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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)

| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2024
| 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 x | Non-accelerated filer o | 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 April 30, 2024, 25,971,450 of the registrant's common shares were outstanding.

Table of Contents
EXPLANATORY NOTE
Inotiv, Inc. (the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 (the “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, originally filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2024 (the “Original Report”). As the result of an inadvertent administrative error, the amounts within the “Liquidity and Capital Resources – Liquidity and Going Concern” section and the principal amount of Notes stated in the third paragraph of the “Liquidity and Capital Resources – Convertible Senior Notes” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 the Original Report were presented in thousands rather than in actual amounts. This Amendment amends the Original Report solely to correct the presentation of these amounts so that they are in actual amounts instead of in thousands.
This Amendment also updates Part II, Item 5 of the Original Report to include a description of the Fourth Amendment to the Company’s Credit Agreement. While such Fourth Amendment was described in other sections of the Original Report, the Company desires to also include that information in Part II, Item 5 in lieu of filing a Current Report on Form 8-K, as permitted since the Fourth Amendment was entered into within four business days prior to the filing of the Original Report and this Amendment.
This Amendment also includes as exhibits new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from the Company's Chief Executive Officer and Chief Financial Officer dated as of the filing date of this Amendment. Item 6 of Part II of the Original Report is amended to reflect the filing of these new certifications.
Except as described above, this Amendment does not amend, update or change any other items or disclosures in the Original Report and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Amendment speaks only as of the date the Original Report was filed, and we have not undertaken herein to amend, supplement or update any information contained in the Original Report to give effect to any subsequent events.

Table of Contents
TABLE OF CONTENTS

|  | Page
PART I | FINANCIAL INFORMATION |
Item 1 | Condensed Consolidated Financial Statements: |
| Condensed Consolidated Balance Sheets as of March 31, 2024 (Unaudited) and September 30, 2023 | 5
| Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2024 and 2023 (Unaudited) | 6
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2024 and 2023 (Unaudited) | 7
| Condensed Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest for the Three and Six Months Ended March 31, 2024 and 2023 (Unaudited) | 8
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2024 and 2023 (Unaudited) | 9
| Notes to Condensed Consolidated Financial Statements | 10
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 51
Item 4 | Controls and Procedures | 52
PART II | OTHER INFORMATION |
Item 1 | Legal Proceedings | 53
Item 1A | Risk Factors | 53
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 62
Item 3 | Defaults Upon Senior Securities | 62
Item 4 | Mine Safety Disclosures | 62
Item 5 | Other Information | 62
Item 6 | Exhibits | 63
| Signatures | 64

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Index to Consolidated Financial Statements

| Page
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 10
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION | 10
2. REVENUE FROM CONTRACTS WITH CUSTOMERS | 14
3. SEGMENT AND GEOGRAPHIC INFORMATION | 15
4. BUSINESS COMBINATIONS | 17
5. INTANGIBLE ASSETS | 18
6. DEBT | 19
7. SUPPLEMENTAL BALANCE SHEET INFORMATION | 25
8. DEFINED BENEFIT PLAN | 26
9. OTHER OPERATING EXPENSE | 27
10. RESTRUCTURING AND ASSETS HELD FOR SALE | 27
11. LEASES | 28
12. EQUITY, STOCK-BASED COMPENSATION AND EARNINGS (LOSS) PER SHARE | 30
13. INCOME TAXES | 31
14. CONTINGENCIES | 32
15. SUBSEQUENT EVENTS | 34

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

| March 31, |  | September 30,
| 2024 |  | 2023
| (Unaudited) |  |
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 32,695 |  |  | $ | 35,492 |
Trade receivables and contract assets, net of allowances for credit losses of $6,459 and $7,446, respectively | 65,757 |  |  | 87,383 |
Inventories, net | 45,406 |  |  | 56,102 |
Prepaid expenses and other current assets | 36,821 |  |  | 33,408 |
Assets held for sale | — |  |  | 1,418 |
Total current assets | 180,679 |  |  | 213,803 |
Property and equipment, net | 191,423 |  |  | 191,068 |
Operating lease right-of-use assets, net | 46,796 |  |  | 38,866 |
Goodwill | 94,286 |  |  | 94,286 |
Other intangible assets, net | 291,331 |  |  | 308,428 |
Other assets | 10,863 |  |  | 10,079 |
Total assets | $ | 815,378 |  |  | $ | 856,530 |
Liabilities, shareholders' equity and noncontrolling interest |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 28,381 |  |  | $ | 32,564 |
Accrued expenses and other current liabilities | 31,102 |  |  | 25,776 |
Fees invoiced in advance | 41,675 |  |  | 55,622 |
Current portion of long-term operating lease | 11,413 |  |  | 10,282 |
Current portion of long-term debt | 380,358 |  |  | 7,950 |
Total current liabilities | 492,929 |  |  | 132,194 |
Long-term operating leases, net | 37,218 |  |  | 29,614 |
Long-term debt, less current portion, net of debt issuance costs | 275 |  |  | 369,795 |
Other long-term liabilities | 38,055 |  |  | 6,373 |
Deferred tax liabilities, net | 39,739 |  |  | 50,064 |
Total liabilities | 608,216 |  |  | 588,040 |
Contingencies (Note 14) |  |  |
Shareholders’ equity and noncontrolling interest: |  |  |
Common shares, no par value: |  |  |
Authorized 74,000,000 shares at March 31, 2024 and September 30, 2023; 25,905,395 issued and outstanding at March 31, 2024 and 25,777,169 at September 30, 2023 | 6,438 |  |  | 6,406 |
Additional paid-in capital | 717,139 |  |  | 715,696 |
Accumulated deficit | (517,185) |  |  | (453,278) |
Accumulated other comprehensive income | 770 |  |  | 330 |
Total equity attributable to common shareholders | 207,162 |  |  | 269,154 |
Noncontrolling interest | — |  |  | (664) |
Total shareholders’ equity and noncontrolling interest | 207,162 |  |  | 268,490 |
Total liabilities and shareholders’ equity and noncontrolling interest | $ | 815,378 |  |  | $ | 856,530 |

The accompanying notes are an integral part of the condensed consolidated financial statements.
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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Service revenue | $ | 56,961 |  |  | $ | 58,752 |  |  | $ | 110,824 |  |  | $ | 108,800 |
Product revenue | 62,074 |  |  | 92,711 |  |  | 143,712 |  |  | 165,417 |
Total revenue | $ | 119,035 |  |  | $ | 151,463 |  |  | $ | 254,536 |  |  | $ | 274,217 |
Costs and expenses: |  |  |  |  |  |  |
Cost of services provided (excluding depreciation and amortization of intangible assets) | 38,663 |  |  | 36,803 |  |  | 77,740 |  |  | 70,804 |
Cost of products sold (excluding depreciation and amortization of intangible assets) | 53,694 |  |  | 65,926 |  |  | 116,645 |  |  | 129,189 |
Selling | 5,403 |  |  | 4,764 |  |  | 10,751 |  |  | 9,265 |
General and administrative | 19,796 |  |  | 28,293 |  |  | 39,723 |  |  | 56,591 |
Depreciation and amortization of intangible assets | 14,155 |  |  | 12,990 |  |  | 28,405 |  |  | 26,253 |
Other operating expense | 30,440 |  |  | 4,812 |  |  | 33,759 |  |  | 8,451 |
Goodwill impairment loss | — |  |  | — |  |  | — |  |  | 66,367 |
Operating loss | $ | (43,116) |  |  | $ | (2,125) |  |  | $ | (52,487) |  |  | $ | (92,703) |
Other (expense) income: |  |  |  |  |  |  |
Interest expense | (11,088) |  |  | (10,515) |  |  | (22,452) |  |  | (20,965) |
Other (expense) income | (239) |  |  | 545 |  |  | 1,174 |  |  | (1,333) |
Loss before income taxes | $ | (54,443) |  |  | $ | (12,095) |  |  | $ | (73,765) |  |  | $ | (115,001) |
Income tax benefit | 6,364 |  |  | 2,466 |  |  | 9,858 |  |  | 18,440 |
Consolidated net loss | $ | (48,079) |  |  | $ | (9,629) |  |  | $ | (63,907) |  |  | $ | (96,561) |
Less: Net income (loss) attributable to noncontrolling interests | — |  |  | 365 |  |  | (440) |  |  | 756 |
Net loss attributable to common shareholders | $ | (48,079) |  |  | $ | (9,994) |  |  | $ | (63,467) |  |  | $ | (97,317) |
Loss per common share |  |  |  |  |  |  |
Net loss attributable to common shareholders: |  |  |  |  |  |  |
Basic | $ | (1.86) |  |  | $ | (0.39) |  |  | $ | (2.46) |  |  | $ | (3.79) |
Diluted | $ | (1.86) |  |  | $ | (0.39) |  |  | $ | (2.46) |  |  | $ | (3.79) |
Weighted-average number of common shares outstanding: |  |  |  |  |  |  |
Basic | 25,831 |  | 25,687 |  | 25,797 |  | 25,645
Diluted | 25,831 |  | 25,687 |  | 25,797 |  | 25,645

The accompanying notes are an integral part of the condensed consolidated financial statements.
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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Consolidated net loss | $ | (48,079) |  |  | $ | (9,629) |  |  | $ | (63,907) |  |  | $ | (96,561) |
Foreign currency translation | (747) |  |  | 936 |  |  | 417 |  |  | 6,043 |
Defined benefit plan: |  |  |  |  |  |  |
Pension cost amortization | 47 |  |  | (54) |  |  | 93 |  |  | (108) |
Foreign currency translation | (107) |  |  | 26 |  |  | (70) |  |  | 267 |
Other comprehensive (loss) income, net of tax | (807) |  |  | 908 |  |  | 440 |  |  | 6,202 |
Consolidated comprehensive loss | (48,886) |  |  | (8,721) |  |  | (63,467) |  |  | (90,359) |
Less: Comprehensive income (loss) attributable to non-controlling interests | — |  |  | 365 |  |  | (440) |  |  | 756 |
Comprehensive loss attributable to common stockholders | $ | (48,886) |  |  | $ | (9,086) |  |  | $ | (63,027) |  |  | $ | (91,115) |

The accompanying notes are an integral part of the condensed consolidated financial statements.
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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(In thousands, except number of shares)
(Unaudited)

| Common Shares |  | Additional paid-in capital |  | Accumulated deficit |  | Accumulated Other Comprehensive Income (Loss) |  | Non- Controlling Interests |  | Total shareholders’ equity
| Number |  | Amount |  |  |  |  |
Balance at September 30, 2023 | 25,777,169 |  | $ | 6,406 |  |  | $ | 715,696 |  |  | $ | (453,278) |  |  | $ | 330 |  |  | $ | (664) |  |  | $ | 268,490 |
Consolidated net (loss) income | — |  | — |  |  | — |  |  | (15,828) |  |  | — |  |  | 440 |  |  | (15,388) |
Change in noncontrolling interest |  |  |  |  | (2,309) |  |  |  |  |  |  | 224 |  |  | (2,085) |
Issuance of stock under employee stock plans | 13,511 |  | 3 |  |  | (2) |  |  | — |  |  | — |  |  | — |  |  | 1 |
Stock-based compensation | — |  | — |  |  | 1,897 |  |  | — |  |  | — |  |  | — |  |  | 1,897 |
Pension cost amortization | — |  | — |  |  | — |  |  | — |  |  | 46 |  |  | — |  |  | 46 |
Foreign currency translation adjustment | — |  | — |  |  | — |  |  | — |  |  | 1,201 |  |  | — |  |  | 1,201 |
Balance at December 31, 2023 | 25,790,680 |  | $ | 6,409 |  |  | $ | 715,282 |  |  | $ | (469,106) |  |  | $ | 1,577 |  |  | $ | — |  |  | $ | 254,162 |
Consolidated net loss | — |  | — |  |  | — |  |  | (48,079) |  |  | — |  |  | — |  |  | (48,079) |
Issuance of stock under employee stock plans | 114,715 |  | 29 |  |  | (27) |  |  | — |  |  | — |  |  | — |  |  | 2 |
Stock-based compensation | — |  | — |  |  | 1,884 |  |  | — |  |  | — |  |  | — |  |  | 1,884 |
Pension cost amortization | — |  | — |  |  | — |  |  | — |  |  | 47 |  |  | — |  |  | 47 |
Foreign currency translation adjustment | — |  | — |  |  | — |  |  | — |  |  | (854) |  |  | — |  |  | (854) |
Balance at March 31, 2024 | 25,905,395 |  | $ | 6,438 |  |  | $ | 717,139 |  |  | $ | (517,185) |  |  | $ | 770 |  |  | $ | — |  |  | $ | 207,162 |

| 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 |

The accompanying notes are an integral part of the condensed consolidated financial statements.
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INOTIV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

| Six Months Ended March 31,
| 2024 |  | 2023
Operating activities: |  |  |
Consolidated net loss | $ | (63,907) |  |  | $ | (96,561) |
Adjustments to reconcile net loss to net cash provided by operating activities, net of acquisitions: |  |  |
Depreciation and amortization | 28,405 |  |  | 26,253 |
Employee stock compensation expense | 3,781 |  |  | 3,827 |
Changes in deferred taxes | (10,391) |  |  | (21,303) |
Provision for expected credit losses | (245) |  |  | 1,333 |
Amortization of debt issuance costs and original issue discount | 1,686 |  |  | 1,512 |
Non-cash interest and accretion expense | 3,336 |  |  | 2,870 |
Other non-cash operating activities | (655) |  |  | 1,113 |
Goodwill impairment loss | — |  |  | 66,367 |
Changes in operating assets and liabilities: |  |  |
Trade receivables and contract assets | 22,265 |  |  | 22,836 |
Inventories | 10,781 |  |  | 7,125 |
Prepaid expenses and other current assets | (3,565) |  |  | 1,862 |
Operating lease right-of-use assets and liabilities, net | 807 |  |  | 429 |
Accounts payable | (3,119) |  |  | 5,018 |
Accrued expenses and other current liabilities | 5,276 |  |  | (3,474) |
Fees invoiced in advance | (14,100) |  |  | (13,720) |
Other asset and liabilities, net | 30,018 |  |  | (61) |
Net cash provided by operating activities | 10,373 |  |  | 5,426 |
Investing activities: |  |  |
Capital expenditures | (12,594) |  |  | (16,840) |
Proceeds from sale of property and equipment | 3,964 |  |  | 276 |
Net cash used in investing activities | (8,630) |  |  | (16,564) |
Financing activities: |  |  |
Payments on revolving credit facility | — |  |  | (21,000) |
Payments on senior term notes and delayed draw term loans | (1,382) |  |  | (1,375) |
Borrowings on revolving credit facility | — |  |  | 6,000 |
Borrowings on delayed draw term loan | — |  |  | 35,000 |
Other financing activities, net | (2,712) |  |  | (1,401) |
Net cash (used in) provided by financing activities | (4,094) |  |  | 17,224 |
Effect of exchange rate changes on cash and cash equivalents | (446) |  |  | 1,052 |
Net (decrease) increase in cash and cash equivalents | (2,797) |  |  | 7,138 |
Less: cash, cash equivalents, and restricted cash held for sale | — |  |  | (1,522) |
Cash, cash equivalents, and restricted cash at beginning of period | 35,492 |  |  | 18,980 |
Cash, cash equivalents, and restricted cash at end of period, net of cash, cash equivalents and restricted cash held for sale | $ | 32,695 |  |  | $ | 24,596 |
Non-cash financing activity: |  |  |
Paid in kind debt issuance costs | $ | — |  |  | $ | 1,363 |
Supplemental disclosure of cash flow information: |  |  |
Cash paid for interest | $ | 16,891 |  |  | $ | 16,374 |
Income taxes paid, net | $ | 1,175 |  |  | $ | 3,952 |

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 DSA 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.
Agreement in Principle
As it relates to the matter of the U.S. Department of Justice (“DOJ”), together with federal and state law enforcement agents, executing a search and seizure warrant on the Cumberland facility on May 18, 2022, the Company and DOJ have reached an agreement in principle (the “Agreement in Principle”) to resolve this investigation as to the Company and its subsidiaries, Envigo Global Services Inc. and Envigo RMS, LLC. Any final resolution is subject to certain material contingencies, including, without limitation, negotiations between the Company and DOJ regarding mutually satisfactory resolution documents, final approvals by DOJ and the Company, and depending on the terms of any final resolution with DOJ, negotiations with certain of the Company’s stakeholders regarding the feasibility of such proposed resolution. While the Company has reached an Agreement in Principle with the DOJ, and believes a resolution is probable and estimable, there can be no assurance that a resolution will be agreed and finalized. Refer to Note 14 – Contingencies for additional information.
For the three and six months ended March 31, 2024, the Company has accrued an estimate of $26,500 related to the Agreement in Principle, which is presented within other operating expense in the Company’s Condensed Consolidated Statement of Operations. In line with the Agreement in Principle, the Company expects that it would pay $6,500 during fiscal year 2024 and $20,000 over multiple years. Accordingly, the Company has included $6,500 in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets as of March 31, 2024 and within “Changes in operating assets and liabilities – accrued expenses and other current liabilities” in its Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2024 and the Company has included $20,000 in other long-term liabilities on its Condensed Consolidated Balance Sheets as of March 31, 2024 and “Changes in operating assets and
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liabilities – other assets and liabilities” in its Condensed Consolidated Statement of Cash Flows for the six months ended March 31, 2024. The $26,500 charge is reflected in the operating loss of the RMS segment.
The Company expects that the $26,500 charge will be non-deductible for U.S. federal income tax purposes. The Company expects to have additional cash outlays in connection with certain costs related to the Agreement in Principle, which would be paid over the next three to five years. The additional cash outlays could include ongoing monitoring and compliance costs, legal expenses and other payments required to comply with the Agreement in Principle, subject to final approvals, and at this time, the Company expects that such costs would be expensed as incurred.
Operational Update
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"). 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, to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts could evaluate 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 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. After a thorough review of the documentation we have for the Cambodian NHPs in our inventory and their colonies, we resumed shipping Cambodian NHPs. In addition, we completed audits on site at our Cambodian supplier and we worked to establish even more robust procedures for future imports. Inotiv has continued to monitor and respond to the evolving environment around non-human primates. Although Cambodia remained closed as a source through fiscal 2023 and into fiscal 2024, the Company identified and extensively audited multiple additional sources of purpose-bred animals that can be made available for life-saving medical research which has allowed the Company to diversify our sourcing of NHPs outside of Cambodia to satisfy demand at our DSA business segment and to our RMS clients. In addition, we have developed, and sourced, novel genetic testing techniques to further bolster our auditing capabilities to determine whether the animals we import are purpose-bred, and we are assessing the ability to introduce these techniques into our supply chain.
NHPs are critical for scientific research, and are required by international regulatory guidance to develop and evaluate the safety and effectiveness of a range of life-saving drugs and treatments prior to their assessment in human clinical trials. Without a consistent source of NHP’s in the U.S., Drug discovery and development in the U.S. could be materially impacted.
NHP imports into the U.S. for drug discovery significantly declined from 2022 to 2023. The decrease in overall NHP supply drove an increase in pricing in 2023. Furthermore, we now believe the decreased U.S. NHP supply caused some studies to be shifted outside of the U.S. We also believe some clients increased their inventory levels of NHP’s during 2023 and therefore recently, clients appear to be utilizing existing NHP inventory without purchasing historical levels of NHPs. RMS revenue decreased $32,100 in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due primarily to the lower NHP-related product and service revenue of $26,200. For the 2024 period, such reduction in sales volumes adversely affected our business, financial condition and results of operations.
During 2022 and 2023 there were decreases in biotech funding which contributed to a reduced demand for preclinical studies. While U.S. biotech funding increased in the first calendar quarter of 2024, the Company has yet to see a meaningful increase in demand from biotech clients.
Liquidity and Going Concern
The accompanying unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") applicable to a going concern. This presentation contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below.
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As of March 31, 2024, the Company has cash and cash equivalents of approximately $32,695 and access to a $15,000 revolver, which currently has no balance outstanding. 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 discussed in Note 6 - Debt to these condensed consolidated financial statements resulting in, among other things. a limitation of our ability to draw on our revolving credit facility. The loss of access to our revolving credit facility at the time 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 to reinstate its ability to borrow under its revolving credit facility. Without the amendment, the Company was at the time at risk of not having the revolving credit facility available.
In 2023, we implemented several initiatives to reduce our operating and investing costs. We announced several site consolidation plans in the U.S. and certain European and U.K. sites. Our site optimization plans allow us to reduce overhead and create efficiencies through scale. During fiscal 2023, we completed all planned fiscal year 2023 consolidations and closures and sold our Israeli businesses. The consolidation of the operations at our Blackthorn, U.K., facility with the operations in Hillcrest, U.K., is expected to be complete in fiscal Q4 2024. Over the last year, we have continued to improve our infrastructure and worked to optimize our operating platform to support future growth. 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. However, there is no assurance that such actions will ultimately have the intended effects.
In connection with the site optimizations noted above and other restructuring initiatives, we reduced our workforce. We also took steps to reduce our budgeted capital expenditures and certain forecasted expenses, including a reduction of nonessential travel and employee-related expenses among other efficiency-based reductions. Additionally, we identified and executed new strategies to improve the efficiency and cost effectiveness of the transportation of our products. In December 2023, we announced that we would be partnering with Vanguard Supply Chain Solutions LLC, a current provider of our transportation services, to enable the in-house integration of our North American transportation operations. By taking direct control of our transportation operations, we expect to achieve key efficiencies to strengthen internal operations, improve our outgoing supply chain, and bolster service and scientific continuity for clients. In the second quarter of fiscal 2024, we completed the in-house integration of our North American transportation operations as described above. The Company is now working on further route optimization projects designed for further efficiencies and cost reductions.
The financial covenants under the Company's Credit Agreement include, among others, a requirement to not permit the consolidated debt to consolidated EBITDA of the Company to exceed certain leverage thresholds under the Credit Agreement. Subsequent to March 31, 2024, the Company entered into the Fourth Amendment (as defined in Note 15 - Subsequent Events) to the Credit Agreement, which provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s consolidated EBITDA (up to $26,500) for purposes of the financial covenants under the Credit Agreement. As a result of the Fourth Amendment obtained by the Company, the Company was in compliance with its covenants under the Credit Agreement as of March 31, 2024.
The Company believes it has sufficient liquidity to satisfy its current obligations as they come due, including cash outflows for planned targeted capital expenditures, for the twelve months following the issuance of these financial statements. Following the decrease in overall revenue for the three months ended March 31, 2024, there is no assurance that the Company will experience an increase in revenue for the remainder of the 2024 fiscal year. If the Company's revenue and related operating margins do not increase, it would result in non-compliance with the financial covenants under the Credit Agreement. If at the time the Company files, or is required to file, its next Quarterly Report on Form 10-Q it reports a failure to comply with its financial covenants and remains unremedied for the period of time stipulated under the Credit Agreement, this would constitute an event of default under the Credit Agreement and the lenders may, among other remedies set out under the Credit Agreement, declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be immediately due and payable. Furthermore, if the lenders were to accelerate the loans under the Credit Agreement, such acceleration would constitute a default under our indenture governing the Company's Convertible Senior Notes (the "Notes") which, if not cured within 30 days following notice of such default from the trustee or holders of 25 percent of the Notes, would permit the trustee or such holders to accelerate the Notes. If the lenders accelerate the loans under the Credit Agreement, the Company does not believe its existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of its outstanding
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senior term loans and repay the entirety of its outstanding Notes in the next twelve months; in addition, access to the $15,000 revolver would be restricted and such funds would not be available to pay for any operating activities.
Further, our evaluation of the Company's ability to continue as a going concern in accordance with U.S. generally accepted accounting principles entailed analyzing prospective fully implemented operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balances in order to satisfy our obligations, including cash outflows for planned targeted capital expenditures, and to comply with minimum liquidity and financial covenant requirements under our debt covenants related to borrowings pursuant to its Credit Agreement for at least the next twelve months. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented and are outside of its control as of the date the financial statements are issued. When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. After considering the factors outlined above, substantial doubt about our ability to continue as a going concern exists.
We plan to continue our efforts to optimize our capital allocation and expense base, which reduced our cash expenses in the three and six months ended March 31, 2024 compared to the three and six months ended March 31, 2023, and which are expected to continue to reduce cash expenses in the remainder of fiscal 2024 and into fiscal 2025. Further, we have invested and plan to continue to invest in our DSA capacity and added to our service offerings in recent periods which we plan to utilize in order to support future revenue growth and margins. The Company also continues to collaborate with its lenders with regard to its current business conditions. The Company plans to request amendments to the Credit Agreement, which may include potential additional financial covenant requirements, in an effort to avoid an acceleration of the loans under the Credit Agreement prior to their existing maturity. In the event that the Company fails to comply with the requirements of the financial covenants set forth in the Credit Agreement, the Company has approximately 55 days subsequent to any fiscal quarter, and approximately 100 days subsequent to fiscal year-end to cure noncompliance. Additionally, the Company may consider seeking additional financing and evaluating financing alternatives to meet its cash requirements for the next 12 months. There is no assurance that the Company’s lenders will agree to any amendment to the Credit Agreement, nor can there be any assurance that the Company would be able to raise additional capital, whether through selling additional equity or debt securities or obtaining a line of credit or other loan on terms acceptable to the Company or at all.
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 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, 2023. In the opinion of management, the condensed consolidated financial statements for the three and six months ended March 31, 2024 and 2023 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 March 31, 2024. The results of operations for the three and six months ended March 31, 2024 are not necessarily indicative of the results for the fiscal year ending September 30, 2024. Certain prior year amounts have been reclassified within the condensed consolidated statements of operations and the consolidated statement of cash flows for consistency with the current year presentation. Specifically, depreciation expense has been combined with amortization of intangible assets. These reclassifications had no effect on the reported results of operations. Further, certain financing activities have been reclassified within the condensed consolidated statements of cash flows for consistency with the current year presentation.
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
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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 prior to December 23, 2023, a variable interest entity (“VIE”) it previously consolidated in accordance with GAAP. During December 2023, the Company entered into a transition services agreement with VSCS, one of the Company's transportation providers, to enable the in-house integration of Inotiv’s North American transportation operations. Following this transaction, Inotiv was no longer required to consolidate this entity. The VIE has not materially impacted our net assets or net loss. The Company successfully completed the in-house integration of its North American transportation operations during the three months ended March 31, 2024.
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 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, 2023, 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 six months ended March 31, 2024, one client accounted for 15.2% and 19.0% of sales, respectively. During the three and six months ended March 31, 2023, one client accounted for 25.0% and 23.6% of sales, respectively. During the three and six months ended March 31, 2024, one vendor accounted for 23.0% and 12.5%, respectively, of the sum of cost of services and cost of products. During the three and six months ended March 31, 2023, no vendors accounted for more than 10% of the sum of cost of services and cost of products.
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 March 31, 2024 |  | Balance at September 30, 2023
Contract assets: Trade receivables | $ | 55,021 |  |  | $ | 77,618 |
Contract assets: Unbilled revenue | 17,195 |  |  | 17,211 |
Contract liabilities: Customer deposits | 24,295 |  |  | 36,689 |
Contract liabilities: Deferred revenue | 17,380 |  |  | 18,933

When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $9,921 and $10,220 of unpaid advanced client billings from both client receivables and deferred revenue as of March 31, 2024 and September 30, 2023, respectively.
The Company expects a majority of deferred revenue to be recognized as revenue within twelve months.
Changes in the contract asset and the contract liability balances during the six months ended March 31, 2024 include the following:
•Changes in the time frame for a right for consideration to become unconditional – approximately 70.0% of unbilled revenue as of September 30, 2023, was billed during the six months ended March 31, 2024; and
•Changes in the time frame for a performance obligation to be satisfied – approximately 68.0% of deferred revenue as of September 30, 2023, was recognized as revenue during the six months ended March 31, 2024.
3. SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information
During the three and six months ended March 31, 2024, the RMS segment reported intersegment revenue of $3,938 and $4,834, respectively, related to sales to the DSA segment. During the three and six months ended March 31, 2023, the RMS segment reported intersegment revenue of $3,262 and $4,387, respectively, related to sales to the DSA segment. The following tables present revenue and other financial information by reportable segment:
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| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Revenue |  |  |  |  |  |  |
DSA: |  |  |  |  |  |  |
Service revenue | $ | 45,302 |  |  | $ | 46,145 |  |  | $ | 88,865 |  |  | $ | 86,116 |
Product revenue | 1,329 |  |  | 878 |  |  | 2,464 |  |  | 2,000 |
RMS: |  |  |  |  |  |  |
Service revenue | 11,659 |  |  | 12,607 |  |  | 21,959 |  |  | 22,684 |
Product revenue | 60,745 |  |  | 91,833 |  |  | 141,248 |  |  | 163,417 |
| $ | 119,035 |  |  | $ | 151,463 |  |  | $ | 254,536 |  |  | $ | 274,217 |
Operating Income (Loss) |  |  |  |  |  |  |
DSA | $ | 2,853 |  |  | $ | 1,924 |  |  | $ | 4,446 |  |  | $ | 4,296 |
RMS | (30,604) |  |  | 12,725 |  |  | (25,525) |  |  | (58,547) |
Unallocated Corporate | (15,365) |  |  | (16,774) |  |  | (31,408) |  |  | (38,452) |
| $ | (43,116) |  |  | $ | (2,125) |  |  | $ | (52,487) |  |  | $ | (92,703) |
Interest expense | (11,088) |  |  | (10,515) |  |  | (22,452) |  |  | (20,965) |
Other (expense) income | (239) |  |  | 545 |  |  | 1,174 |  |  | (1,333) |
Loss before income taxes | $ | (54,443) |  |  | $ | (12,095) |  |  | $ | (73,765) |  |  | $ | (115,001) |

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Depreciation and amortization: |  |  |  |  |  |  |
DSA | $ | 4,363 |  |  | $ | 3,611 |  |  | $ | 8,772 |  |  | $ | 7,591 |
RMS | 9,643 |  |  | 9,379 |  |  | 19,380 |  |  | 18,662 |
Unallocated Corporate | 149 |  |  | — |  |  | 253 |  |  | — |
| $ | 14,155 |  |  | $ | 12,990 |  |  | $ | 28,405 |  |  | $ | 26,253 |
Capital expenditures: |  |  |  |  |  |  |
DSA | $ | 929 |  |  | 3,970 |  |  | $ | 3,204 |  |  | $ | 7,264 |
RMS | 6,093 |  |  | 4,501 |  |  | 9,390 |  |  | 9,576 |
| $ | 7,022 |  |  | $ | 8,471 |  |  | $ | 12,594 |  |  | $ | 16,840 |

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

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
United States | $ | 102,429 |  |  | $ | 129,980 |  |  | $ | 214,198 |  |  | $ | 228,989 |
Netherlands | 9,724 |  |  | 11,522 |  |  | 27,786 |  |  | 26,744 |
Other | 6,882 |  |  | 9,961 |  |  | 12,552 |  |  | 18,484 |
| $ | 119,035 |  |  | $ | 151,463 |  |  | $ | 254,536 |  |  | $ | 274,217 |

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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:

| March 31, |  | September 30,
| 2024 |  | 2023
United States | $ | 174,664 |  |  | $ | 178,021 |
Netherlands | 6,619 |  |  | 6,656 |
Other | 10,140 |  |  | 6,391 |
| $ | 191,423 |  |  | $ | 191,068 |

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.
Histion Acquisition
On April 25, 2022, the Company completed the acquisition of Histion, LLC (“Histion”), which was 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 based on the closing stock price of the Company’s common shares as reported by Nasdaq on the closing date and (iii) unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433.
Protypia Acquisition
On July 7, 2022, the Company entered into a Stock Purchase Agreement with Protypia, Inc. (“Protypia”), which was 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 (i) $9,460 in cash, subject to certain adjustments, (ii) 74,997 of the Company's common shares valued at $806 based on the opening stock price of the Company’s common shares as reported by Nasdaq on the closing date and (iii) $600 in seller notes.
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 client 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
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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 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.
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.
5. INTANGIBLE ASSETS
The following table displays intangible assets, net by major class:

| March 31, 2024
| Carrying Amount, Gross |  | Accumulated Amortization |  | Carrying Amount, Net
Client relationships | $ | 317,137 |  |  | $ | (68,659) |  |  | $ | 248,478 |
Intellectual property | 56,376 |  |  | (15,468) |  |  | 40,908 |
Other | 4,837 |  |  | (2,892) |  |  | 1,945 |
| $ | 378,350 |  |  | $ | (87,019) |  |  | $ | 291,331 |

| September 30, 2023
| Carrying Amount, Gross |  | Accumulated Amortization |  | Carrying Amount, Net
Client relationships | $ | 316,820 |  |  | $ | (54,711) |  |  | $ | 262,109 |
Intellectual property | 56,337 |  |  | (12,234) |  |  | 44,103 |
Other | 4,837 |  |  | (2,621) |  |  | 2,216 |
| $ | 377,994 |  |  | $ | (69,566) |  |  | $ | 308,428 |

The decrease in intangible assets, net during the six months ended March 31, 2024 related to amortization over the applicable useful lives, partially offset by the impact of foreign exchange rates.
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6. DEBT
Long-term debt as of March 31, 2024 and September 30, 2023 is detailed in the table below.

| March 31, 2024 |  | September 30, 2023
Seller Note – Bolder BioPath (Related party) | $ | 489 |  |  | $ | 602 |
Seller Note – Preclinical Research Services | 503 |  |  | 541 |
Seller Payable - Orient BioResource Center | 3,680 |  |  | 3,649 |
Seller Note – Histion (Related party) | 156 |  |  | 229 |
Seller Note – Protypia (Related party) | — |  |  | 400 |
Economic Injury Disaster Loan | — |  |  | 140 |
Convertible Senior Notes | 113,716 |  |  | 110,651 |
Term Loan Facility, DDTL and Incremental Term Loans | 271,849 |  |  | 272,930 |
Total debt before unamortized debt issuance costs | $ | 390,393 |  |  | $ | 389,142 |
Less: Debt issuance costs not amortized | (9,760) |  |  | (11,397) |
Total debt, net of unamortized debt issuance costs | $ | 380,633 |  |  | $ | 377,745 |
Less: Current portion | $ | (380,358) |  |  | $ | (7,950) |
Total Long-term debt | $ | 275 |  |  | $ | 369,795 |

Revolving Credit Facility
As of March 31, 2024 and September 30, 2023, the Company had no outstanding balance on the revolving credit facility. Refer to the statements of cash flows for information related to payments on the revolving credit facility during the six months ended March 31, 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 amount 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.
Absent the Fourth Amendment (as defined in Note 15 - Subsequent Events), the Company would not have complied with its financial covenants under the Credit Agreement and the Company believes that if we do not see an increase in revenue, and related operating margins, it is probable that the Company will fail its financial covenants within twelve months of the balance sheet date. As a result, we have classified the Term Loan Facility, DDTL and Incremental Term Loans and the Convertible Senior Notes as current. Refer to Note 1 - Description of the Business and Basis of Presentation for the Company's Operational Update and the Company's analysis of Liquidity and Going Concern.
Term Loan Facility, DDTL and Incremental Term Loans
Below are the weighted-average effective interest rates for the loans available under the Credit Agreement (as defined below):
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| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Effective interest rates: |  |  |  |  |  |  |
Term Loan | 11.06 | % |  | 10.40 | % |  | 11.30 | % |  | 10.32 | %
Initial DDTL | 11.05 | % |  | 10.45 | % |  | 11.29 | % |  | 10.35 | %
Additional DDTL | 11.17 | % |  | 10.68 | % |  | 11.42 | % |  | 11.07 | %

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 (the "Term Loan") 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 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 accrued 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%.
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 were subject to a 1.00% 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 a Secured Leverage Ratio of not more than 4.25 to 1.00 for the Company's fiscal quarters through the fiscal quarter ended June 30, 2023, 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023, and 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 was 1.00 to 1.00 during the first year of the Credit Agreement and is 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.
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%.
The Term Loan and the Initial DDTL will mature on November 5, 2026.
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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 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%.
The Additional Term Loans require annual principal payments in an amount equal to 1.00% of the original principal amount. Voluntary prepayments of the Additional Term Loans were subject to a 1.00% 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 provided 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 added 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 0.50%, (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 provided 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 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, 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 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.
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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 Pre-Clinical Research Services, Inc. ("PCRS"), the Company issued an unsecured subordinated promissory note payable to the PCRS seller in the initial principal amount of $800. The promissory note bears interest at a rate of 4.50% per annum with monthly payments of principal and interest and a maturity date of December 1, 2024.
As part of the acquisition of Bolder BioPATH, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Bolder BioPATH in an aggregate principal amount of $1,500. As part of the working capital adjustment in March 2022, a reduction of the promissory note of $470 was recorded. The promissory notes bear interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of May 1, 2026.
As part of the acquisition of Plato BioPharma, Inc. ("Plato"), 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 bore interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023. The promissory notes were paid in full as of June 1, 2023.
As part of the acquisition of Orient BioResource Center, Inc. ("OBRC"), the Company agreed to leave in place a payable owed by OBRC to Orient Bio, Inc. (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 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 under the stock purchase agreement, nor alter, modify or amend or in any way affect any of the terms and conditions, obligations, covenants or agreements contained in the stock purchase agreement.
As part of the acquisition of Histion, 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 4.50% 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 4.50% per annum, with monthly interest payments, as well as principal payments on July 7, 2023 and on the maturity date, January 7, 2024. These notes were paid in full on 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
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subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by the Guarantor.
The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2022. The Notes will mature on October 15, 2027, unless earlier repurchased, redeemed or converted. Before April 15, 2027, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 15, 2027, noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company’s election. The initial conversion rate is 21.7162 common shares per $1 principal amount of Notes, which represents an initial conversion price of approximately $46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
As of March 31, 2024 and September 30, 2023, there were $3,705 and $4,172, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended March 31, 2024, the total interest expense was $2,907, including coupon interest expense of $1,131, accretion expense of $1,542, and the amortization of debt discount and issuance costs of $234. During the three months ended March 31, 2023, the total interest expense was $2,740, including coupon interest expense of $1,138, accretion expense of $1,383, and the amortization of debt discount and issuance costs of $219. For the six months ended March 31, 2024, the total interest expense was $5,807, including coupon interest expense of $2,275, accretion expense of $3,065, and the amortization of debt discount and issuance costs of $467. During the six months ended March 31, 2023, the total interest expense was $5,504, including coupon interest expense of $2,300, accretion expense of $2,764, and the amortization of debt discount and issuance costs of $440.
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 130.00% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common shares.
The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least $20,000; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes.
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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 25.00% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
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. In subsequent periods, the Notes conversion rights met all equity classification criteria and the fair value of the embedded derivative was reclassified to additional paid-in-capital. The discount resulting from the initial fair value of the embedded derivative has and will continue to be amortized to interest expense using the effective interest method. Non-cash interest expense during the period primarily related to this discount.
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
Trade receivables and contract assets, net consisted of the following:

| March 31, |  | September 30,
| 2024 |  | 2023
Trade receivables | $ | 55,021 |  |  | $ | 77,618 |
Unbilled revenue | 17,195 |  |  | 17,211 |
Total | 72,216 |  |  | 94,829 |
Less: Allowance for credit losses | (6,459) |  |  | (7,446) |
Trade receivables and contract assets, net of allowances for credit losses | $ | 65,757 |  |  | $ | 87,383 |

Inventories, net consisted of the following:

| March 31, |  | September 30,
| 2024 |  | 2023
Raw materials | $ | 2,007 |  |  | $ | 2,259 |
Work in progress | 86 |  |  | 124 |
Finished goods | 4,540 |  |  | 4,439 |
Research Model Inventory | 42,718 |  |  | 52,524 |
Total | 49,351 |  |  | 59,346 |
Less: Obsolescence reserve | (3,945) |  |  | (3,244) |
Inventories, net | $ | 45,406 |  |  | $ | 56,102 |

Prepaid expenses and other current assets consisted of the following:

| March 31, |  | September 30,
| 2024 |  | 2023
Advances to suppliers | $ | 21,331 |  |  | $ | 19,247 |
Prepaid research models | 4,705 |  |  | 4,300 |
Income tax receivable | 2,313 |  |  | 1,813 |
Note receivable | 1,334 |  |  | 1,226 |
Other | 7,138 |  |  | 6,822 |
Prepaid expenses and other current assets | $ | 36,821 |  |  | $ | 33,408 |

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The composition of other assets is as follows:

| March 31, |  | September 30,
| 2024 |  | 2023
Long-term advances to suppliers | $ | 3,741 |  |  | $ | 3,681 |
Funded status of defined benefit plan | 3,163 |  |  | 3,036 |
Other | 3,959 |  |  | 3,362 |
Other assets | $ | 10,863 |  |  | $ | 10,079 |

Accrued expenses and other current liabilities consisted of the following:

| March 31, |  | September 30,
| 2024 |  | 2023
Accrued compensation | $ | 11,099 |  |  | $ | 12,966 |
Non-income taxes | 4,474 |  |  | 4,596 |
Accrued interest | 3,887 |  |  | 2,975 |
Other | 5,141 |  |  | 5,239 |
Agreement in Principle (Note 1) | $ | 6,501 |  |  | — |
Accrued expenses and other current liabilities | $ | 31,102 |  |  | $ | 25,776 |

The composition of fees invoiced in advance is as follows:

| March 31, |  | September 30,
| 2024 |  | 2023
Customer deposits | $ | 24,295 |  |  | $ | 36,689 |
Deferred revenue | 17,380 |  |  | 18,933 |
Fees invoiced in advance | $ | 41,675 |  |  | $ | 55,622 |

The composition of other liabilities is as follows:

| March 31, |  | September 30,
| 2024 |  | 2023
Long-term client deposits | $ | 17,000 |  |  | $ | 5,250 |
Other | 1,055 |  |  | 1,123 |
Agreement in Principle (Note 1) | 20,000 |  |  | — |
Other liabilities | $ | 38,055 |  |  | $ | 6,373 |

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, 2024, the Company expects to contribute $0 to the Pension Plan. As of March 31, 2024, the funded status of the defined benefit plan obligation of $3,163 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 March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Components of net periodic expense: |  |  |  |  |  |  |
Interest cost | $ | 185 |  |  | $ | 182 |  |  | $ | 366 |  |  | $ | 364 |
Expected return on assets | (197) |  |  | (198) |  |  | (389) |  |  | (396) |
Amortization of prior loss | (35) |  |  | (37) |  |  | (70) |  |  | (75) |
Net periodic expense | $ | (47) |  |  | $ | (53) |  |  | $ | (93) |  |  | $ | (107) |

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

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Acquisition and integration costs | $ | — |  |  | $ | 105 |  |  | $ | 70 |  |  | $ | 1,088 |
Restructuring costs 1 | 1,368 |  |  | 1,740 |  |  | 2,402 |  |  | 2,006 |
Startup costs | 967 |  |  | 2,281 |  |  | 1,797 |  |  | 3,786 |
Remediation costs | 369 |  |  | 555 |  |  | 652 |  |  | 1,140 |
Other costs | 1,236 |  |  | 131 |  |  | 2,338 |  |  | 431 |
Agreement in Principle 2 | 26,500 |  |  | — |  |  | 26,500 |  |  | — |
| $ | 30,440 |  |  | $ | 4,812 |  |  | $ | 33,759 |  |  | $ | 8,451 |
1 Restructuring costs represent costs incurred in connection with the Company's site closures, site optimization strategy and the in-house integration of Inotiv’s North American transportation operations as discussed in Note 10 – Restructuring and Assets Held for Sale and Note 1 - Description of Business and Basis of Presentation.
2 Refer to Note 1 - Description of Business and Basis of Presentation for further discussion of the Agreement in Principle

10. RESTRUCTURING AND ASSETS HELD FOR SALE
During June 2022, the Company approved and announced a plan to close its facility in Cumberland, Virginia. Further, the Company’s restructuring and site optimization plan includes the following sites, which were identified for relocation of operations: Dublin, Virginia, Gannat, France, Blackthorn, U.K., RMS St. Louis, Missouri, Spain, Boyertown, Pennsylvania, and Haslett, Michigan.
For the three and six months ended March 31, 2024 and 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 March 31, 2024 and 2023, the liability balance for exit and disposal costs that qualify as employee-related exit and disposal costs was $616 and $503, respectively. As of March 31, 2024, the property and equipment related to the facilities at Haslett, Michigan and Cumberland, Virginia were presented within assets held for sale.
Cumberland and Dublin
During June 2022, the Company approved and announced a plan to close its facility in Cumberland, Virginia ("Cumberland facility") and to close and relocate its operations in Dublin, Virginia ("Dublin facility) into its other existing facilities, as a part of the Company's restructuring and site optimization plan. The Cumberland facility exit was also a part of the settlement, as further described in Note 14 – Contingencies. The Cumberland facility exit was completed in September 2022 and 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
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costs to sell. As a result, an asset impairment charge of $678 was recorded within the RMS reportable segment during the three months ended March 31, 2023. The real property of the Cumberland facility is under contract to be sold and continued to meet the criteria for assets held for sale as of March 31, 2024. The Dublin facility transition was completed in November 2022 and initially met the criteria for assets held for sale as of December 31, 2023. The Dublin facility was sold in March 2024. The operations at both the Cumberland facility and the Dublin facility were within the RMS reporting segment.
Gannat, Blackthorn, Spain and RMS St. Louis
As of March 31, 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 initially met the criteria for assets held for sale as of June 30, 2023. The Gannat facility was sold in December 2023. As of June 30, 2023, the real property of the Blackthorn facility initially met the criteria for assets held for sale. The Blackthorn facility sold in February 2024 which the Company is leasing back until the operations are relocated to its Hillcrest, U.K. site. 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 September 2024. In July 2023, the Company decided to close its Spain facility. The exit of the facility in Spain was completed in September 2023 and initially met the criteria for assets held for sale as of September 30, 2023. The facility in Spain was sold in November 2023. The leased 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, Spain and RMS St. Louis facilities were 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 and both facilities initially met the criteria for assets held for sale as of March 31, 2023. The Boyertown facility was sold in September 2023. The Haslett facility continued to meet the criteria for assets held for sale as of March 31, 2024. Subsequent to March 31, 2024, the facility in Haslett was sold.
Israel
As of December 31, 2022, the assets and liabilities related to the Israel RMS and Israel CRS businesses (the “Israeli Businesses”) initially met the held for sale criteria and, in August 2023, the Company sold its ownership interest in the Israeli Businesses, which were previously reflected in the RMS reportable segment. Consideration for the sale consisted of (i) $1,000 in cash, (ii) an excess cash adjustment of $316, (iii) real property valued at $3,700, and (iv) a promissory note receivable in the aggregate amount of $2,453. The promissory note bears interest at a rate of 5.00% per annum, with quarterly payments of interest and principal payments on the first anniversary of the closing date and at maturity on August 29, 2025. The sale includes the Company’s 100.00% ownership in Israel RMS and Israel RMS’s 62.50% ownership interest in Israel CRS. Prior to the sale, the management team owned a 37.50% non-controlling ownership position in Israel CRS.
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 ASC 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 one to 21 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.
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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.
ROU lease assets and operating lease liabilities that are reported in the Company’s condensed consolidated balance sheets are as follows:

| March 31, 2024 |  | September 30, 2023
Operating ROU assets, net | $ | 46,796 |  |  | $ | 38,866 |
Current portion of operating lease liabilities | 11,413 |  |  | 10,282 |
Long-term operating lease liabilities | 37,218 |  |  | 29,614 |
Total operating lease liabilities | $ | 48,631 |  |  | $ | 39,896 |

During the three and six months ended March 31, 2024, the Company had operating lease amortization of $2,208 and $4,355, respectively. During the three and six months ended March 31, 2023, the Company had operating lease amortization of $2,466 and $4,401, 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 six months ended March 31, 2024 and 2023 were:

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Operating lease costs: |  |  |  |  |  |  |
Fixed operating lease costs | $ | 3,491 |  |  | $ | 3,322 |  |  | $ | 6,594 |  |  | $ | 5,914 |
Short-term lease costs | — |  |  | 50 |  |  | — |  |  | 62 |
Lease income | (794) |  |  | (811) |  |  | (1,558) |  |  | (1,485) |
Total operating lease cost | $ | 2,697 |  |  | $ | 2,561 |  |  | $ | 5,036 |  |  | $ | 4,491 |

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.
Supplemental cash flow information related to leases was as follows:

| Six Months Ended March 31,
| 2024 |  | 2023
Cash flows included in the measurement of lease liabilities: |  |  |
Operating cash flows from operating leases | $ | 5,762 |  |  | $ | 5,491 |
Non-cash lease activity: |  |  |
ROU assets obtained in exchange for new operating lease liabilities | $ | 12,441 |  |  | $ | 14,080 |

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The weighted average remaining lease term and discount rate for the Company’s operating leases as of March 31, 2024 and 2023 were:

| March 31, 2024 |  | March 31, 2023
Weighted-average remaining lease term (in years) |  |  |
Operating lease | 8.91 |  | 5.92
Weighted-average discount rate (in percentages) |  |  |
Operating lease | 11.84 | % |  | 7.85 | %

Lease duration was determined utilizing renewal options that the Company is reasonably certain to execute.
As of March 31, 2024, maturities of operating lease liabilities for each of the following five fiscal years and a total thereafter were as follows:

| Operating Leases
2024 (remainder of fiscal year) | $ | 6,122 |
2025 | 9,695 |
2026 | 10,340 |
2027 | 8,375 |
2028 | 6,859 |
Thereafter | 47,843 |
Total minimum future lease payments | 89,234 |
Less interest | (40,603) |
Total lease liability | 48,631 |

12. EQUITY, STOCK-BASED COMPENSATION AND EARNINGS (LOSS) PER SHARE
Authorized Shares
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 March 14, 2024, the Company's shareholders approved the Inotiv, Inc. 2024 Equity Incentive Plan (the “2024 Plan”). The 2024 Plan provides for the issuance of up to 1,500,000 of the Company's common shares, plus the number of common shares remaining available for future grants under the Amended and Restated 2018 Equity Incentive Plan (the “2018 Plan”) as of March 14, 2024. Any common shares subject to an award under the 2024 Plan or 2018 Plan that expires, is forfeited or cancelled, is settled for cash or exchanged will become available for future awards under the 2024 Plan. Following the shareholders' approval of the 2024 Plan, no further awards will be granted under the 2018 Plan. As of March 31, 2024, 1,683,962 shares remained available for grants under the 2024 Plan.
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 March 31, 2024 and 2023, was $1,884 and $1,781, respectively. Stock based compensation expense for the six months ended March 31, 2024 and 2023, was $3,781 and $3,827, respectively.
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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 loss per share:

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Numerator: |  |  |  |  |  |  |
Consolidated net loss | $ | (48,079) |  |  | $ | (9,629) |  |  | $ | (63,907) |  |  | $ | (96,561) |
Less: Net income (loss) attributable to noncontrolling interests | — |  |  | 365 |  |  | (440) |  |  | 756 |
Net loss attributable to common shareholders | (48,079) |  |  | (9,994) |  |  | (63,467) |  |  | (97,317) |
Denominator: |  |  |  |  |  |  |
Weighted-average shares outstanding - Basic and diluted (in thousands) | 25,831 |  | 25,687 |  | 25,797 |  | 25,645
Anti-dilutive common share equivalents (1) | 5,664 |  | 5,549 |  | 5,664 |  | 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 loss per share 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 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 March 31, 2024 and 2023 were 11.7% and 20.4%, respectively. For the three months ended March 31, 2024, the Company’s effective tax rate was primarily driven by unfavorable discrete adjustments related to the Agreement in Principle and changes in valuation allowance, partially offset by a change in the Company's forecasted loss before income taxes. For the three months ended March 31, 2023, 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 six months ended March 31, 2024 and 2023 were 13.4% and 16.0%, respectively. For the six months ended March 31, 2024, the Company’s effective tax rate was primarily driven by unfavorable permanent items related to the Agreement in Principle and valuation allowance adjustments. For the six months ended March 31, 2023, the Company’s effective tax rate was primarily related to the impact of non-deductible goodwill impairment and other permanent items.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The Company measures the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability basis that it believes is more likely than not to be realized upon settlement of the position. As of March 31, 2024, 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.
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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 subsequent quarters. The parties are in the process of finalizing the long-form settlement agreement. While the timeline for final court approval is not yet determined, the Company took a reserve equal to the proposed settlement amount, which is included in accrued expenses and other current 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 was fully briefed by April 28, 2023. On March 29, 2024, the Court issued a decision denying, in part, Defendants’ motion to dismiss. The case is now in discovery. 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 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 “Grobler Derivative 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
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Burkhart v. Robert W. Leasure, et al., Case No 4:23-cv-00003 (N.D. Ind.) (the “Burkhart Derivative Action,” and together with the Grobler Derivative Action, the “Federal Derivative Actions”). The Federal Derivative Actions collectively assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of Sections 10(b), 14(a), and 21D of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance. The Court entered orders on November 15, 2022 and May 8, 2023 in the Grobler and Burkhart Derivative Actions, respectively, staying each Action pending a resolution of a motion to dismiss in the securities class action. The stays expired following the March 29, 2024 decision on the motion to dismiss in the securities class action. The Court consolidated the Federal Derivative Actions on April 24, 2024, and ordered Plaintiffs to file a consolidated complaint by June 24, 2024. Defendants’ response to the consolidated complaint is currently due by July 24, 2024. While the Company cannot predict the outcome of these matters, the Company believes the consolidated Federal 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 for any of these matters.
On April 20, 2023, a purported 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 “Whitfield Derivative 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 “Castro Derivative Action,” and together with the Whitfield Derivative Action, the “State Derivative Actions”). The State Derivative Actions collectively assert claims for breach of fiduciary duty, unjust enrichment, 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 August 24, 2023, the Castro Derivative Action was transferred to the Tippecanoe County Circuit Court and consolidated with the Whitfield Derivative Action. The consolidated State Derivative Actions were stayed pending resolution of a motion to dismiss in the securities class action. That stay expired following the March 29, 2024 decision on the motion to dismiss in the securities class action. The parties will submit a proposed schedule governing further proceedings in the consolidated State Derivative Actions by June 12, 2024. While the Company cannot predict the outcome of these matters, the Company believes the consolidated State 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 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, except as otherwise noted, 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
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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 and the DOJ have reached an Agreement in Principle to resolve this investigation by the DOJ and other federal and state law enforcement agencies as to the Company, EGSI and Envigo RMS. Any final resolution is subject to certain material contingencies, including, without limitation, negotiations between the Company and DOJ regarding mutually satisfactory resolution documents, final approvals by DOJ and the Company, and depending on the terms of any final resolution with DOJ, negotiations with certain of the Company’s stakeholders regarding the feasibility of such proposed resolution. While the Company has reached an Agreement in Principle with the DOJ, and believes a resolution is probable and estimable, there can be no assurance that a resolution will be agreed and finalized. For the three and six months ended March 31, 2024, the Company has accrued expenses of $26,500 related to the Agreement in Principle. Refer to the Agreement in Principle section of Note 1 – Description of Business and Basis of Presentation for additional information.
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., a subsidiary of Laboratory Corporation of America Holdings, in June 2019. As of the filing date of this report, the Company has not received any additional subpoenas related to this matter.
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. As of the filing date of this report, the Company has not received any additional subpoenas related to this matter.
On November 16, 2022 the Company disclosed that employees of the principal supplier of NHPs to the Company, along with two Cambodian government officials, had been criminally charged by the USAO-SDFL with conspiring to illegally import NHPs into the United States from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021. One of these Cambodian officials was tried in March 2024 and prevailed on all charges.
Consistent with Company policy, the Company is cooperating with USAO-SDFL in connection with the matters described herein.
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. In March 2024, the SEC provided the Company a formal order of investigation concerning this matter that is dated January 9, 2024, and on April 12, 2024, the SEC provided supplemental document requests to the Company. The Company is cooperating with the SEC.
15. SUBSEQUENT EVENTS
On May 14, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s Consolidated EBITDA (up to $26,500) for purposes of the financial covenants under the Credit Agreement.
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The fee consideration payable by the Company for each consenting lender party to the Fourth Amendment is 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.
The Company is reviewing the Credit Agreement, as amended for accounting and tax impacts, which would be included in the quarterly report for quarter ending June 30, 2024.
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) market and company-specific impacts of NHP supply and demand matters; (v) the investigations by the U.S. Department of Justice, including any potential resolution thereof and the expected impacts on the Company, such as the estimated amounts, timing and expense treatment of cash payments and other investments thereunder; (vi) our ability to service our outstanding indebtedness and to comply with financial covenants; (vii) our current and forecasted cash position; (viii) our ability to make capital expenditures, fund our operations and satisfy our obligations; (ix) our ability to manage recurring and unusual costs; (x) our ability to execute on our restructuring and site optimization plans and to realize the expected benefits related to such actions; (xi) our expectations regarding the volume of new bookings, pricing, operating income or losses and liquidity; (xii) our ability to effectively manage current expansion efforts or any future expansion or acquisition initiatives undertaken by us; (xiii) our ability to develop and build infrastructure and teams to manage growth and projects; (xiv) our ability to continue to retain and hire key talent; (xv) our ability to market our services and products under our corporate name and relevant brand names; (xvi) our ability to develop new services and products; ### ### and ### ### and (xvii) the impact of public health emergencies 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, including those detailed in the Company's filings with the U.S. Securities and Exchange Commission. 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, 2023, 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.
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 focusing on 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.
During recent periods, we have undertaken significant internal and external growth initiatives, as well as site optimization initiatives. Our growth initiatives include acquisitions and related integrations, expansion of existing capacity and services, and startup of new services. Prior to fiscal year 2022, our growth initiatives focused on discovery and safety assessment
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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”). In addition to the growth initiatives described above, we have also undertaken site optimization initiatives through site closures and consolidation in the U.S. and Europe as further described below.
DSA
During the six months ended March 31, 2024, our focus for the DSA segment revolved around maximizing the integration of service offerings from previous acquisitions and continuing to build out additional service capabilities and capacity. As we completed fitting out laboratory space, validating new equipment and establishing our processes over the last year, we added to the overall depth and breadth of our services portfolio, and expanded our client service capabilities, which are designed to enhance both overall quality and operating margins by reducing our reliance on third-party outsourcing. Furthermore, the expansion activities at Fort Collins, Colorado, were completed by the end of October 2023 and the expanded site completed the validation of our facility and equipment in January 2024.
RMS
During the six months ended March 31, 2024, our focus for our business within the RMS segment included navigating the global non-human primate ("NHP") market and executing on our continued site optimization plans and new strategies to improve the efficiency and cost effectiveness of the production and transportation of our products. We closed on the sale of our Blackthorn, U.K. and Dublin, Virginia facilities during the three months ended March 31, 2024. While we closed on the sale of our Blackthorn site during the second quarter of fiscal 2024, we are leasing the facility back until we are able to finalize the relocation to our Hillcrest, U.K. site. The Company continues to execute on its site optimization plan for its Blackthorn, UK site. The consolidation of the operations at our Blackthorn, U.K. facility with the operations in Hillcrest, U.K. is expected to be complete in the fourth quarter of fiscal 2024.
In December 2023, the Company announced that it would be partnering with Vanguard Supply Chain Solutions LLC, the Company’s then-current provider of transportation services, to enable the in-house integration of Inotiv’s North American transportation operations. The Company completed this in-house integration in the second quarter of fiscal 2024. The Company is now working on further route optimization projects, which are expected to allow for further efficiencies and cost reductions.
Refer to Note 10 – Restructuring and Assets Held for Sale in our consolidated financial statements contained in Part I, Item 1 for more information related to the site optimizations.
Agreement in Principle
As it relates to the matter of the U.S. Department of Justice (“DOJ”), together with federal and state law enforcement agents, executing a search and seizure warrant on the Cumberland facility on May 18, 2022, the Company and DOJ have reached an agreement in principle (the “Agreement in Principle”) to resolve this investigation as to the Company and its subsidiaries, Envigo Global Services Inc. and Envigo RMS, LLC. Any final resolution is subject to certain material contingencies, including, without limitation, negotiations between the Company and DOJ regarding mutually satisfactory resolution documents, final approvals by DOJ and the Company, and depending on the terms of any final resolution with DOJ, negotiations with certain of the Company’s stakeholders regarding the feasibility of such proposed resolution. While the Company has reached an Agreement in Principle with the DOJ, and believes a resolution is probable and estimable, there can be no assurance that a resolution will be agreed and finalized. Refer to Note 14 – Contingencies for additional information.
For the three and six months ended March 31, 2024, the Company has accrued an estimate of $26.5 million related to the Agreement in Principle, which is presented within other operating expense in the Company’s Condensed Consolidated Statement of Operations. In line with the Agreement in Principle, the Company expects that it would pay $6.5 million during fiscal year 2024 and $20.0 million over multiple years. Accordingly, the Company has included $6.5 million in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets as of March 31, 2024 and within “Changes in operating assets and liabilities – accrued expenses and other current liabilities” in its Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2024 and the Company has included $20.0 million in other long-term liabilities on its Condensed Consolidated Balance Sheets as of March 31, 2024 and “Changes in
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operating assets and liabilities – other assets and liabilities” in its Condensed Consolidated Statement of Cash Flows for the six months ended March 31, 2024. The $26.5 million charge is reflected in the operating loss of the RMS segment.
The Company expects that the $26.5 million charge will be non-deductible for U.S. federal income tax purposes. The Company expects to have additional cash outlays in connection with certain costs related to the Agreement in Principle, which would be paid over the next three to five years. The additional cash outlays could include ongoing monitoring and compliance costs, legal expenses and other payments required to comply with the Agreement in Principle, subject to final approvals, and at this time, the Company expects that such costs would be expensed as incurred.
Operational Update
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"). 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, to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. until the Company’s staff and external experts could evaluate 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 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. After a thorough review of the documentation we have for the Cambodian NHPs in our inventory and their colonies, we resumed shipping Cambodian NHPs. In addition, we completed audits on site at our Cambodian supplier and we worked to establish even more robust procedures for future imports. Inotiv has continued to monitor and respond to the evolving environment around non-human primates. Although Cambodia remained closed as a source through fiscal 2023 and into fiscal 2024, the Company identified and extensively audited multiple additional sources of purpose-bred animals that can be made available for life-saving medical research which has allowed the Company to diversify our sourcing of NHPs outside of Cambodia to satisfy demand at our DSA business segment and to our RMS clients. In addition, we have developed, and sourced, novel genetic testing techniques to further bolster our auditing capabilities to determine whether the animals we import are purpose-bred, and we are assessing the ability to introduce these techniques into our supply chain.
NHPs are critical for scientific research, and are required by international regulatory guidance to develop and evaluate the safety and effectiveness of a range of life-saving drugs and treatments prior to their assessment in human clinical trials. Without a consistent source of NHP’s in the U.S., Drug discovery and development in the U.S. could be materially impacted.
NHP imports into the U.S. for drug discovery significantly declined from 2022 to 2023. The decrease in overall NHP supply drove an increase in pricing in 2023. Furthermore, we now believe the decreased U.S. NHP supply caused some studies to be shifted outside of the U.S. We also believe some clients increased their inventory levels of NHP’s during 2023 and therefore recently, clients appear to be utilizing existing NHP inventory without purchasing historical levels of NHPs. RMS revenue decreased $32.1 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due primarily to the lower NHP-related product and service revenue of $26.2 million. For the 2024 period, such reduction in sales volumes adversely affected our business, financial condition and results of operations.
During 2022 and 2023 there were decreases in biotech funding which contributed to a reduced demand for preclinical studies. While U.S. biotech funding increased in the first calendar quarter of 2024, the Company has yet to see a meaningful increase in demand from biotech clients.
Financial Highlights During Three Months Ended March 31, 2024
•Revenue was $119.0 million during the three months ended March 31, 2024 as compared to $151.5 million during the three months ended March 31, 2023, driven by a $32.1 million, or 30.7% decrease in RMS revenue.
•Consolidated net loss for the three months ended March 31, 2024 was $48.1 million, or 40.4% of total revenue, compared to consolidated net loss for the three months ended March 31, 2023 of $9.6 million, or 6.4% of total
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revenue. Consolidated net loss for the three and six months ended March 31, 2024 included a $26.5 million charge related to the Company's Agreement in Principle as it relates to a matter with the DOJ as discussed above.
•Book-to-bill ratio was 0.77x for the DSA services business.
•DSA backlog was $142.1 million at March 31, 2024, down from $145.7 million at March 31, 2023, and down from $152.3 million at December 31, 2023.
Financial Highlights During Six Months Ended March 31, 2024
•Revenue was $254.5 million during the six months ended March 31, 2024 compared to $274.2 million during the six months ended March 31, 2023, driven by a $22.9 million decrease in RMS revenue partially offset by a $3.2 million increase in DSA revenue.
•Consolidated net loss for the six months ended March 31, 2024 was $63.9 million, or 25.1% of total revenue, compared to consolidated net loss of $96.6 million, or 35.2% of total revenue for the six months ended March 31, 2023. Consolidated net loss for the six months ended March 31, 2024 included a $26.5 million charge related to the Company's Agreement in Principle as it relates to a matter with the DOJ as discussed above. Consolidated net loss for the six months ended March 31, 2023 included a $66.4 million non-cash goodwill impairment charge related to the RMS segment.
•Book-to-bill ratio was 1.11x for the DSA services business.
Events Subsequent to Quarter End Date
•The Company closed on the sale of its Haslett, Michigan facility in April of 2024.
•The Company listed for sale an additional 85 acres in Pennsylvania which consists of excess property not being used.
•On May 14, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s Consolidated EBITDA (up to $26.5 million) for purposes of the financial covenants under the Credit Agreement.
Results of Operations
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
DSA

(in millions, except percentages) | Three Months Ended March 31, |  |  |  |
| 2024 |  | 2023 |  | $ Change |  | % Change
Revenue | $ | 46.6 |  | $ | 47.0 |  | $ | (0.4) |  |  | (0.9) | %
Cost of revenue 1 | 32.0 |  | 30.6 |  | 1.4 |  | 4.6 | %
Operating expenses 2 | 7.3 |  | 10.9 |  | (3.6) |  | (33.0) | %
Depreciation and amortization of intangible assets | 4.4 |  | 3.6 |  | 0.8 |  | 22.2 | %
Operating income 3 | $ | 2.9 |  | $ | 1.9 |  | $ | 1.0 |  | 52.6 | %
Operating income % of total revenue | 2.4 | % |  | 1.3 | % |  |  |  |
1 Cost of revenue includes cost of services provided and cost of products sold and excludes depreciation and amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses and excludes depreciation and amortization of intangible assets, which is separately stated
3 Table may not foot due to rounding

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DSA revenue decreased by $0.4 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease in DSA revenue was primarily driven by a decrease of $2.6 million in discovery services revenue as a result of the decline in overall biotech funding in the market, offset by a $1.8 million increase in safety assessment service revenue, which includes increased revenue from genetic toxicology services and biotherapeutic analysis in connection with new business at our Rockville facility of $2.1 million. Additionally, product revenues increased $0.5 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.
DSA operating income increased by $1.0 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to a decrease of $3.6 million in operating expenses, partially offset by an increase of $1.4 million in cost of revenue and an increase of $0.8 million in depreciation and amortization of intangible assets. Operating expenses decreased due to decreases in general and administrative expense related to lower compensation expense and decreases in other operating expense related to a decrease of $1.3 million in start-up costs, partially offset by an increase in selling costs related primarily to additional headcount to optimize sales territory coverage and a focus on sales of discovery services. Cost of revenue increased due to the new services provided at the Rockville facility during the three months ended March 31, 2024.
RMS

(in millions, except percentages) | Three Months Ended March 31, |  |  |  |
| 2024 |  | 2023 |  | $ Change |  | % Change
Revenue | $ | 72.4 |  | $ | 104.5 |  | $ | (32.1) |  |  | (30.7) | %
Cost of revenue 1 | 60.4 |  | 72.2 |  | (11.8) |  | (16.3) | %
Operating expenses 2 | 33.0 |  | 10.2 |  | 22.8 |  | 223.5 | %
Depreciation and amortization of intangible assets | 9.7 |  | 9.4 |  | 0.3 |  | 3.2 | %
Operating (loss) income 3 | $ | (30.7) |  | $ | 12.7 |  | $ | (43.4) |  | (341.7) | %
Operating (loss) income % of total revenue | (25.8) | % |  | 8.4 | % |  |  |  |
1 Cost of revenue includes cost of services provided and cost of products sold and excludes depreciation and amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses and excludes depreciation and amortization of intangible assets, which is separately stated
3 Table may not foot due to rounding

RMS revenue decreased $32.1 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due primarily to the lower NHP-related product and service revenue of $26.2 million. Additionally, in the three months ended March 31, 2024, there was a decrease of $3.1 million in RMS revenue as a result of the sale of our Israeli businesses in the fourth quarter of fiscal 2023. The remaining decrease in RMS revenue was due primarily to decreases in small animal sales and RMS services, such as surgeries, partially offset by a slight increase in diets and bedding sales.
RMS operating loss was $30.7 million in the three months ended March 31, 2024, a decrease of $43.4 million compared to the RMS operating income of $12.7 million in the three months ended March 31, 2023, due to the $32.1 million decrease in revenue discussed above and increase of $22.8 million in operating expenses, partially offset by a decrease of $11.8 million in cost of revenue. The increase in operating expenses was primarily related to the $26.5 million charge related to the Agreement in Principle (as defined in Note 1), partially offset by decreased legal fees of $2.1 million in addition to decreased professional fees and decreased restructuring costs. The decrease in cost of revenue was primarily due to reduced costs associated to lower NHP-related product and service revenue of $7.2 million, the impact of the sale of our Israeli businesses of $2.0 million and favorable cost reductions related to the site closures and optimizations compared to the prior year period.
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Unallocated Corporate

(in millions, except percentages) | Three Months Ended March 31, |  |  |  |
| 2024 |  | 2023 |  | $ Change |  | % Change
Operating expenses 1 | $ | 15.3 |  | $ | 16.8 |  | $ | (1.5) |  |  | (8.9) | %
Depreciation | 0.1 |  | — |  | 0.1 |  | 100.0 | %
Operating loss 2 | $ | (15.4) |  |  | $ | (16.8) |  |  | $ | (1.4) |  | 8.3 | %
Operating loss % of total revenue | (12.9) | % |  | (11.1) | % |  |  |  |
1 Operating expenses includes 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 $1.4 million was primarily driven by decreased legal and third party fees.
Other Expense
Other expense increased by $1.3 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily driven by an increase of $0.6 million in interest expense as a result of increased interest rates and changes in foreign exchange rates.
Income Taxes
The Company’s effective tax rates for the three months ended March 31, 2024 and 2023 were 11.7% and 20.4%, respectively. For the three months ended March 31, 2024, the Company’s effective tax rate was primarily driven by unfavorable discrete adjustments related to the Agreement in Principle and changes in valuation allowance, partially offset by a change in the Company's forecasted loss before income taxes. For the three months ended March 31, 2023, the Company’s effective tax rate was driven by an increase in unfavorable permanent items and discrete adjustments.
Consolidated Net Loss
As a result of the above described factors, we had a consolidated net loss of $48.1 million for the three months ended March 31, 2024 as compared to a consolidated net loss of $9.6 million during the three months ended March 31, 2023.
Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023
DSA

(in millions, except percentages) | Six Months Ended March 31, |  |  |  |
| 2024 |  | 2023 |  | $ Change |  | % Change
Revenue | $ | 91.3 |  | $ | 88.1 |  | $ | 3.2 |  | 3.6 | %
Cost of revenue 1 | 63.6 |  | 57.2 |  | 6.4 |  | 11.2 | %
Operating expenses 2 | 14.5 |  | 19.0 |  | (4.5) |  | (23.7) | %
Depreciation and amortization of intangible assets | 8.8 |  | 7.6 |  | 1.2 |  | 15.8 | %
Operating income 3 | $ | 4.4 |  | $ | 4.3 |  | $ | 0.1 |  | 2.3 | %
Operating income % of total revenue | 1.7 | % |  | 1.6 | % |  |  |  |
1 Cost of revenue includes cost of services provided and cost of products sold and excludes depreciation and amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses and excludes depreciation and amortization of intangible assets, which is separately stated
3 Table may not foot due to rounding

DSA revenue increased $3.2 million in the six months ended March 31, 2024 compared to the six months ended March 31, 2023. The increase in DSA revenue was primarily driven by an increase of $5.6 million in safety assessment service
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revenue, partially offset by a decrease in revenue related to our discovery services of $2.7 million as a result of the decline in overall biotech funding in the market. The increase in safety assessment service revenue was primarily driven by increased revenue from genetic toxicology services and biotherapeutic analysis in connection with new business at our Rockville facility of $4.1 million and increased revenue related to general toxicology services of $2.0 million, partially offset by a decrease in medical device surgical services of $2.2 million due to cancellations we experienced in the fourth quarter of fiscal 2023 and delayed projects. Additionally, product revenues increased $0.5 million in the six months ended March 31, 2024 compared to the six months ended March 31, 2023.
DSA operating income was generally consistent for the six months ended March 31, 2024 compared to the six months ended March 31, 2023, due to a decrease of $4.5 million in operating expenses and the $3.2 million revenue increase described above, largely offset by an increase of $6.4 million in cost of revenue and an increase of $1.2 million in depreciation and amortization of intangible assets. The increase in cost of revenue was primarily driven by cost increases related to the implementation and startup of new services along with general price increases for research models, operating supplies and compensation and benefits. The decrease in operating expenses related primarily to reduced startup costs of $2.0 million, reduced bad debt expense of $0.9 million and reduced general and administrative compensation and benefits, partially offset an increase in selling costs for additional headcount to optimize sales territory coverage and a focus on discovery services.
RMS

(in millions, except percentages) | Six Months Ended March 31, |  |  |  |
| 2024 |  | 2023 |  | $ Change |  | % Change
Revenue | $ | 163.2 |  | $ | 186.1 |  | $ | (22.9) |  |  | (12.3) | %
Cost of revenue 1 | 130.8 |  | 142.8 |  | (12.0) |  | (8.4) | %
Operating expenses 2 | 38.6 |  | 16.7 |  | 21.9 |  | 131.1 | %
Depreciation and amortization of intangible assets | 19.3 |  | 18.7 |  | 0.6 |  | 3.2 | %
Goodwill impairment loss 3 | — |  | 66.4 |  | (66.4) |  | (100.0) | %
Operating (loss) income 4 | $ | (25.5) |  | $ | (58.5) |  | $ | 33.0 |  | (56.4) | %
Operating (loss) income % of total revenue | (10.0) | % |  | (21.3) | % |  |  |  |
1 Cost of revenue includes cost of services provided and cost of products sold and excludes depreciation and amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses and excludes depreciation and amortization of intangible assets, which is separately stated
3 Goodwill impairment loss shown on the consolidated statement of operations only impact the RMS Segment
4 Table may not foot due to rounding

RMS revenue decreased $22.9 million in the six months ended March 31, 2024 compared to the six months ended March 31, 2023 due primarily to the negative impact of lower NHP sales of $12.5 million. Additionally, there was a decrease of $5.9 million in RMS revenue as a result of the sale of our Israeli business in the fourth quarter of fiscal 2023. The remaining decrease in RMS revenue was due primarily to decreases in small animal sales and RMS services, such as surgeries, partially offset by an increase in diets and bedding sales.
RMS operating loss was $25.5 million in the six months ended March 31, 2024, an increase of $33.0 million compared to an operating loss of $58.5 million in the six months ended March 31, 2023, primarily due to a $66.4 million decrease in the goodwill impairment charge related to our RMS segment in the prior year that did not recur and a decrease of $12.0 million in cost of revenue, partially offset by the decrease of $22.9 million in revenue discussed above and an increase of $21.9 million in operating expenses. The decrease in cost of revenue was primarily due to reduced costs associated to lower NHP-related product and service revenue of $5.1 million, the impact of the sale of our Israeli business of $4.1 million and the reduced expenses from the various site closures and optimizations previously disclosed. The increase in operating expenses was primarily due to to the $26.5 million charge related to the Agreement in Principle (as defined in Note 1), partially offset by reduced legal fees of $3.8 million.
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Unallocated Corporate

(in millions, except percentages) | Six Months Ended March 31, |  |
| 2024 |  | 2023 |  | $ Change |  | % Change
Operating expenses 1 | $ | 31.1 |  | $ | 38.5 |  | $ | (7.4) |  | (19.2) | %
Depreciation | 0.3 |  | — |  | 0.3 |  | 100.0 | %
Operating loss 2 | $ | 31.4 |  | $ | 38.5 |  | $ | (7.1) |  | (18.4) | %
Operating loss % of total revenue | (12.3) | % |  | (14.0) | % |  |  |  |
1 Operating loss includes general and administrative and other operating expenses
2 Table may not foot due to rounding

Unallocated corporate operating loss consists of general and administrative expenses, other operating expenses and depreciation expense that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate operating expenses of $7.4 million in the six months ended March 31, 2024, compared to the six months ended March 31, 2023 was primarily driven by decreased compensation and benefits expense, third party fees, legal fees and acquisition and integration costs.
Other Expense
Other expense decreased by $1.0 million for the six months ended March 31, 2024 compared to the six months ended March 31, 2023 primarily driven by net gains on disposition of property and equipment, offset by an increase of $1.5 million in interest expense as a result of increasing interest rates.
Income Taxes
The Company’s effective tax rates for the six months ended March 31, 2024 and 2023 were 13.4% and 16.0%, respectively. For the six months ended March 31, 2024, the Company’s effective tax rate was primarily driven by unfavorable permanent items related to the Agreement in Principle and valuation allowance adjustments. For the six months ended March 31, 2023, the Company’s effective tax rate was primarily related to the impact of non-deductible goodwill impairment and other permanent items.
Consolidated Net Loss
As a result of the above described factors, we had a consolidated net loss of $63.9 million for the six months ended March 31, 2024 as compared to a consolidated net loss of $96.6 million during the six months ended March 31, 2023.
Liquidity and Capital Resources
Liquidity and Going Concern
The accompanying unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") applicable to a going concern. This presentation contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below.
As of March 31, 2024, the Company has cash and cash equivalents of approximately $32.7 million and access to a $15.0 million revolver, which currently has no balance outstanding. 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 discussed in Note 6 - Debt to these condensed consolidated financial statements resulting in, among other things. a limitation of our ability to draw on our revolving credit facility. The loss of access to our revolving credit facility at the time 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 to reinstate its ability to borrow under its revolving credit facility. Without the amendment, the Company was at the time at risk of not having the revolving credit facility available.
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In 2023, we implemented several initiatives to reduce our operating and investing costs. We announced several site consolidation plans in the U.S. and certain European and U.K. sites. Our site optimization plans allow us to reduce overhead and create efficiencies through scale. During fiscal 2023, we completed all planned fiscal year 2023 consolidations and closures and sold our Israeli businesses. The consolidation of the operations at our Blackthorn, U.K., facility with the operations in Hillcrest, U.K., is expected to be complete in fiscal Q4 2024. Over the last year, we have continued to improve our infrastructure and worked to optimize our operating platform to support future growth. 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. However, there is no assurance that such actions will ultimately have the intended effects.
In connection with the site optimizations noted above and other restructuring initiatives, we reduced our workforce. We also took steps to reduce our budgeted capital expenditures and certain forecasted expenses, including a reduction of nonessential travel and employee-related expenses among other efficiency-based reductions. Additionally, we identified and executed new strategies to improve the efficiency and cost effectiveness of the transportation of our products. In December 2023, we announced that we would be partnering with Vanguard Supply Chain Solutions LLC, a current provider of our transportation services, to enable the in-house integration of our North American transportation operations. By taking direct control of our transportation operations, we expect to achieve key efficiencies to strengthen internal operations, improve our outgoing supply chain, and bolster service and scientific continuity for clients. In the second quarter of fiscal 2024, we completed the in-house integration of our North American transportation operations as described above. The Company is now working on further route optimization projects designed for further efficiencies and cost reductions.
The financial covenants under the Company's Credit Agreement include, among others, a requirement to not permit the consolidated debt to consolidated EBITDA of the Company to exceed certain leverage thresholds under the Credit Agreement. Subsequent to March 31, 2024, the Company entered into the Fourth Amendment (as defined in Note 15 - Subsequent Events) to the Credit Agreement, which provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s consolidated EBITDA (up to $26.5 million) for purposes of the financial covenants under the Credit Agreement. As a result of the Fourth Amendment obtained by the Company, the Company was in compliance with its covenants under the Credit Agreement as of March 31, 2024.
The Company believes it has sufficient liquidity to satisfy its current obligations as they come due, including cash outflows for planned targeted capital expenditures, for the twelve months following the issuance of these financial statements. Following the decrease in overall revenue for the three months ended March 31, 2024, there is no assurance that the Company will experience an increase in revenue for the remainder of the 2024 fiscal year. If the Company's revenue and related operating margins do not increase, it would result in non-compliance with the financial covenants under the Credit Agreement. If at the time the Company files, or is required to file, its next Quarterly Report on Form 10-Q it reports a failure to comply with its financial covenants and remains unremedied for the period of time stipulated under the Credit Agreement, this would constitute an event of default under the Credit Agreement and the lenders may, among other remedies set out under the Credit Agreement, declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be immediately due and payable. Furthermore, if the lenders were to accelerate the loans under the Credit Agreement, such acceleration would constitute a default under our indenture governing the Company's Convertible Senior Notes (the "Notes") which, if not cured within 30 days following notice of such default from the trustee or holders of 25 percent of the Notes, would permit the trustee or such holders to accelerate the Notes. If the lenders accelerate the loans under the Credit Agreement, the Company does not believe its existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of its outstanding senior term loans and repay the entirety of its outstanding Notes in the next twelve months; in addition, access to the $15.0 million revolver would be restricted and such funds would not be available to pay for any operating activities.
Further, our evaluation of the Company's ability to continue as a going concern in accordance with U.S. generally accepted accounting principles entailed analyzing prospective fully implemented operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balances in order to satisfy our obligations, including cash outflows for planned targeted capital expenditures, and to comply with minimum liquidity and financial covenant requirements under our debt covenants related to borrowings pursuant to its Credit Agreement for at least the next twelve months. This evaluation initially does not take into consideration the potential mitigating effect of
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management’s plans that have not been fully implemented and are outside of its control as of the date the financial statements are issued. When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. After considering the factors outlined above, substantial doubt about our ability to continue as a going concern exists.
We plan to continue our efforts to optimize our capital allocation and expense base, which reduced our cash expenses in the three and six months ended March 31, 2024 compared to the three and six months ended March 31, 2023, and which are expected to continue to reduce cash expenses in the remainder of fiscal 2024 and into fiscal 2025. Further, we have invested and plan to continue to invest in our DSA capacity and added to our service offerings in recent periods which we plan to utilize in order to support future revenue growth and margins. The Company also continues to collaborate with its lenders with regard to its current business conditions. The Company plans to request amendments to the Credit Agreement, which may include potential additional financial covenant requirements, in an effort to avoid an acceleration of the loans under the Credit Agreement prior to their existing maturity.In the event that the Company fails to comply with the requirements of the financial covenants set forth in the Credit Agreement, the Company has approximately 55 days subsequent to any fiscal quarter, and approximately 100 days subsequent to fiscal year-end to cure noncompliance. Additionally, the Company may consider seeking additional financing and evaluating financing alternatives to meet its cash requirements for the next 12 months. There is no assurance that the Company’s lenders will agree to any amendment to the Credit Agreement, nor can there be any assurance that the Company would be able to raise additional capital, whether through selling additional equity or debt securities or obtaining a line of credit or other loan on terms acceptable to the Company or at all.
Comparative Cash Flow Analysis
At March 31, 2024, we had cash and cash equivalents of $32.7 million, compared to $35.5 million at September 30, 2023.
Net cash provided by operating activities was $10.4 million for the six months ended March 31, 2024 compared to net cash provided by operating activities of $5.4 million for the six months ended March 31, 2023.
Net cash provided by operating activities in the six months ended March 31, 2024, was driven by non-cash charges of $25.9 million and a net increase in operating assets and liabilities of $48.4 million, partially offset by a net loss of $(63.9) million. Non-cash charges primarily included $28.4 million for depreciation and amortization, $3.8 million for non-cash stock compensation expense, non-cash interest and accretion of $3.3 million and amortization of debt issuance costs and original issue discount of $1.7 million, partially offset by a decrease in deferred taxes of $10.4 million.
Net cash provided by operating activities for the six months ended March 31, 2023 was driven by a net increase in noncash charges of $82.0 million and a net increase in operating assets and liabilities of $20.0 million, partially offset by a net loss of $96.6 million. Noncash charges primarily included $66.4 million for goodwill impairment loss, $26.3 million for depreciation and amortization, $3.8 million for non-cash stock compensation expense, non-cash interest and accretion of $2.9 million, amortization of debt issuance costs and original issue discount of $1.5 million and other non-cash operating activities of $1.1 million, partially offset by a decrease in deferred taxes of $21.3 million.
Net cash used in investing activities of $8.6 million in the six months ended March 31, 2024 was primarily due to capital expenditures of $12.6 million. The capital additions during the six months ended March 31, 2024 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. Partially offsetting these capital expenditures were net investing cash inflows of $4.0 million related to the proceeds from the sale of property and equipment, which primarily related to the sale of various sites in connection with our site optimization strategy.
Net cash used in investing activities of $16.6 million in the six months ended March 31, 2023 was primarily due to capital expenditures of $16.8 million. The capital additions during the six months ended March 31, 2023 primarily consisted of investments in facility improvements, site expansions, enhancements to laboratory technology, and system enhancements to improve the client experience.
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Net cash used in financing activities of $4.1 million in the six months ended March 31, 2024 primarily included principal payments of $1.4 million on the senior term notes and delayed draw term loans and other net financing payments of $2.7 million.
Net cash provided by financing activities of $17.2 million in the six months ended March 31, 2023 primarily included borrowings on the Additional DDTL (as defined below) of $35.0 million and borrowings 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 $1.4 million on the promissory notes and senior term notes and delayed draw term loans, respectively.
Capital Resources
Long-term debt as of March 31, 2024 and September 30, 2023 is detailed in the table below.

(in millions) | March 31, 2024 |  | September 30, 2023
Seller Note – Bolder BioPath (Related party) | $ | 0.5 |  |  | $ | 0.6 |
Seller Note – Preclinical Research Services | 0.5 |  |  | 0.5 |
Seller Payable - Orient BioResource Center | 3.7 |  |  | 3.6 |
Seller Note – Histion (Related party) | 0.2 |  |  | 0.2 |
Seller Note – Protypia (Related party) | — |  |  | 0.4 |
Economic Injury Disaster Loan | — |  |  | 0.1 |
Convertible Senior Notes | 113.7 |  |  | 110.7 |
Term Loan Facility, DDTL and Incremental Term Loans | 271.8 |  |  | 272.9 |
Total debt before unamortized debt issuance costs | $ | 390.4 |  |  | $ | 389.0 |
Less: Debt issuance costs not amortized | (9.8) |  |  | (11.4) |
Total debt, net of unamortized debt issuance costs | 380.6 |  |  | 377.6 |
Less: Current portion | (380.4) |  |  | (8.0) |
Total Long-term debt | $ | 0.2 |  |  | $ | 369.6 |
Note: Table may not foot due to rounding |  |  |

Revolving Credit Facility
As of March 31, 2024 and September 30, 2023, the Company had no outstanding balance on the revolving credit facility. Refer to the statements of cash flows for information related to payments on the revolving credit facility during the six months ended March 31, 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 was used to repay the $15.0 million balance on the Company’s revolving credit facility, while the remaining amount 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.
On May 14, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s Consolidated EBITDA (capped at $26.5 million) for purposes of the financial covenants under the Credit Agreement.
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The fee consideration payable by the Company for each consenting lender party to the Fourth Amendment is 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.
The Company is reviewing the Credit Agreement, as amended for accounting and tax impacts, which would be included in the quarterly report for quarter ending June 30, 2024
Term Loan Facility, DDTL and Incremental Term Loans
Below are the weighted-average effective interest rates for the loans available under the Credit Agreement (as defined below):

| Three Months Ended March 31, |  | Six Months Ended March 31,
| 2024 |  | 2023 |  | 2024 |  | 2023
Term Loan | 11.06 | % |  | 10.40 | % |  | 11.30 | % |  | 10.32 | %
Initial DDTL | 11.05 | % |  | 10.45 | % |  | 11.29 | % |  | 10.35 | %
Additional DDTL | 11.17 | % |  | 10.68 | % |  | 11.42 | % |  | 11.07 | %

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 (the "Term Loan") 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 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 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 accrued 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%.
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 were subject to a 1.00% 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 a Secured Leverage Ratio of not more than 4.25 to 1.00 for the Company's fiscal quarters through the fiscal quarter ended June 30, 2023, 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023, and 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 was 1.00 to 1.00 during the first year of the Credit Agreement and is 1.10 to 1.00 from and after the Credit Agreement’s first anniversary.
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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.
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%.
The Term Loan and the Initial DDTL will mature on November 5, 2026.
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 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 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%.
The Additional Term Loans require annual principal payments in an amount equal to 1.00% of the original principal amount. Voluntary prepayments of the Additional Term Loans were subject to a 1.00% 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 provided 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 added 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.
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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 0.50%, (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.
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 provided 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 $10.0 million.
Under the Third Amendment, the Company may elect to borrow on each of the loan facilities accruing interest at either an adjusted 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, provided that, the Adjusted Term SOFR shall never be less than 1.00% per annum, plus (ii) an
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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 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.
On May 14, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s Consolidated EBITDA (capped at $26.5 million) for purposes of the financial covenants under the Credit Agreement.
The fee consideration payable by the Company for each consenting lender party to the Fourth Amendment is 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.
The Company is reviewing the Credit Agreement, as amended for accounting and tax impacts, which would be included in the quarterly report for quarter ending June 30, 2024.
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 Pre-Clinical Research Services, Inc. ("PCRS"), the Company issued an unsecured subordinated promissory note payable to the PCRS seller in the initial principal amount of $0.8 million. The promissory note bears interest at a rate of 4.50% per annum with monthly payments of principal and interest and a maturity date of December 1, 2024.
As part of the acquisition of Bolder BioPATH, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Bolder BioPATH in an aggregate principal amount of $1.5 million. As part of the working capital adjustment in March 2022, a reduction of the promissory note of $0.5 million was recorded. The promissory notes bear interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of May 1, 2026.
As part of the acquisition of Plato BioPharma, Inc. ("Plato"), 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 bore interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023. The promissory notes were paid in full as of June 1, 2023.
As part of the acquisition of Orient BioResource Center, Inc. ("OBRC"), the Company agreed to leave in place a payable owed by OBRC to Orient Bio, Inc. (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 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 under the stock purchase agreement, nor alter, modify or amend or in any way affect any of the terms and conditions, obligations, covenants or agreements contained in the stock purchase agreement.
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As part of the acquisition of Histion, 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 4.50% 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 4.50% per annum, with monthly interest payments, as well as principal payments on July 7, 2023, and on the maturity date, January 7, 2024. These notes were paid in full on 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 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 each one thousand dollars of 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 March 31, 2024 and September 30, 2023, there were $3.7 million and $4.2 million, respectively, in unamortized debt issuance costs related to the Notes. For the three months ended March 31, 2024, the total interest expense was $2.9 million, including coupon interest expense of $1.1 million accretion expense of $1.5 million, and the amortization of debt discount and issuance costs of $0.2 million. During the three months ended March 31, 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. For the six months ended March 31, 2024, the total interest expense was $5.8 million, including coupon interest expense of $2.3 million, accretion expense of $3.1 million, and the amortization of debt discount and issuance costs of $0.5 million. During the six months ended March 31, 2023, the total interest expense was $5.5 million, including coupon interest expense of $2.3 million, accretion expense of $2.8 million, and the amortization of debt discount and issuance costs of $0.4 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 130.00% 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
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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 25.00% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
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 March 31, 2024, our debt portfolio was reliant on reference rates. Based on our interest rate exposure at March 31, 2024, 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, in the fiscal year 2023 period, the Israeli Shekel.
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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 March 31, 2024 cash balance by approximately $0.7 million and our revenue by approximately $4.0 million for the six months ended March 31, 2024.
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 rules and forms adopted by the SEC, including 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 and Senior Vice President - Finance (our principal financial officer), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure ("Management").
Management has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) under the Exchange Act, as of the end of the period covered by this Report. Based on that evaluation, Management has concluded that our disclosure controls and procedures were not effective as of March 31, 2024 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 March 31, 2024:
a)Management did not design and maintain effective controls over information technology general controls ("ITGCs") for all applications that are relevant to the preparation of the consolidated financial statements throughout the year ended September 30, 2022, which resulted in ineffective business process controls (automated and IT-dependent manual controls) that could result in misstatements potentially impacting all of the financial statement accounts and disclosures. Specifically, management did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; and program change management controls to ensure that information technology (“IT”) program and data changes affecting financial information technology applications and underlying accounting records are authorized, tested, and implemented appropriately. As a result, business process controls (automated and IT-dependent manual controls) that are dependent on the ineffective ITGCs, or that use data produced from systems impacted by the ineffective ITGCs were deemed ineffective at September 30, 2022, and were not remediated and therefore remained ineffective at March 31, 2024; 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 control over financial reporting. As such, we determined that management did not effectively design and implement components of the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO
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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, and were not remediated and therefore remained ineffective at March 31, 2024.
As of the date of this Report, Management has updated the design of several of its controls and modified process designs in an effort to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses described above. However, there remain several controls and processes that Management continues to re-assess, including the design of controls and modifying processes to improve our internal control over financial reporting. Management’s remediation efforts have included but are not limited to: (i) hiring additional accounting personnel, (ii) hiring key IT personnel with appropriate technical and internal control-related skillsets, and (iii) implementing an internal team dedicated to oversight of control and process design. Management’s ongoing remediation efforts include: (i) improving consistency in ITGCs supported by standard operating procedures to govern the authorization, testing and approval of changes to IT systems supporting all of the Company’s internal control processes, including the implementation of certain applications to achieve these operating procedures, (ii) enhancing design and implementation of our control environment, including the expansion of formal accounting and IT policies and procedures, (iii) designing, implementing, reviewing, analyzing, and properly documenting our review and approval controls, as it relates to ITGCs, account reconciliations, journal entries and estimates, and (iv) continuing to provide training to personnel related to ensuring the accuracy and completeness of data used in the performance of the internal controls.
The material weaknesses cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Controls
Except for the changes in connection with our remediation activities as described above, there were no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the fiscal quarter ended March 31, 2024 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
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.
Except as set forth below, there have been no material changes to the risk factors associated with our business previously described in our Annual Report on Form 10-K filed with the SEC on December 12, 2023 and in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 filed with the SEC on February 7, 2024. The risk factors set forth below update, and should be read together with our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, including those disclosed under the heading “Risk Factors” appearing in Item 1A of Part I of the Annual Report on Form 10-K and in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 filed with the SEC on February 7, 2024.
Risks Related to our Financial Activities
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We have identified conditions and events that could raise substantial doubt about our ability to continue as a going concern.
We have identified certain conditions or events, which are discussed below, that could raise substantial doubt about our ability to continue as a going concern. As a result of these and as disclosed elsewhere in this report, substantial doubt about the Company's ability to continue as a going concern exists.
The financial covenants under the Company's Credit Agreement include, among others, a requirement to not permit the consolidated debt to consolidated EBITDA of the Company to exceed certain leverage thresholds under the Credit Agreement. Subsequent to March 31, 2024, the Company entered into the Fourth Amendment (as defined in Note 15 - Subsequent Events) to the Credit Agreement, which provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s consolidated EBITDA (up to $26.5 million) for purposes of the financial covenants under the Credit Agreement. As a result of the Fourth Amendment obtained by the Company, the Company was in compliance with its covenants under the Credit Agreement as of March 31, 2024.
The Company believes it has sufficient liquidity to satisfy its current obligations as they come due, including cash outflows for planned targeted capital expenditures, for the twelve months following the issuance of these financial statements. Following the decrease in overall revenue for the three months ended March 31, 2024, there is no assurance that the Company will experience an increase in revenue for the remainder of the 2024 fiscal year. If the Company's revenue and related operating margins do not increase, it would result in non-compliance with the financial covenants under the Credit Agreement. If at the time the Company files, or is required to file, its next Quarterly Report on Form 10-Q it reports a failure to comply with its financial covenants and remains unremedied for the period of time stipulated under the Credit Agreement, this would constitute an event of default under the Credit Agreement and the lenders may, among other remedies set out under the Credit Agreement, declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be immediately due and payable. Furthermore, if the lenders were to accelerate the loans under the Credit Agreement, such acceleration would constitute a default under our indenture governing the Company's Convertible Senior Notes (the "Notes") which, if not cured within 30 days following notice of such default from the trustee or holders of 25 percent of the Notes, would permit the trustee or such holders to accelerate the Notes. If the lenders accelerate the loans under the Credit Agreement, the Company does not believe its existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of its outstanding senior term loans and repay the entirety of its outstanding Notes in the next twelve months; in addition, access to the $15.0 million revolver would be restricted and such funds would not be available to pay for any operating activities.
Further, our evaluation of the Company's ability to continue as a going concern in accordance with U.S. generally accepted accounting principles entailed analyzing prospective fully implemented operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balances in order to satisfy our obligations, including cash outflows for planned targeted capital expenditures, and to comply with minimum liquidity and financial covenant requirements under our debt covenants related to borrowings pursuant to its Credit Agreement for at least the next twelve months. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented and are outside of its control as of the date the financial statements are issued. When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. After considering the factors outlined above, substantial doubt about our ability to continue as a going concern exists.
In addition, the fact that there is substantial doubt about the Company’s ability to continue as a going concern and that the Company is operating under these conditions may adversely affect the Company’s stock price, its ability to raise capital, its ability to comply with its Credit Agreement and its normal business operations, among other implications.
We have experienced periods of losses and financial insecurity.
Throughout our history we have experienced periods of financial losses and financial hardship. Our current efforts may not result in profitability, or if our efforts result in profits, such profits may not continue for any meaningful period of time. In order to finance various acquisitions and expand certain facilities, we have significantly increased our leverage. Sustained
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losses may result in our inability to service our financial obligations as they come due, including the additional indebtedness we have incurred to support our growth initiatives, or to meaningfully invest in our business.
The Company’s RMS segment revenue decreased $32.1 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, due primarily to the negative impact of lower NHP-related product and service revenue. For the 2024 period, such reduction in revenue adversely affected our business, financial condition and results of operations.
Further, during 2022 and 2023 there were decreases in biotech funding which contributed to a reduced demand for preclinical studies. This reduced demand has negatively impacted the Company’s DSA segment revenue.
For further information, refer to the Operational Update within Note 1 – Description of Business and Basis of Presentation of the unaudited interim condensed consolidated financial statements contained in Part I, Item 1. There is no assurance that the Company will experience an increase in sales for the remainder of the 2024 fiscal year. If the Company’s revenue and related operating margins do not increase, it would have an adverse effect on the Company’s business financial condition and results of operations, and could result in non-compliance with the financial covenants under the Company’s Credit Agreement, as discussed elsewhere in this “Risk Factors” section.
We have incurred significant additional indebtedness during recent periods, which may impair our ability to raise further capital or impact our ability to service our debt.
We have incurred significant additional indebtedness during recent periods. Our additional indebtedness may impair our ability to raise further capital, including to expand our business, pursue strategic investments, and take advantage of financing or other opportunities that we believe to be in the best interests of the Company and our shareholders.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, curtailing spend, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. Our additional indebtedness may also impact our ability to service our debt and to comply with financial covenants and the other terms of our relevant credit arrangements, in which case our lenders might pursue available remedies up to and including terminating our credit arrangements and foreclosing on available collateral.
While we have begun efforts to curtail spending, there is no assurance that any such efforts will be successful or will have intended effect on our available cash.
Our credit agreement contains covenants that restrict our business and financing activities. All of our assets secure our obligations under the credit agreement and may be subject to foreclosure.
We are party to a Credit Agreement with Jefferies Finance LLC, as administrative agent, and the lenders party thereto (as amended, the “Credit Agreement”). The Credit Agreement contains various covenants, restrictions, and events of default. Among other things, these provisions require us to maintain certain financial ratios, including a secured leverage ratio and a fixed charge coverage ratio, and impose certain limits on our ability to engage in certain activities. The Third Amendment to the Credit Agreement that we entered into on January 9, 2023, imposes additional limitations on us through the date that we deliver financial statements for the quarter ending March 31, 2024, 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. Further during that time, we can only use borrowings under the revolving credit facility to fund operational expenses in the ordinary course.
The restrictions in the Credit Agreement, including under the Third Amendment, impose operating and financial restrictions on us and may limit our ability to compete effectively, take advantage of new business opportunities, or take other actions that may be in our, or our shareholders’, best interests. Further, various risks and uncertainties, including those arising as a result of the USAO-SDFL criminally charging employees of the Company’s principal supplier of NHPs, along with two Cambodian government officials, may impact our ability to comply with our obligations under the Credit Agreement.
Our obligations under the Credit Agreement are secured by all assets (other than certain excluded assets) of the Company and each of the subsidiary guarantors.
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Our inability to comply with any of the provisions of the Credit Agreement could result in a default under it. If such a default occurs, including because we fail to comply with our financial covenants at the time we file or are required to file our fiscal third quarter results on Form 10-Q, and such non-compliance remains unremedied for the period of time stipulated under the Credit Agreement, the lenders may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, and they would have the right to terminate any commitments to provide further funds. If the lenders accelerate the loans under the Credit Agreement, we do not believe our existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund our operations, satisfy our obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of our outstanding senior term loans and repay the entirety of the outstanding Notes in the next twelve months. In addition, if we are unable to repay outstanding borrowings when due, the lenders also have the right to proceed against the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our failure to comply with the terms of our Credit Agreement could result in an event of default that could materially adversely affect our business, financial condition and results of operations.
If there were an event of default under our Credit Agreement, all amounts outstanding under that agreement could be due and payable immediately, which may have an adverse impact on our business, financial condition and results of operations. An event of default may occur should our assets or cash flow be insufficient to fully repay borrowings under our Credit Agreement, whether paid in the ordinary course or accelerated, or if we are unable to maintain compliance with relevant obligations thereunder, including financial and other covenants. Various risks and uncertainties, including those arising as a result of the USAO-SDFL criminally charging employees of the principal supplier of non-human primates to the Company, along with two Cambodian government officials, may impact our ability to comply with our obligations under the Credit Agreement.
Our inability to comply with any of the provisions of the Credit Agreement could result in a default under it. If such a default occurs, including because we fail to comply with our financial covenants at the time we file or are required to file our fiscal third quarter results on Form 10-Q, and such non-compliance remains unremedied for the period of time stipulated under the Credit Agreement, the lenders may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, and they would have the right to terminate any commitments to provide further funds. If the lenders accelerate the loans under the Credit Agreement, we do not believe our existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund our operations, satisfy our obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of our outstanding senior term loans and repay the entirety of the outstanding Notes in the next twelve months. In addition, if we are unable to repay outstanding borrowings when due, the lenders also have the right to proceed against the collateral. Further, access to the $15.0 million revolver under the Credit Agreement would be restricted and such funds would not be available to pay for any operating activities. The occurrence of any of these events could have a material adverse effect on our business, financial condition, results of operations and liquidity.
We may need additional capital, and any additional capital we seek may not be available in the amount or at the time we need it.
Successful execution of our growth plans will require that we have access to capital. Our expected financing needs are based upon management’s estimates as to future revenue and expense. Our business plan and financing needs are subject to change based upon, among other factors, our ability to increase revenues and manage expenses and the timing and extent of our future capital expenditures and acquisition activity. If our estimates of our financing needs change, we may need additional capital more quickly than we expect or we may need a greater amount of capital.
In general, additional capital may be raised through the sale of common shares, preferred equity or convertible debt securities, entry into debt facilities or other third-party funding arrangements. The sale of equity and convertible debt securities may result in dilution to our shareholders and those securities may have rights senior to those of our common shares. Agreements entered into in connection with such capital raising activities could contain covenants that would restrict our operations or require us to relinquish certain rights. Additional capital may not be available on reasonable terms, or at all. If we cannot timely raise any needed funds, we may be forced to reduce our operating expenses, which could adversely affect our ability to implement our long-term strategic roadmap and grow our business.
The financial covenants under the Company's Credit Agreement include, among others, a requirement to not permit the consolidated debt to consolidated EBITDA of the Company to exceed certain leverage thresholds under the Credit Agreement. Subsequent to March 31, 2024, the Company entered into the Fourth Amendment (as defined in Note 15 - Subsequent Events) to the Credit Agreement, which provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s consolidated EBITDA (up to $26.5 million) for purposes of
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the financial covenants under the Credit Agreement. As a result of the Fourth Amendment obtained by the Company, the Company was in compliance with its covenants under the Credit Agreement as of March 31, 2024.
The Company believes it has sufficient liquidity to satisfy its current obligations as they come due, including cash outflows for planned targeted capital expenditures, for the twelve months following the issuance of these financial statements. Following the decrease in overall revenue for the three months ended March 31, 2024, there is no assurance that the Company will experience an increase in revenue for the remainder of the 2024 fiscal year. If the Company's revenue and related operating margins do not increase, it would result in non-compliance with the financial covenants under the Credit Agreement. If at the time the Company files, or is required to file, its next Quarterly Report on Form 10-Q it reports a failure to comply with its financial covenants and remains unremedied for the period of time stipulated under the Credit Agreement, this would constitute an event of default under the Credit Agreement and the lenders may, among other remedies set out under the Credit Agreement, declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be immediately due and payable. Furthermore, if the lenders were to accelerate the loans under the Credit Agreement, such acceleration would constitute a default under our indenture governing the Company's Convertible Senior Notes (the "Notes") which, if not cured within 30 days following notice of such default from the trustee or holders of 25 percent of the Notes, would permit the trustee or such holders to accelerate the Notes. If the lenders accelerate the loans under the Credit Agreement, the Company does not believe its existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of its outstanding senior term loans and repay the entirety of its outstanding Notes in the next twelve months; in addition, access to the $15.0 million revolver would be restricted and such funds would not be available to pay for any operating activities.
Further, our evaluation of the Company's ability to continue as a going concern in accordance with U.S. generally accepted accounting principles entailed analyzing prospective fully implemented operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balances in order to satisfy our obligations, including cash outflows for planned targeted capital expenditures, and to comply with minimum liquidity and financial covenant requirements under our debt covenants related to borrowings pursuant to its Credit Agreement for at least the next twelve months. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented and are outside of its control as of the date the financial statements are issued. When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. After considering the factors outlined above, substantial doubt about our ability to continue as a going concern exists.
We plan to continue our efforts to optimize our capital allocation and expense base, which reduced our cash expenses in the three and six months ended March 31, 2024 compared to the three and six months ended March 31, 2023, and which are expected to continue to reduce cash expenses in the remainder of fiscal 2024 and into fiscal 2025. Further, we have invested and plan to continue to invest in our DSA capacity and added to our service offerings in recent periods which we plan to utilize in order to support future revenue growth and margins. The Company also continues to collaborate with its lenders with regard to its current business conditions. The Company plans to request amendments to the Credit Agreement, which may include potential additional financial covenant requirements, in an effort to avoid an acceleration of the loans under the Credit Agreement prior to their existing maturity.In the event that the Company fails to comply with the requirements of the financial covenants set forth in the Credit Agreement, the Company has approximately 55 days subsequent to any fiscal quarter, and approximately 100 days subsequent to fiscal year-end to cure noncompliance. Additionally, the Company may consider seeking additional financing and evaluating financing alternatives to meet its cash requirements for the next 12 months. There is no assurance that the Company’s lenders will agree to any amendment to the Credit Agreement, nor can there be any assurance that the Company would be able to raise additional capital, whether through selling additional equity or debt securities or obtaining a line of credit or other loan on terms acceptable to the Company or at all.
In relation to the existence of substantial doubt about the Company’s ability to continue as a going concern as discussed above and in Note 1, the Company plans to request amendments to the Credit Agreement, which may include potential additional financial covenant requirements, in an effort to avoid an acceleration of the loans under the Credit Agreement prior to their existing maturity. Additionally, the Company may consider seeking additional financing and evaluating financing alternatives to meet its cash requirements for the next 12 months. There is no assurance that the Company’s lenders will agree to any amendment to the Credit Agreement, nor can there be any assurance that the Company would be
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able to raise additional capital, whether through selling additional equity or debt securities or obtaining a line of credit or other loan on terms acceptable to the Company or at all.
Risks Related to NHP Supply and Demand
Our business, results of operations, financial condition, including the carrying value of certain of our assets, and cash flows have and may continue to be adversely affected by our dependence on the importation of NHPs from suppliers located outside the U.S., particularly from communist countries in Southeast Asia, legal issues related to these suppliers, and any inability to diversify our suppliers located outside the U.S.
Our business, results of operations, financial condition, including the carrying value of certain of our assets, and cash flows have and may continue to be adversely affected by our dependence on NHP suppliers that are located outside the U.S. and difficulties in being able to diversify our suppliers located outside the U.S. China exited the NHP exportation market in 2020 during the COVID-19 pandemic, and has repeatedly stated that it strategically intends to dominate, amongst other things, worldwide biomedical research. As such, their demand for NHPs has shifted a previously exported supply to their domestic use. Legal matters affecting the Cambodian supply of NHPs further exacerbated an already constrained NHP supply for U.S. research. The allegations contained in that indictment also led us to refrain from selling or delivering any of the Cambodian NHPs we held in the U.S. until we could evaluate what additionally could be done to confirm that the NHPs in inventory from Cambodia could be reasonably determined to be purpose-bred. The decision to refrain from selling or delivering the Cambodian NHPs had a material adverse effect on our liquidity. In order to address the material adverse effect, we entered into an amendment to our credit facility.
While we are seeking to diversify our suppliers located outside the U.S., the number of NHP suppliers is limited, and we may not be successful in doing so. If we are unable to obtain NHPs in sufficient quantities of the required species or in a timely manner to meet the needs of our clients, if the price of NHPs that are available increases significantly, or if we are unable to ship the NHPs in our possession to our clients because of governmental restrictions or limitations, our business, particularly in our RMS segment, will be materially adversely affected.
In addition, overall supply constraints with respect to NHPs has led to an extremely dynamic pricing environment for NHPs, which has, and could continue to, make it difficult to predict results, lead to reduced volumes, and require us to adjust operations. Further, during fiscal 2023, the volume of NHPs we sold to third parties was significantly lower than in fiscal 2022.
Our sales of NHPs have decreased significantly in recent periods, which adversely affected our business, financial condition and results of operations, and this trend may continue.
The Company’s RMS segment revenue decreased $32.1 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, due primarily to the negative impact of lower NHP-related product and service revenue. For the 2024 period, such reduction in revenue adversely affected our business, financial condition and results of operations. There is no assurance that the Company will experience an increase in sales for the remainder of the 2024 fiscal year. If the Company’s revenue and related operating margins do not increase, it would have an adverse effect on the Company’s business financial condition and results of operations, and could result in non-compliance with the financial covenants under the Company’s Credit Agreement, as discussed elsewhere in this “Risk Factors” section.
Risks Related to Regulation and Legal Matters
We are involved in legal proceedings that could adversely affect our business, financial condition, and results of operations.
We are involved in legal proceedings related to various matters, including employment and securities litigation, and may become involved in other legal proceedings that arise from time to time in the future. For example, as discussed further in Note 16 - Contingencies to our consolidated financial statements contained in Part II, Item 8, a putative securities class action and derivative securities lawsuits have been filed against the Company and certain officers and directors, alleging, among other things, violations of the Exchange Act related to the Company’s disclosures concerning its acquisitions of Envigo and OBRC and their regulatory compliance.
Any claims against us, whether meritorious or not, can be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention, and divert significant resources. In addition, the expense of litigation and the timing of this expense from period to period are difficult to estimate and subject to change. Litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. Given the uncertain nature of legal proceedings generally, we are not able in all cases to estimate the amount or range of loss that
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could result from an unfavorable outcome. We could incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.
For further information on these and other actions, see Note 14 – Contingencies to the unaudited interim condensed consolidated financial statements contained in Part I, Item 1.
We are subject to inspections, investigations and enforcement actions by regulatory authorities, which could lead to penalties, including substantial fines, warning letters, a temporary restraining order or injunction, civil and/or criminal penalties, and/or license suspension or revocation.
We are subject to periodic inspections by regulatory authorities, including the FDA, the USDA and the U.S. Fish and Wildlife Service. As part of these inspections, the regulatory authorities seek to determine whether our facilities, operations and animal research model importation practices comply with applicable laws and regulations. Adverse findings as a result of these inspections could lead to enforcement actions, including substantial fines, warning letters that require corrective action (including potential facilities improvement requirements), revocation of approvals, exclusion from future participation in government healthcare programs, criminal prosecution and even the denial of the right to conduct business. Envigo’s Cumberland, VA facility, at which the Company ceased commercial operations in September 2022, had been the subject of inspections by the USDA, a search and seizure warrant executed by the U.S. Department of Justice (the “DOJ”) and federal and state law enforcement agents. Further, certain employees also received a grand jury subpoena requested by the U.S. Attorney’s Office for the Western District of Virginia, and the Company has received additional subpoenas related to this matter. For further information on these and other actions, see Note 14 - Contingencies to the unaudited interim condensed consolidated financial statements contained in Part I, Item 1.
Inspections, investigations and/or other actions could result in penalties that could include a temporary restraining order or injunction, civil and/or criminal penalties, and/or license suspension or revocation. The imposition of any of these penalties or other restrictions on our business could adversely affect our business reputation and could have a material adverse impact on our financial condition, results of operations and stock price.
We are subject to environmental, health and safety requirements and risks as a result of which we may incur significant costs, liabilities and obligations.
We are subject to a variety of federal, state, local and foreign environmental laws, regulations, initiatives and permits that govern, among other things: the emission and discharge of materials, including greenhouse gases, in air, land and water; the remediation of soil, surface water and groundwater contamination; the generation, storage, handling, use, disposal and transportation of regulated materials and wastes, including biomedical and radioactive wastes; and health and safety. Failure to comply with these laws, regulations or permits could result in fines or sanctions, obligations to investigate or remediate existing or potential contamination, third-party property damage claims, personal injury claims, natural resource damages claims or modification or revocation of operating permits and may lead to temporary or permanent business interruptions. Pursuant to certain environmental laws, we may be held strictly, and under certain circumstances jointly and severally, liable for costs of investigation and remediation of contaminated sites which we currently own or operate, or sites we or our predecessors have owned or operated in the past. Further, we could be held liable at sites where we have sent waste for disposal.
Environmental laws, regulations and permits, and the enforcement thereof, change frequently and have tended to become more stringent over time. Compliance with the requirements of laws and regulations may increase capital costs and operating expenses or necessitate changes to our production processes.
We use, and in the past have used, hazardous materials and generate, and in the past have generated, hazardous wastes. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any resulting damages and incur liabilities which could exceed our resources. Our costs, liabilities and obligations relating to environmental matters may have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows.
For further information on these and other actions, see Note 14 – Contingencies to the unaudited interim condensed consolidated financial statements contained in Part I, Item 1.
Any failure by us to comply with existing regulations could harm our reputation and operating results, and requirements to comply with new laws, regulations and guidance may have an adverse effect on our financial condition and results of operations.
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Any failure on our part to comply with existing regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. For example, if we were to fail to properly monitor compliance with study protocols, the data collected could be disqualified. Under such circumstances, we may be contractually required to repeat a study at no further cost to the client, but at substantial cost to us. That development would harm our reputation, our prospects for future work and our operating results. The issuance of a notice from the FDA or the USDA, or other relevant authorities, based on a finding of a material violation by us of good clinical practice, good laboratory practice or good manufacturing practice requirements, animal welfare laws and regulations, or other applicable regulations could materially and adversely affect our business and financial performance through fines and sanctions and responsive actions, including revocation of license(s), debarment and may lead to temporary or permanent business interruptions. Furthermore, the cost to comply with new federal or state legislature may adversely affect our operating results.
For further information on these and other actions, see Note 14 – Contingencies to the unaudited interim condensed consolidated financial statements contained in Part I, Item 1.
Risks Related to our Operations
We rely on a limited number of key clients, the importance of which may vary dramatically from year to year, and a loss of one or more of these key clients may adversely affect our operating results.
One client related to the RMS segment accounted for approximately 22.0% and 28.2% of our total revenue during fiscal years 2023 and 2022, respectively. Five clients of the DSA segment in the aggregate accounted for approximately 5.4% and 7.2% of our total revenue during fiscal years 2023 and 2022, respectively. The loss of a significant amount of business from one or more of our major clients would materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost business. Significant clients or projects in any one period may not continue to be significant clients or projects in other periods. In any given year, there is a possibility that a single client may account for a significant percentage of our total revenue or that our business may depend on one or more large projects. Since we do not have long-term contracts with most of our clients, the importance of a single client may vary dramatically from year to year as projects end and new projects begin. To the extent that we are meaningfully dependent on any single client, we are indirectly subject to risks related to that client, including if such risks impede the client’s ability to stay in business or otherwise to make timely payments to us.
During the three and six months ended March 31, 2024, one client accounted for 15.2% and 19.0% of sales, respectively. During the three and six months ended March 31, 2023, one client accounted for 25.0% and 23.6% of sales, respectively. For the 2024 periods, such reduction in sales volumes to this client adversely affected our business, financial condition and results of operations.
Risks Related to the Industries we Serve
We are substantially dependent on the pharmaceutical and biotechnology industries.
Our revenues depend greatly on the expenditures made by pharmaceutical and biotechnology companies in research and development, including their decisions to outsource drug development services to providers like us, rather than handling such services in-house. In some instances, companies in these industries are reliant on their ability to raise capital in order to fund their research and development projects and to compensate us for services rendered.
Fluctuations in the research and development budgets of researchers and their organizations has, had and could continue to have a significant effect on the demand for our products and services. Research and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities and institutional budgetary policies, among other reasons. Accordingly, economic factors and industry trends that affect our clients in these industries also affect our business. Our ability to continue to grow and win new business depends in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on research and development and to purchase the products and outsource the services we provide. If companies in these industries were to reduce the number or scope of research and development projects they conduct or outsource, our business could be materially adversely affected. We believe this occurred to some extent is fiscal year 2023 and in the first six months of fiscal year 2024 and could continue.
NHP imports into the U.S. for drug discovery significantly declined from 2022 to 2023. A decrease in overall NHP supply drove an increase in pricing in 2023. Furthermore, we believe the decreased U.S. NHP supply caused some studies to be shifted outside of the U.S. We also believe some clients increased their inventory levels of NHP’s during 2023 and therefore recently clients appear to be utilizing existing NHP inventory without purchasing normal levels of NHPs. RMS segment revenue decreased $32.1 million in the three months ended March 31, 2024 compared to the three months ended
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March 31, 2023 due primarily to the negative impact of lower volumes of NHP sales. For the 2024 period, such reduction in revenue adversely affected our business, financial condition and results of operations.
Further, during 2022 and 2023 there was a decrease in biotech funding which has contributed to a reduced demand for preclinical studies. This reduced demand has negatively impacted the Company’s DSA segment revenue.
If the Company’s revenue and related operating margins do not increase, it would have an adverse effect on the Company’s business financial condition and results of operations, and could result in non-compliance with the financial covenants under the Company’s Credit Agreement, as discussed elsewhere in this “Risk Factors” section.
Risks Related to Share Ownership
Our share price could continue to be volatile and our trading volume may fluctuate substantially.
The market price of our common shares has historically been and might continue to be volatile. Many factors may have a significant impact on the future price of our common shares, including:
•the fact that there is substantial doubt about our ability to continue as a going concern;
•our failure to successfully implement our business objectives;
•our businesses, operations, results and prospects;
•changes in revenue or earnings estimates, or changes in recommendations by equity research analysts;
•compliance with ongoing regulatory requirements;
•market acceptance of our products;
•technological innovations, new commercial products or drug discovery efforts and preclinical and clinical activities by us or our competitors;
•changes in government regulations, taxes, legal proceedings and other developments;
•inspections, investigations and enforcement actions by regulatory authorities against us or our principal suppliers;
•negative information related to, or adverse regulatory or other actions against us or our principal suppliers;
•pandemics, epidemics or other public health emergencies, such as COVID-19;
•general economic conditions, including changes in interest rates, and other external factors;
•actual or anticipated fluctuations in our quarterly financial and operating results and those of our competitors;
•announcements concerning us or our competitors;
•market conditions in CRO or research model industries;
•additions or departures of key management personnel;
•future mergers and strategic alliances;
•investor sentiment toward the stock of animal breeding companies;
•maintenance of acceptable credit ratings or credit quality;
•ability to fund future growth;
•the degree of trading liquidity in our common shares; and
•our ability to meet the minimum standards required for remaining listed on The Nasdaq Capital Market.
Factors which may impact the price of our common shares include influences beyond our control, such as market conditions and changes in the pharmaceutical and biotechnology industries we serve. The stock market, and in particular the market for pharmaceutical and biotechnology company stocks, has experienced periods of significant price and volume fluctuations, including as a result of recent increases in interest rates and inflation. Volatility and valuation decline have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and might adversely affect the price of our common shares.
Following periods of volatility in the overall market and in the market price of a company’s securities, securities class action litigation and derivative securities litigation have often been instituted against that company, as has been the case
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with us. Such occurrences of litigation could result in very substantial costs, divert management’s attention and resources and harm our business, operating results and financial condition.
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
Fourth Amendment to Credit Agreement
Because we are filing this Quarterly Report on Form 10-Q within four business days after the triggering event, we are making the following disclosure under this Item 5 instead of filing a Current Report on Form 8-K under Item 1.01, Entry into a Material Definitive Agreement and Item 2.03, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant:
On May 14, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment provides that any charges or expenses attributable to or related to the Agreement in Principle may be added back to the Company’s consolidated EBITDA (up to $26.5 million) for purposes of the financial covenants under the Credit Agreement.
The fee consideration payable by the Company for each consenting lender party to the Fourth Amendment is 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.
The foregoing description of the Fourth Amendment is a summary, does not purport to be complete, and is qualified in its entirety by reference to the Fourth Amendment, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2 and is incorporated herein by reference.
Trading Arrangements
During the three months ended March 31, 2024, 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).
(10) | 10.1 |  | Inotiv, Inc. 2024 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed May 15, 2024)
| 10.2 |  | Fourth Amendment to Credit Agreement dated as of May 14, 2024, by and among Inotiv, Inc., certain subsidiaries of Inotiv, Inc., the lenders party thereto, and Jefferies Finance LLC (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed May 15, 2024)
(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: May 15, 2024 | INOTIV, INC.
| (Registrant)
| By: | /s/ Robert W. Leasure
| Robert W. Leasure
| President and Chief Executive Officer
| (Principal Executive Officer)

Date: May 15, 2024 | By: | /s/ Beth A. Taylor
| Beth A. Taylor
| Chief Financial Officer and Senior Vice President - Finance (Principal Financial Officer)

Date: May 15, 2024 | By: | /s/ Brennan Freeman
| Brennan Freeman
| Vice President of Finance and Corporate Controller (Principal Accounting Officer)

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