impact of certain book to tax differences on the deductibility of transaction costs, loss on fair value remeasurement of the embedded derivative component of the convertible notes, 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. The Company settled the previously reported uncertain tax position derived from the acquisition of Envigo with a taxing authority during the nine months ended June 30, 2023, with no impact on consolidated net loss. As of June 30, 2023, the Company had no material liability for uncertain tax positions.
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.
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 non-exempt 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. On June 2, 2023, Envigo RMS and the plaintiff signed a Memorandum of Understanding (“MOU”) that sets forth the parties’ intent to settle these matters for $795 which includes attorneys’ fees. The MOU provides that the parties will negotiate and enter into a definitive settlement agreement, which will be subject to court approval. The MOU contains no admission of liability or wrongdoing by Envigo RMS. The MOU provides that, if the settlement is approved by the court, the settlement amount would be paid in four quarterly installments, with the first one to be funded after the court’s final approval of the settlement, and the following ones in the three
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subsequent quarters. While the timeline for final court approval is not yet determined, the Company has taken a reserve equal to the proposed settlement amount, which is included in accrued expenses and other liabilities.
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 “Exchange 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 Exchange 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. On January 27, 2023, the defendants filed a motion to dismiss the amended complaint. That motion has been fully briefed since April 28, 2023, and is currently pending. 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. We cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for this matter.
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. On May 8, 2023, the Court entered an order staying the derivative action pending a resolution of a motion to dismiss in the securities class action.
On April 20, 2023, an additional shareholder derivative lawsuit was filed in the State of Indiana Tippecanoe County Circuit Court, 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 Whitfield v. Gregory C. Davis, et al., Case No. 79C01-2304-PL-000048 (Tippecanoe Circuit Court). The derivative action asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and waste of corporate assets arising out of the Company’s acquisition of Envigo and its regulatory compliance, and the Company’s non-human primate business. On June 20, 2023, the Court entered an order staying the derivative action pending resolution of a motion to dismiss in the securities class action.
On June 2, 2023, an additional shareholder derivative lawsuit was filed in the Indiana Commercial Court of Marion County, naming Robert W. Leasure, Beth A. Taylor, Carmen Wilbourn, 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 Castro v. Robert W. Leasure, et al., Case No. 49D01-2306-PL-022213 (Marion Superior Court 1). The derivative action asserts claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets arising out of the Company’s acquisition of Envigo and its regulatory compliance, and the Company’s NHP business. Defendants have until August 23, 2023 to respond to the complaint.
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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. We cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters.
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
The Company is subject to and/or involved in various government investigations, inquiries and actions, including those described below. Given their inherent uncertainty, the Company cannot predict the duration or outcome of the pending matters described below. An adverse outcome of any of the following matters could have a material adverse impact on the Company’s operations, financial condition, operating results and cash flows.
During the period from July 2021 through March 2022, Envigo RMS’s Cumberland facility was inspected on several occasions by the U.S. Department of Agriculture (“USDA”). USDA issued inspection reports with findings of non-compliance with certain USDA laws and regulations. Envigo RMS formally appealed certain of the findings, and made multiple remediations and improvements at the Cumberland facility, of which it kept USDA apprised.
On May 18, 2022, the U.S. Department of Justice (“DOJ”), together with federal and state law enforcement agents, executed a search and seizure warrant on the Cumberland facility. The warrant was issued by the U.S. District Court for the Western District of Virginia on May 13, 2022. In 2022, EGSI and Inotiv received grand jury subpoenas and other requests from the U.S. Attorney’s Office for the Western District of Virginia (“USAO-WDVA”) for documents and information related to the companies’ compliance with the Animal Welfare Act (“AWA”), the Clean Water Act (“CWA”), the Virginia State Water Control Law and local pretreatment requirements from January 2017 to present. On July 23, 2023, EGSI and Inotiv received a grand jury subpoena from USAO-WDVA for documents related to the Cumberland facility’s compliance with the Clean Air Act, Virginia Air Pollution Control Laws and Regulations, and local requirements from January 1, 2017 to present. Also on July 23, 2023, Inotiv received a grand jury subpoena from USAO-WDVA for documents and information related to the Company’s Alice, Texas facilities’ compliance with the CWA, the Texas State Water Control Law, and local pretreatment requirements from January 1, 2020 to present. Certain current and former employees have also received subpoenas for testimony and documents related to these matters. The Company is continuing to cooperate with USAO-WDVA and other involved authorities, and is evaluating the potential to resolve the matter. While an unfavorable outcome is probable, the Company cannot predict whether or when it will be able to do resolve the matter or reasonably estimate the range of loss.
As previously disclosed, on May 19, 2022, a civil complaint was filed by DOJ against Envigo RMS in the U.S. District Court for the Western District of Virginia alleging violations of the AWA at the Cumberland facility. On July 15, 2022, the court approved a settlement entered into by Envigo RMS, DOJ and the USDA in this civil case, which also comprised USDA’s administrative claims against Envigo RMS for the Cumberland facility, and the civil and administrative complaints were dismissed with prejudice on September 14, 2022. This matter is now fully resolved.
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-SDFL”) 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-SDFL 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-SDFL 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-SDFL 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-SDFL.
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-SDFL with conspiring to
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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.
On May 23, 2023, Inotiv received a voluntary request from the U.S. Securities and Exchange Commission (“SEC”) seeking documents and information for the period December 1, 2017 to the present regarding the Company, EGSI, and OBRC’s importation of NHPs from Asia, including information relating to whether their importation practices complied with the U.S. Foreign Corrupt Practices Act. The Company is fully cooperating with the SEC.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our services and products; (iii) trends in the industries that consume our services and products; (iv) our ability to develop or acquire new services and products; (v) our ability to source animal research models from Asia and our ability to continue to ship the inventory of remaining Cambodian non-human primates ("NHPs"); (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 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
Since fiscal year 2021, we have undertaken significant internal and external growth initiatives. Our growth initiatives include (1) acquisitions, (2) expansion of facilities and businesses, and (3) startup of new services. Previously, our growth initiatives focused on discovery and safety assessment 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: Discovery and Safety Assessment (“DSA”) and Research Models and Services (“RMS”). We have also engaged in restructuring and site optimization activities.
Update on Expansions of Facilities and Lines of Business
During the twelve months ended September 30, 2022, we initiated a facility expansion to our facility in Boulder, Colorado, 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, 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”). The facility buildout at Rockville was substantially complete in March 2023 and we are continuing to validate the equipment and assays required to support growth in both the genetic toxicology and biotherapeutics businesses. 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.
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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 and nine months ended June 30, 2023, we incurred start up costs of $1.8 million and $5.6 million, respectively. In the three and nine months ended June 30, 2022, we incurred start up costs of $1.7 million and $4.2 million, respectively.
Update on Restructurings and Site Optimization Plans
Over the past year, we approved and announced a plan to close our facility in Cumberland, Virginia and to consolidate the following sites, which were identified for relocation of operations: Dublin, Gannat, Blackthorn, RMS St. Louis, Boyertown and Haslett. Refer to Note 10 – Restructuring and Assets Held for Sale and to the Liquidity section below for further information regarding the site optimization plans. All sites identified for relocation are defined within the Liquidity section below.
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.
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 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 bus iness, 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 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”)
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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 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 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 $547.7 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 nine months ended June 30, 2023, and expected future impacts.
Liquidity
As of June 30, 2023, the Company had cash and cash equivalents of approximately $22.2 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 (as defined in Note 6 – Debt) 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.
As a result of the Company's site optimization strategy, the Company announced the completion of the closure of the Cumberland, Virginia (“Cumberland”) facility during the first quarter of fiscal year 2023. Further, the Dublin, Virginia (“Dublin”) facility transition was completed in November 2022, the exits of the Boyertown, Pennsylvania (“Boyertown”) and Haslett, Michigan (“Haslett”) facilities were completed in March 2023 and the relocation of operations for Gannat, France (“Gannat”) and and St. Louis, Missouri (“RMS St. Louis”) were completed in June 2023. In addition to the completed closures and consolidations, the facility in Blackthorn, U.K. (“Blackthorn”) is expected to be complete by the end of June 2024. Refer to Note 10 – Restructuring and Assets Held for Sale for further information regarding the site optimization plan.
Further, the Company has executed 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 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.
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Financial Highlights During Three Months Ended June 30, 2023
•Revenue was $157.5 million during the three months ended June 30, 2023 as compared to $172.7 million during the three months ended June 30, 2022, driven by a $2.4 million decrease in DSA revenue and a $12.7 million decrease in RMS revenue.
•Consolidated net income for the three months ended June 30, 2023 was $0.4 million, or 0.2% of total revenue, compared to consolidated net loss for the three months ended June 30, 2022 of $(3.6) million, or (2.1)% of total revenue.
•Book-to-bill ratio was 1.08x for the DSA services business.
•DSA backlog was $149.1 million at June 30, 2023, up from $143.2 million at June 30, 2022.
Financial Highlights During Nine Months Ended June 30, 2023
•Revenue grew to $431.7 million during the nine months ended June 30, 2023 from $397.2 million during the nine months ended June 30, 2022, driven by a $13.8 million increase in DSA revenue and a $20.7 million increase in RMS revenue.
•Consolidated net loss for the nine months ended June 30, 2023 was $(96.2) million, or (22.3)% of total revenue, compared to consolidated net loss of $(93.6) million, or (23.6)% of total revenue for the nine months ended June 30, 2022. Consolidated net loss for the nine months ended June 30, 2023 included a $66.4 million non-cash goodwill impairment charge related to the RMS segment. The YTD FY 2022 consolidated net loss included one-time charges of $56.7 million of fair value remeasurement of the embedded derivative component of the convertible notes issued in September 2021 and $23.0 million of post combination stock compensation expense relating to the adoption of the Envigo Equity Plan.
•Book-to-bill ratio was 1.01x for the DSA services business.
Results of Operations
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
DSA

(in millions, except percentages) | Three Months Ended June 30, |  |  |  |
| 2023 |  | 2022 |  | $ Change |  | % Change
Revenue | $ | 46.8 |  | $ | 49.2 |  | $ | (2.4) |  |  | (4.9) | %
Cost of revenue 1 | 29.5 |  | 27.4 |  | 2.1 |  | 7.7 | %
Operating expenses 2 | 11.4 |  | 7.2 |  | 4.2 |  | 58.3 | %
Amortization of intangible assets | 1.7 |  | 1.5 |  | 0.2 |  | 13.3 | %
Operating income 3 | $ | 4.2 |  | $ | 13.2 |  | $ | (8.9) |  |  | (67.4) | %
Operating income % of total revenue | 2.7 | % |  | 7.6 | % |  |  |  |
1 Cost of revenue excludes amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses
3 Table may not foot due to rounding

DSA revenue decreased by $2.4 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The decrease in the DSA revenue was primarily driven by our discovery services as a result of the decline in overall biotech funding in the market, plus the timing of general toxicology services. Partially offsetting this, we continue to see increased revenue from genetic toxicology services in connection with new business at our Rockville facility.
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DSA operating income decreased by $8.9 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022, due to the $2.4 million revenue decrease described above, an increase of $2.1 million in cost of revenue, an increase of $4.2 million in operating expenses, and an increase of $0.2 million in amortization of intangible assets. Cost of revenue increased due to the new services provided at the Rockville facility during the three months ended June 30, 2023. Operating expenses increased due to increases in general and administrative expense related to higher compensation expense, bad debt expense and legal and third party fees, as well as an increase in selling costs.
RMS

(in millions, except percentages) | Three Months Ended June 30, |  |  |  |
| 2023 |  | 2022 |  | $ Change |  | % Change
Revenue | $ | 110.7 |  | $ | 123.4 |  | $ | (12.7) |  |  | (10.3) | %
Cost of revenue 1 | 72.7 |  | 94.3 |  | (21.6) |  | (22.9) | %
Operating expenses 2 | 9.2 |  | 9.8 |  | (0.6) |  | (6.1) | %
Amortization of intangible assets | 6.9 |  | 7.4 |  | (0.5) |  | (6.8) | %
Operating income 3 | $ | 21.9 |  | $ | 11.9 |  | $ | 10.0 |  |  | 84.0 | %
Operating income % of total revenue | 13.9 | % |  | 6.9 | % |  |  |  |
1 Cost of revenue excludes amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses
3 Table may not foot due to rounding

RMS revenue decreased $12.7 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was due primarily to the negative impact of lower volumes of NHP sales offset by favorable pricing across several products, particularly NHPs. Lower volumes of NHP sales year over year was due to the lack of importation of NHPs from Cambodia beginning November 2022
RMS operating income was $21.9 million in the three months ended June 30, 2023, an increase of $10.0 million compared to the three months ended June 30, 2022, due to the $12.7 million decrease in revenue discussed above, offset by a decrease of $21.6 million in cost of revenue, a decrease of $0.5 million in amortization of intangible assets and a decrease of $0.6 million in operating expenses. The decrease in cost of revenue was primarily due to lower volumes of NHP sales, favorable cost reductions related to the site closures and optimizations as well as a reduction in non-cash inventory step-up amortization compared to last year. The decrease in operating expenses relates to decreased restructuring costs offset by higher compensation expense and legal fees incurred in connection with the U.S. Department of Justice ("DOJ") and the U.S. Attorney’s Office for the Western District of Virginia (“USAO-WDVA”) actions at the Cumberland facility as discussed in Note 14 – Contingencies, as well as related to the November 16, 2022 event.
Unallocated Corporate

(in millions, except percentages) | Three Months Ended June 30, |  |  |  |
| 2023 |  | 2022 |  | $ Change |  | % Change
Operating loss | $ | (17.3) |  |  | $ | (20.3) |  |  | $ | 3.0 |  |  | (14.8) | %
Operating loss % of total revenue 1,2 | (11.0) | % |  | (11.7) | % |  |  |  |
1 Operating loss includes selling, general and administrative and other operating expenses
2 Table may not foot due to rounding

Unallocated corporate costs consist of general and administrative and other operating expenses that are not directly related or allocated to the reportable segments. The decreased operating loss of $3.0 million was primarily driven by decreased acquisition and integration costs.
Other Expense
Other expense increased by $2.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 primarily driven by an increase of $2.4 million in interest expense as a result of increasing interest
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rates and additional debt obtained in connection with various acquisitions partially offset by changes in foreign exchange rates.
Income Taxes
The Company’s effective tax rates for the three months ended June 30, 2023 and 2022 were 118.1% and (10.6)%, respectively. For the three months ended June 30, 2023, the Company’s effective tax rate was primarily driven by a change in the Company’s loss before income taxes resulting in a catch-up adjustment.. For the three months ended June 30, 2022, the Company’s effective tax rate was driven by by the impact of unfavorable permanent items and discrete adjustments.
Consolidated Net Income (Loss)
As a result of the above described factors, we had consolidated net income of $0.4 million for the three months ended June 30, 2023 as compared to a consolidated net loss of $(3.6) million during the three months ended June 30, 2022.
Nine Months Ended June 30, 2023 Compared to Nine Months Ended June 30, 2022
DSA

(in millions, except percentages) | Nine Months Ended June 30, |  |  |  |
| 2023 |  | 2022 |  | $ Change |  | % Change
Revenue | $ | 134.9 |  | $ | 121.1 |  | $ | 13.8 |  |  | 11.4 | %
Cost of revenue 1 | 89.4 |  | 74.7 |  | 14.7 |  | 19.7 | %
Operating expenses 2 | 31.8 |  | 19.2 |  | 12.6 |  | 65.6 | %
Amortization of intangible assets | 5.2 |  | 4.3 |  | 0.9 |  | 20.9 | %
Operating income 3 | $ | 8.5 |  | $ | 23.0 |  | $ | (14.4) |  |  | (62.6) | %
Operating income % of total revenue | 2.0 | % |  | 5.8 | % |  |  |  |
1 Cost of revenue excludes amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses
3 Table may not foot due to rounding

DSA revenue increased $13.8 million in the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022. The increase in DSA revenue was primarily driven by additional revenue generated from Integrated Laboratory Systems, LLC (“ILS”), which was acquired on January 10, 2022, plus new services related to genetic toxicology and organic growth in general toxicology services. These increases in DSA service revenues were partially offset by decreases in our discovery services revenue primarily related to the decline in overall biotech funding in the market.
DSA operating income decreased by $14.4 million in the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022, due to the $13.8 million revenue increase described above, an increase of $14.7 million in cost of revenue, an increase of $12.6 million in operating expenses and an increase of $0.9 million in amortization of intangible assets. The increase in cost of revenue was driven by additional cost of revenue generated by ILS in addition to costs associated to expanded capacity as a result of capital investments and costs associated with the successful recruitment of scientists to begin adding services and capacity, some of which became available during the nine months ended June 30, 2023, and some of which are expected to become available during the remainder of the fiscal year. Operating expenses increased due to increases in selling costs, primarily due to increased revenue, increased compensation expense and increased start-up costs related to our Rockville facility, among other costs. Amortization of intangibles increased primarily as a result of additional acquired intangible assets.
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RMS

(in millions, except percentages) | Nine Months Ended June 30, |  |  |  |
| 2023 |  | 2022 |  | $ Change |  | % Change
Revenue | $ | 296.8 |  | $ | 276.1 |  | $ | 20.7 |  |  | 7.5 | %
Cost of revenue 1 | 220.5 |  | 207.5 |  | 13.0 |  | 6.3 | %
Operating expenses 2 | 25.9 |  | 19.6 |  | 6.3 |  | 32.1 | %
Amortization of intangible assets | 20.7 |  | 14.4 |  | 6.3 |  | 43.8 | %
Goodwill impairment loss 3,4 | 66.4 |  | — |  | 66.4 |  | 100.0 | %
Operating (loss) income 2, 3, 4 | $ | (36.7) |  | $ | 34.5 |  | $ | (71.3) |  |  | (206.7) | %
Operating (loss) income % of total revenue | (8.5) | % |  | 8.7 | % |  |  |  |
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
3 Goodwill 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 $20.7 million in the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022 due primarily to the favorable pricing across several products, particularly NHPs, partially offset by the negative impact of lower volumes of NHP sales and the lower sales of small animal models. Additionally, the increase in RMS revenue was impacted by the timing of contributions from acquisitions. 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 $(36.7) million in the nine months ended June 30, 2023, a decrease of $71.3 million compared to operating income of $34.5 million in the nine months ended June 30, 2022, due to the $20.7 million increase in revenue discussed above offset by an increase of $13.0 million in cost of revenue, and increase of $6.3 million in operating expenses, an increase of $6.3 million in amortization of intangible assets and a $66.4 million non-cash goodwill impairment charge related to our RMS segment. Refer to Note 5 for more information related to the goodwill impairment charge. The increase in cost of revenue was primarily due to the mix of products sold and inflationary pressure on product expenses, energy and wages, partially offset by a decrease in non-cash amortization of inventory step-up and reduced expenses related to the site closures and relocation of operations. Operating expenses increased by $6.3 million due to increases in selling costs, primarily due to increased revenue, higher compensation expense and higher legal fees incurred in connection with the November 16, 2022 event and the DOJ and USAO-WDVA actions at the Cumberland facility. Amortization of intangibles increased by $6.3 million primarily as a result of additional acquired intangible assets.
Unallocated Corporate

(in millions, except percentages) | Nine Months Ended June 30, |  |
| 2023 |  | 2022 |  | $ Change |  | % Change
Operating loss 1 | $ | (55.7) |  | $ | (78.5) |  | $ | 22.8 |  |  | (29.0) | %
Operating loss % of total revenue | (12.9) | % |  | (19.8) | % |  |  |  |
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 $22.8 million in the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022 was primarily related to a decrease in stock-based compensation expense. Unallocated corporate costs for the nine months ended June 30, 2022 included a one-time charge of $23.0 million for post combination stock compensation expense relating to the adoption of the Envigo Equity Plan.
Other Expense
Other expense decreased by $(45.1) million for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022. For the nine months ended June 30, 2022, there was a one-time charge of $56.7 million related to the
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fair value remeasurement of the embedded derivative component of the convertible notes issued in September 2021. The other expense decrease was partially offset by an increase in interest expense of $11.0 million in the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022, as a result of the draw of the $35.0 million delayed draw term loan allowed under the First Amendment to the Credit Agreement and rising interest rates. Refer to the "Liquidity and Capital Resources" section for further discussion of debt.
Income Taxes
The Company’s effective tax rates for the nine months ended June 30, 2023 and 2022 were 17.8% and 5.6%, respectively. For the nine months ended June 30, 2023, the Company’s effective tax rate was primarily related to the impact of non-deductible goodwill impairment and other discrete adjustments. For the nine months ended June 30, 2022, the Company’s effective tax rate was primarily related to a release of valuation allowance due to deferred tax liabilities established as part of the acquisition of Envigo, as well as the impact of certain book to tax differences on the deductibility of transaction costs, loss on fair value remeasurement of the embedded derivative component of the convertible notes, and other permanent items.
Consolidated Net Loss
As a result of the above described factors, we had a consolidated net loss of $(96.2) million for the nine months ended June 30, 2023 as compared to a consolidated net loss of $(93.6) million during the nine months ended June 30, 2022.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At June 30, 2023, we had cash and cash equivalents of $22.2 million, compared to $21.7 million at June 30, 2022.
Net cash provided by operating activities was $9.1 million for the nine months ended June 30, 2023 compared to net cash used in operating activities of $(5.4) million for the nine months ended June 30, 2022.
Net cash provided by operating activities in the nine months ended June 30, 2023, was driven by non-cash charges of $96.8 million and a net increase in operating assets and liabilities of $8.5 million, partially offset by a net loss of $(96.2) million. Non-cash charges included, but are not limited to, $66.4 million for goodwill impairment loss, $40.1 million for depreciation and amortization, $5.9 million for non-cash stock compensation expense, non-cash interest and accretion of $4.6 million, amortization of debt issuance costs and original issue discount of $2.3 million and provision for expected credit losses of $2.2 million, partially offset by changes in deferred taxes of $(27.1) million.
Net cash used in operating activities for the nine months ended June 30, 2022 was $(5.4) million. Contributing factors to our cash used in operations in the nine months ended June 30, 2022 were primarily driven by a net loss of $(93.6) million, and further decreased due to changes in operating assets and liabilities of $(34.5) million, most notably an increase in trade receivables and contract assets, inventories and prepaid expenses and other current assets, partially offset by increases in fees invoiced in advance and accounts payable. The net decrease in cash from operating activities was partially offset by a net increase in noncash charges of $122.8 million. Non-cash charges included, but are not limited to, $56.7 million for loss on fair value remeasurement of the embedded derivative component of the convertible notes, $31.9 million for depreciation and amortization, $22.3 million for non-cash stock compensation expense, changes in deferred taxes of $(8.4) million, amortization of debt issuance costs and original issue discount of $1.9 million, non-cash amortization of inventory fair value step-up of $10.0 million and non-cash restructuring costs related to the exit of the Dublin and Cumberland sites of $3.0 million.
Net cash used in investing activities of $(21.1) million in the nine months ended June 30, 2023 was primarily due to capital expenditures of $(21.3) million. The capital additions during the nine months ended June 30, 2023 primarily consisted of investments in facility improvements, site expansions, enhancements to laboratory technology, improvements for animal welfare and system enhancements to improve the client experience.
Net cash used in investing activities of $(318.1) million in the nine months ended June 30, 2022 was due mainly to $287.1 million paid in the acquisitions of Plato, Envigo RSI, ILS, OBRC and Histion and capital expenditures of $31.3 million. The capital additions during the nine months ended June 30, 2022 primarily consisted of investments in
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facility improvements, site expansions, enhancements to laboratory technology, and system enhancements to improve the client experience.
Financing activities provided $16.2 million in the nine months ended June 30, 2023. The cash provided in the nine months ended June 30, 2023 primarily included borrowings on the Additional DDTL (as defined below) of $35.0 million and on the revolving loan facility of $6.0 million, partially offset by the repayment of the revolving loan facility of $21.0 million and principal payments of $2.1 million and $1.8 million on the senior term notes and delayed draw term loans and on the promissory notes, respectively.
Financing activities provided $189.2 million in the nine months ended June 30, 2022. The cash provided in the nine months ended June 30, 2022 included borrowings on the senior term notes of $205.0 million, which consisted of $165.0 million related to the term loan facility used in the Envigo acquisition and $40.0 million related to the Amendment (defined below), which was partially used in the OBRC acquisition and partially used to repay the revolving loan facility borrowings, and included the Initial DDTL (defined below) borrowings of $35.0 million, which was used in the ILS acquisition, partially offset by payments of long-term borrowings of $36.8 million and payments of debt issuance costs of $10.1 million.
Capital Resources
Long-term debt as of June 30, 2023 and September 30, 2022 is detailed in the table below.

(in millions) | June 30, 2023 |  | September 30, 2022
Seller Note – Bolder BioPath | $ | 0.7 |  |  | $ | 0.8 |
Seller Note – Preclinical Research Services | 0.6 |  |  | 0.6 |
Seller Note – Plato BioPharma | — |  |  | 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 | 109.2 |  |  | 105.0 |
Term Loan Facility, DDTL and Incremental Term Loans | 272.8 |  |  | 238.2 |
| $ | 387.8 |  |  | $ | 350.7 |
Less: Current portion | (3.8) |  |  | (8.0) |
Less: Debt issuance costs not amortized | (12.2) |  |  | (12.0) |
Total long-term debt | $ | 371.8 |  |  | $ | 330.7 |
Note: Table may not foot due to rounding |  |  |

Revolving Credit Facility
As of June 30, 2023 and September 30, 2022, the Company had a $0 and $15.0 million outstanding balance on the revolving credit facility. Refer to the statements of cash flows for information related to borrowings and paydowns of the revolving credit facility during the nine months ended June 30, 2023.
Significant Transactions
On October 12, 2022, the Company drew its $35.0 million delayed draw term loan (the “Additional DDTL”) allowed under the First Amendment to the Credit Agreement (“First Amendment”). A portion of the proceeds were used to repay the $15.0 million balance on the Company’s revolving credit facility, while the remaining was drawn to fund a portion of the Company’s capital expenditures in fiscal year 2022 and those planned for fiscal year 2023.
On December 29, 2022 and January 9, 2023, the Company, the lenders party thereto, and Jefferies Finance LLC, as administrative agent (the “Agent”), entered into the Second and Third Amendments, respectively, to the Credit Agreement. Refer below for further information related to those amendments.
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Term Loan Facility, DDTL and Incremental Term Loans
Credit Agreement
On November 5, 2021, the Company, certain subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and 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) (the “Initial DDTL” and together with the Additional DDTL, the “DDTL”), 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.
The Company could 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 accrued 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 had to be a minimum of 1.00%. The initial adjusted LIBOR rate of interest was 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 was the prime rate plus 5.25%. For the term loan facility, interest expense was accrued at an effective rate of 10.25% and 10.29% for the three and nine months ended June 30, 2023, respectively.
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. Voluntary prepayments will be subject to a 1.0% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
The Company is required to maintain an initial Secured Leverage Ratio of not more than 4.25 to 1.00. The maximum permitted Secured Leverage Ratio shall reduce to 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023 and to 3.00 to 1.00 beginning with the Company’s fiscal quarter ending March 31, 2025. The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio shall be 1.00 to 1.00 during the first year of the Credit Agreement and shall be 1.10 to 1.00 from and after the Credit Agreement’s first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
Utilizing proceeds from the Credit Agreement on November 5, 2021, the Company repaid all indebtedness and terminated the credit agreement related to the First Internet Bank of Indiana (“FIB”) credit facility and recognized an $0.9 million loss on debt extinguishment during the nine months ended June 30, 2022.
On January 7, 2022, the Company drew $35.0 million on the Initial DDTL. Amounts outstanding under the Initial DDTL accrued 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 was the LIBOR rate plus 6.25%. For the Initial DDTL, interest expense was accrued at an effective rate of 10.22% and 10.31% for the three and nine months ended June 30, 2023, respectively.
First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and the Agent entered into the First Amendment to the existing Credit Agreement. The First Amendment provides for, among other things, an increase
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to the existing term loan facility in the amount of $40.0 million (the “Incremental Term Loans”) and the Additional DDTL 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 First Amendment. 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 $35.0 million under the Additional DDTL.
Amounts outstanding under the Additional Term Loans will accrued 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 was the LIBOR rate plus 6.25%. For the Additional DDTL, interest expense was accrued at an effective rate of 10.35% and 10.47% for the three and nine months ended June 30, 2023, respectively.
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 1.0% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to a any prepayment premium.
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 could have elected 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. Term SOFR loans accrued 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 could 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 could 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 “Second Amendment Alternate Base Rate”); provided that, the Second Amendment Alternate Base Rate could 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.
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The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement, 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 timely satisfied each of these requirements.
Third Amendment to Credit Agreement
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;
•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
•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.
Under the Third Amendment, the Company may elect to borrow on each of the loan facilities accruing interest at either an adjusted secured overnight financing rate (“Term SOFR”) or an alternate base rate of interest. 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, the Adjusted Term SOFR shall never be less than 1.00% per annum, plus (ii) an applicable margin of 6.75% per annum for term loans maintained as SOFR loans or 9.50% per annum for revolving loans maintained as SOFR loans. 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 0.50%, (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 is subject to a floor of 2.00% per annum plus (ii) an applicable margin of 5.75% per annum for term loans maintained as Alternate Base Rate loans or 8.50% per annum for revolving loans maintained as Alternate Base Rate loans.
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
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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
Acquisition-related Debt (Seller Notes)
In addition to the indebtedness under the Credit Agreement, certain of the Company’s subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.
As part of the acquisition of Plato, which is a part of the Company’s Inotiv Boulder subsidiary, Inotiv Boulder, LLC, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Plato in an aggregate principal amount of $3.0 million. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023.
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 was originally required to be paid to the 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. On April 4, 2023, the Company and the Seller entered into a First Amendment to extend the maturity date of the payable to July 27, 2024. This extension did not affect the rights and remedies of any party to the SPA, nor alter, modify or amend or in any way affect any of the terms and conditions, obligations, covenants or agreements contained in the SPA.
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.
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
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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 June 30, 2023 and September 30, 2022, there were $4.4 million and $5.1 million, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended June 30, 2023, the total interest expense was $2.7 million, including coupon interest expense of $1.1 million accretion expense of $1.4 million, and the amortization of debt discount and issuance costs of $0.2 million. During the three months ended June 30, 2022, the total interest expense was $2.7 million, including coupon interest expense of $1.2 million, accretion expense of $1.3 million, and the amortization of debt discount and issuance costs of $0.2 million. For the nine months ended June 30, 2023, the total interest expense was $8.2 million, including coupon interest expense of $3.4 million, accretion expense of $4.2 million, and the amortization of debt discount and issuance costs of $0.7 million. During the nine months ended June 30, 2022, the total interest expense was $7.9 million, including coupon interest expense of $3.5 million, accretion expense of $3.8 million, and the amortization of debt discount and issuance costs of $0.6 million.
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 $20.0 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
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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, Stock-Based Compensation and Earnings (Loss) Per Share), the Note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as of November 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital.
Based upon the above, the Company remeasured the fair value of the embedded derivative as of November 4, 2021, which resulted in a fair value measurement of $88.6 million and a loss on remeasurement included in other income (loss) for the nine months ended June 30, 2022 of $56.7 million.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to changes in interest rates while conducting normal business operations as a result of ongoing financing activities. As of June 30, 2023, our debt portfolio was reliant on reference rates. Based on our interest rate exposure at June 30, 2023, 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 June 30, 2023 cash balance by approximately $0.5 million and our revenue by approximately $6.5 million for the nine months ended June 30, 2023.
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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 June 30, 2023 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 June 30, 2023:
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 information technology (“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 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.
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
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approval of changes to information technology systems supporting all of 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
As of September 30, 2022, management had excluded several of its previous acquisitions from its assessment of internal controls over financial reporting; however, management's updated assessment as of June 30, 2023, as described above, now includes the operations of all previous acquisitions. Except for the changes in connection with our remediation activities as described above and the inclusion of all operations of previous acquisitions, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the third quarter of fiscal 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 Annual Report on 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
During the three months ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement (as defined in the SEC’s rules).
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ITEM 6 – EXHIBITS

Number |  | Description of Exhibits
(2) | 2.1 |  | Amendment No. 1 to Stock Purchase Agreement, dated April 4, 2023, by and among Envigo Global Services, Inc., Inotiv, Inc. and Orient Bio, Inc. (incorporated by reference to Exhibit 2.1 to the Form 10-Q filed May 15, 2023).
(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).
(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: August 11, 2023 | INOTIV, INC.
| (Registrant)
| By: | /s/ Robert W. Leasure
| Robert W. Leasure
| President and Chief Executive Officer
| (Principal Executive Officer)

Date: August 11, 2023 | By: | /s/ Beth A. Taylor
| Beth A. Taylor
| Chief Financial Officer and Senior Vice President of Finance (Principal Financial Officer)

Date: August 11, 2023 | By: | /s/ Brennan Freeman
| Brennan Freeman
| Vice President of Finance and Corporate Controller (Principal Accounting Officer)

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