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DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION | 9 Months Ended
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Jun. 30, 2024
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION | 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. in November 2021, which added a complementary research model platform, our full spectrum solutions 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 in addition to diet and bedding. 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. Resolution and Plea Agreements On June 3, 2024, Inotiv, Inc. announced that it had reached agreement with the U.S. Department of Justice (“DOJ”) to resolve a previously-announced criminal investigation into its shuttered canine breeding facility located in Cumberland, Virginia, which was operated originally by Envigo RMS, LLC (“Envigo RMS”), an entity acquired by the Company in November 2021. In connection with such resolution, the Company and its related entities have entered into a Resolution Agreement (the “Resolution Agreement”) with the DOJ and the United States Attorney’s Office for the Western District of Virginia (“USAO-WDV”), and Envigo RMS and Envigo Global Services, Inc. (“EGSI” and together with Envigo RMS, “Envigo”) have entered into a Plea Agreement (the “Plea Agreement”) with the DOJ and the USAO-WDV. On June 3, 2024, before the United States District Court for the Western District of Virginia, Envigo RMS pleaded guilty to one misdemeanor count of conspiracy to violate the Animal Welfare Act and EGSI pleaded guilty to one felony count of conspiracy to violate the Clean Water Act. While the terms of the resolution are subject to Court approval at a sentencing hearing, which is currently scheduled for October 7, 2024, the obligations of the Company and Envigo under the Resolution Agreement, the Plea Agreement and related documents apply beginning on the date of execution of June 3, 2024. Refer to Note 14 – Contingencies for additional information. Pursuant to the Resolution Agreement and the Plea Agreement, the Company and Envigo, among other matters, have agreed to: (i) make payments totaling $22,000 in fines, with $5,000 payable on each of June 3, 2025, 2026 and 2027, and $7,000 (plus accrued interest beginning on the sentencing date) payable on June 3, 2028; (ii) on June 3, 2024, pay $3,000, split between the Virginia Animal Fighting Taskforce and the Humane Society of the United States in recognition of assistance provided to the U.S. Government’s investigation; (iii) on June 3, 2024, pay $3,500 to the National Fish and Wildlife Foundation to fund environmental projects, studies, and initiatives in Cumberland County, Virginia; (iv) expend at least $7,000 ($2,500 by June 3, 2025, $2,500 by June 3, 2026, and $2,000 by June 3, 2027) for improvements to its facilities and personnel related to the welfare of animals; (v) provide a lien to the United States against sufficient Company assets to secure the deferred payments in connection with the $22,000 fine, which lien will be junior to only the lien provided by the Company to lenders under its credit facility as of April 1, 2024 and additional liens to secure up to $100,000 of additional debt; (vi) meet specified standards with respect to the health, safety and well-being of animals under the Company’s care; (vii) develop, adopt, implement, fund and comply with a comprehensive nationwide compliance plan related to applicable laws; and (viii) the appointment of a Compliance Monitor to review the Company’s care of animals and compliance with certain laws, and to pay all associated costs, which Compliance Monitor shall serve for a term that expires five years after the completion of the selection process for the Compliance Monitor, unless Envigo is released from probation prior to completion of the five-year term, in which case the monitorship term shall expire three years after the completion of the selection process, or two months after the completion of probation, whichever is later. In addition, the pleas result in Envigo RMS and EGSI being subject to probation for up to five years, with the potential to end the term early at a minimum of three years if the Company complies with the elements of the resolution. For the nine months ended June 30, 2024, the Company has expensed $28,500 related to the Resolution and Plea Agreements, which is presented within other operating expense in the Company’s Condensed Consolidated Statement of Operations. In line with the Resolution and Plea Agreements, the Company paid $6,500 during the three months ended June 30, 2024 and expects to pay an additional $22,000 over multiple years. Accordingly, the Company has included $5,000 in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets as of June 30, 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 nine months ended June 30, 2024 and the Company has included $17,000 in other long-term liabilities on its Condensed Consolidated Balance Sheets as of June 30, 2024 and “Changes in operating assets and liabilities – other assets and liabilities” in its Condensed Consolidated Statement of Cash Flows for the nine months ended June 30, 2024. The total $28,500 charge is reflected in the operating loss of the RMS segment. The charge of $28,500 is non-deductible for U.S. federal income tax purposes. Further, the Fifth Amendment (as defined in Note 6 - Debt), among other changes to the Credit Agreement, permits charges or expenses attributable to or related to the Resolution Agreement and the Plea Agreement to be added back to the Company’s Consolidated EBITDA in an amount up to $28,500 for purposes of the financial covenants under the Credit Agreement. The Company expects to have additional cash outlays in connection with certain costs related to the Resolution Agreement, 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 Resolution Agreement, 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 has remained closed as a source through the third quarter of fiscal 2024, we have identified and extensively audited multiple additional sources of purpose-bred animals that can be made available for life-saving medical research. This has allowed us 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 $49,143 in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due primarily to lower NHP-related product and service revenue of $45,667. For the 2024 period, the 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 half of calendar 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. As of June 30, 2024, the Company has cash and cash equivalents of approximately $14,434 and access to a $15,000 revolver, which had no balance outstanding as of June 30, 2024 and a $12,000 balance outstanding as of the date of this report. The proceeds from the recent draw on the revolver were used for working capital demands, such as timing of an NHP deposit. 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 in January 2023 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 integrate and optimize several of the facilities we acquired through acquisitions in 2021 and 2022. The initiatives included significant investments in existing facilities and were also designed to enhance animal welfare and customer experience, reduce our operating costs and provide additional scale and create efficiencies in our remaining operations. Additionally, we identified and have been implementing new strategies to improve the efficiency and cost effectiveness of the transportation of our products. 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 complete as of the date of this report and we expect to exit the leased facility before the end of the fourth quarter of fiscal 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 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 believe we have achieved 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. During the three months ended June 30, 2024, t he Company worked on route optimization projects, which are designed for further efficiencies and cost reductions and is continuing to work on route optimization projects in the fourth quarter of fiscal 2024. 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. On June 2, 2024, the Company entered into the Fifth Amendment to the Credit Agreement, which provides that any charges or expenses attributable to or related to the Resolution and Plea Agreements may be added back to the Company’s consolidated EBITDA (up to $28,500) for purposes of the financial covenants under the Credit Agreement. As of the date of filing the Quarterly Report on Form 10-Q, due to the decrease in the Company's revenue during the three months ended June 30, 2024, the Company entered into the Sixth Amendment (as defined in Note 15 - Subsequent Events) to the Credit Agreement, which waives the testing of the secured leverage ratio and fixed charge coverage ratio financial covenants thereunder as of June 30, 2024. As a result of the unexpected shift in NHP demand as discussed in the Operational Update above, 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 beginning with the September 30, 2024 test date. If at the time the Company files its Annual Report on Form 10-K it reports a failure to comply with its financial covenants which 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, repay the entirety of its outstanding Notes and repay the entirety of the $12,000 balance of the revolving credit facility in the next twelve months. Additionally, access to the revolver would be restricted and such funds would not be available to pay for any operating activities. 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 condensed 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 nine months ended June 30, 2024 compared to the three and nine months ended June 30, 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 (the "grace period"). Additionally, the Company has and may continue to seek additional financing and evaluate 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 unaudited condensed consolidated financial statements for the three and nine months ended June 30, 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 June 30, 2024. The results of operations for the three and nine months ended June 30, 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 condensed 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 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 Vanguard Supply Chain Solutions LLC, 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 second fiscal quarter of 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 months ended June 30, 2024, no clients accounted for more than 10% of sales. During the nine months ended June 30, 2024, one client accounted for 16.1% of sales. During the three and nine months ended June 30, 2023, one client accounted for 19.7% and 22.5% of sales, respectively. During the three and nine months ended June 30, 2024 and June 30, 2023, no vendors accounted for more than 10% of the sum of cost of services and cost of products.

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