NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Nature of Business and Organization

Envigo RMS Holding Corp. (the “Parent”) was formed on April 9, 2019 as a wholly owned subsidiary of Envigo Holdings, Inc. (Holdings) for the sole purpose of owning Holdings’ research models and services businesses (“RMS”) and certain other assets. On June 3, 2019, in anticipation of the acquisition of the majority of Holdings’ contract research services (“CRS”) operating segment by Laboratory Corporation of America Holdings’ (“LabCorp”) Covance Drug Development segment (“Covance”), Holdings executed a group restructuring and spin-off whereby Holdings’ RMS operating subsidiaries were contributed to the Parent. The group restructuring was completed by entities under common control with the shareholder group of the Parent remaining substantially the same. However, long-lived assets, including property, plant and equipment, intangibles and goodwill, were reviewed for impairment which resulted in adjustments to the value of property, plant and equipment and intangibles. The Parent together with its subsidiaries are referred to collectively as “Envigo”, or the “Company”.

Concurrent with the spin-off, Envigo RMS LLC, a wholly owned subsidiary of the Parent, acquired Covance Research Products, Inc. (“CRP”) (later renamed Envigo Global Services Inc. or “EGSI”) for $110,000 with the Parent as “Issuer” of the “Seller Note” to Covance Preclinical Corporation as “Holder”. This acquisition was financed by the Seller Note. See Note 15 for additional details on the Seller Note. The sale of the CRS business to LabCorp and the purchase of the EGSI business from LabCorp are referred to collectively as the LabCorp Transaction. The LabCorp Transaction was completed on June 3, 2019. The Company incurred costs of $6,391 related to the LabCorp Transaction, including $350 related to the Seller Note, which has been capitalized and is being amortized over the term of the debt. All information contained in this Annual Report for the nine months ended September 30, 2021 and the year ended December 31, 2020 relates to Envigo.

Envigo breeds, imports and sells research-quality animal models for use in laboratory tests, manufactures and distributes standard and custom diets, distributes bedding and enrichment products, and provides other services associated with these products. The Company is one of the largest providers of research models and services (“RMS”) products and services globally and has been supplying research models since 1931. With over 130 different species and strains, the Company is a global leader in the production and sale of some of the most widely used rodent research model strains, among other species. The Company maintains production and distribution facilities, including barrier and isolator facilities, in the United States (“U.S.”), United Kingdom (“U.K.”), mainland Europe, and Israel.

Inotiv Merger

On September 21, 2021, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) pursuant to which Inotiv, Inc. (“Inotiv”) agreed, subject to certain closing conditions, to acquire the Company by merger of the Company into a newly formed, wholly owned subsidiary of Inotiv. Under the terms and conditions of the Merger Agreement, the aggregate consideration paid to the holders of outstanding equity interests in the Company will consists of cash consideration of $200 million, and 9,365,173 Inotiv common shares, which shares had an aggregate market value of approximately $285 million, subject to adjustment as defined in the Merger Agreement. Subsequently, on November 5, 2021, Inotiv completed the acquisition wherein the Company merged into a wholly owned subsidiary of Inotiv. The aggregate consideration paid to the holders of outstanding equity interests in the Company in the merger consisted of cash consideration of $271 million, including adjustments for net working capital and cash balances as provided in the merger agreement of approximately $13 million and $48 million, respectively, and 9,036,538 Inotiv common shares. The common shares included in the merger consideration include 790,620 shares issuable upon exercise of certain Envigo stock options that were assumed by Inotiv in the transaction. In conjunction with the Inotiv Merger, the $271 million cash proceeds from the transaction were used in part to repay all outstanding principal (including payment-in-kind) and interest due as of November 5, 2021 on the Seller Note, Main Street Term Loan and Second Lien Term Loan. The Company expects to record a loss of $1,932 on the early extinguishment of the debt primarily related to unamortized debt issuance costs and original issuance discounts. In addition, the Company paid an early repayment fee of $207 on the Second Lien Term Loan.

COVID-19

The outbreak of COVID-19, which the World Health Organization declared in March 2020 to be a pandemic, continues to spread throughout the United States of America and the globe. Many U.S. State Governors issued temporary Executive Orders that, among other stipulations, effectively prohibited in-person work activities for many industries and businesses, having the effect of suspending or severely curtailing operations. The spread of the virus continued throughout 2020 and into Summer 2021, and is expected to continue through the remainder of 2021, despite widespread vaccination rollout due to new variants. The extent of the ultimate impact of the pandemic on the Company's operational and financial performance will depend on various developments, including the duration and spread of the outbreak, its impact on potential customers, employees, and vendors and the timing and breadth of vaccinations, all of which cannot be reasonably predicted at this time.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Due to the world-wide impact of the COVID-19 pandemic, the Company’s operations were initially impacted by: disruption in the supply of certain animal research models, including a disruption in the supply of non-human primates from China, temporary cancelation or delay in customer orders, and product demand fluctuations. While the supply of non-human primates from China continues to be an issue, with no resolution in sight, the Company has been able to identify and access alternative inventory supply resources to mitigate a large portion of the China supply disruption. The issues around cancelation or delay of customer orders and product demand fluctuation have been resolved over time.

Consolidation

The accompanying consolidated financial statements (“consolidated financial statements”) of the Company have been prepared, including all subsidiaries and a variable interest entity (“VIE”) it consolidates, in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). See Note 8 – Variable Interest Entities, for a further discussion of the VIE in which the Company held a variable interest and the consolidation of the entity in its consolidated financial statements as of and for the nine months ended September 30, 2021 and year ended December 31, 2020. In the opinion of management, the Company’s consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

The Company accounts for non-controlling interests in accordance with Accounting Standard Codification (“ASC”) 810, “Consolidation” (“ASC 810”). ASC 810 requires companies with non-controlling interests to disclose such interests as a portion of equity but separate from the Parent’s equity. The non-controlling interests’ portion of net income (loss) is presented on the consolidated statement of operations.

Intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Comparatives

In conjunction with the LabCorp Transaction, the Company undertook a plan to sell or dispose of certain assets comprising the remaining CRS businesses in Germany, Spain and Israel (together the “CRS business”). At that time, the Company conducted a review and determined that the CRS business met the criteria for assets and liabilities held for sale and discontinued operations presentation. The discontinued operations criteria was initially met as of September 30, 2019. Accordingly, the CRS business is presented as discontinued operations in the consolidated statements of operations for the nine months ended September 30, 2021 and year ended December 31, 2020 and the consolidated balance sheets as of September 30, 2021 and December 31, 2020. See Note 4 for a more detailed discussion of discontinued operations including details of assets and liabilities and income (loss) related to the discontinued business, along with certain information for the consolidated statement of cash flows. Unless otherwise, noted all information presented hereafter is based upon continuing operations.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgements that may affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. These include 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.

Net Revenue

Effective for the period ended December 31, 2019, the Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Product Revenue. Product revenue included research models, diets and bedding, bioproducts and transgenic. Product revenue is recognized at the point in time when the Company’s performance obligations with the applicable customers have been satisfied. Revenue is recorded at the transaction price, which is the amount of consideration the Company expects to receive in exchange for transferring products to a customer. The Company considered the unit of account for each purchase order that contains more than one product. Because all products in a given purchase order are generally delivered at the same time and the method of revenue recognition is the same for each, there is no need to separate an individual order into separate performance obligations. The performance obligations, including associated freight to deliver products, is met upon delivery (destination point) and transfer of title. The Company determines the transaction price based on fixed consideration in its contractual agreements. In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers product to when the customers pay for the product is less than one year and the customers do not pay for product in advance of the transfer of the product. However, in certain transactions, there can be greater than one year between when the customer pays for product and the Company delivers the product. The Company recorded interest expense of $361 and $691 during the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively, related to the financing component for these transactions. During the nine months ended September 30, 2021 and the year ended December 31, 2020, $374 and $252 of accrued interest was released as revenue was recognized.

Services Revenue. Services revenue include per diem charges for boarding customer-owned animals. The service revenue performance obligation is the delivery of service which generally represents caring for animals we are holding for customers. Services revenue is recognized as invoiced in accordance with the invoice method practical expedient which permits the recognition of revenue, for contracts over time, as invoiced if the company's right to payment is for an amount that corresponds directly with the value to the customer of the company’s performance to-date.

Shipping and handling costs incurred are recorded in cost of sales. The Company accounts for the sale of containers used to ship products as revenue. Costs related to containers are recorded in cost of sales.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original maturities of three months or less and consist primarily of amounts invested in money market funds and bank deposits. As of September 30, 2021 and December 31, 2020, the Company has $421 and $421 of cash equivalents, respectively.

Accounts Receivable and Allowance for Uncollectible Accounts

The Company records accounts receivable net of an allowance for doubtful accounts. The Company establishes an allowance for uncollectible accounts which it believes is adequate to cover anticipated losses on the collection of all outstanding trade receivables, which is based on historical information, a review of customer accounts and related receivables, and management’s assessment of current economic conditions. The Company reassesses the allowance for uncollectible accounts at the end of each quarter. The following table rolls forward the allowance for doubtful accounts for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively.

Fees Invoiced in Advance

Fees invoiced in advance include customer prepayments which are typically used to secure supply of certain animal models. The prepayments are typically credited against sales invoices when products are sold to the customers.

Inventories

Inventories consist primarily of research models stock, biomedical products, diets and bedding, and are stated at the lower of cost or net realizable value using the average costing methodology. The determination of net realizable value is assessed using the selling price of the products. Provisions are recorded to reduce the carrying value of inventory determined to be unsalable. Inventory not expected to be sold within the next twelve months is classified as noncurrent in the consolidated balance sheets.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Property, Plant and Equipment (“PP&E”)

Property, plant and equipment are stated at cost and depreciated over the estimated useful lives on a straight-line basis. Estimated useful lives of respective assets are as follows:

Leasehold buildings and improvements are depreciated over the lesser of its estimated useful life or remaining lease term. Repairs and maintenance expenses on these assets arising from the normal course of business are expensed in the period incurred.

Goodwill

Goodwill represents the difference between the purchase price and the fair value of net tangible and identifiable net intangible assets acquired in business combinations when accounted for using the purchase method of accounting.

Goodwill is not amortized but is tested for impairment at the reporting unit level on an annual basis. The Company early adopted ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” in the prior year. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative impairment test, in which the Company compares the fair value of its reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, an impairment charge is booked but this must not be greater than the total amount of goodwill allocated to that reporting unit. During the year ended December 31, 2020, the Company recorded goodwill impairment charges of $39,679. See Note 13 for further discussion.

Long-lived and intangible assets subject to amortization, to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than the carrying amount of the asset group. If such assets are considered to be impaired, a charge is recorded to reduce the carrying amount of the asset to fair value and the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. Long-lived and intangible assets subject to amortization to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. See Note 13 for a discussion of impairment of intangibles assets recorded during the year ended December 31, 2020. There were no indicators of impairment at September 30, 2021.

As of September 30, 2021 and December 31, 2020, there were no intangible assets with indefinite useful lives.

Income Taxes

The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense.

Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact, and the assumptions that market participants would use when pricing the asset or liability.

The Company’s financial assets are measured and recorded at cost. The Company’s liabilities are measured and recorded at cost or amortized cost.

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of hierarchy consist of the following:

Concentration of Risk

The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located primarily in the U.S., U.K. and Europe, and the Company’s policy is designed to limit exposure with any one institution. Balances in these accounts, at times, may be in excess of insured limits. At September 30, 2021 and December 31, 2020, the Company had uninsured balances of $49,371 and $30,131, respectively. The Company has not experienced any losses in such accounts. The Company does not engage in any currency hedging transactions.

Financial instruments that also 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 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 accounts receivable and unbilled receivables less fees invoiced in advance.

The Company has a wide range of customers and suppliers and therefore believes its concentration risk to any one customer or supplier is minimal. During the nine months ended September 30, 2021 and the year ended December 31, 2020, one customer accounted for 31.1% and 24.9% of sales, respectively. During the nine months ended September 30, 2021, one supplier accounted for 12.2% of purchases of goods and services. During the year ended December 31, 2020, no supplier accounted for more than 10% of purchases of goods and services.

An analysis of the Company’s net revenues from continuing operations and total assets are included in the notes to the consolidated financial statements (see Note 22 – Geographical Information).

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Leased Assets

Assets held under the terms of capital leases are included in property, plant and equipment and are depreciated on a straight-line basis over the lesser of the useful life of the asset or the term of the lease. Obligations for future lease payments under capital leases, less attributable finance charges, are shown within debt and are presented between current and long-term.

Operating leases are expensed on a straight-line basis over the lease term, and the Company records the difference between amounts charged to operations and amounts paid within accrued expenses.

Pension Costs

The Company has a number of defined contribution plans and a defined benefit plan for one of its U.K. subsidiaries.

The projected benefit obligations and funded position of the defined benefit plan is estimated by actuaries and the Company recognizes the funded status of its defined benefit plan on its consolidated balance sheet and recognizes gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of accumulated other comprehensive income (loss), net of tax. The Company measures plan assets and obligations as of the date of the Company’s year-end consolidated balance sheet making assumptions to anticipate future events.

Additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations are disclosed in the notes to the consolidated financial statements (see Note 17 - Employee Benefits).

Debt Issuance Costs

Fees incurred related to the issuance of debt are recorded as deferred financing costs and are amortized to interest expense using the effective interest method over the term of the loan. The deferred debt issuance costs are presented as a reduction of the carrying value of debt on the consolidated balance sheets.

Comprehensive Income (Loss)

Comprehensive income (loss) for the periods presented is comprised of consolidated net income (loss) plus the change in the cumulative translation adjustment equity account and the adjustments, net of tax, for the current year actuarial gains (losses) in connection with the Company’s defined benefit plan.

Foreign Currencies

Transactions in currencies other than the functional currency of each entity are recorded at the rates of exchange at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange at the balance sheet date and the related transaction gains and losses are reported in the consolidated statements of operations, in Operating income. The Company records gains and losses from re-measuring intercompany loans separately in Foreign exchange gain (loss) in the consolidated statement of operations.

The results of operations of subsidiaries whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rate, assets and liabilities are translated at year-end exchange rates, capital accounts are translated at historical exchange rates, and retained earnings are translated at the weighted average of historical rates. Translation adjustments are excluded from the determination of net income and are recorded as a separate component of equity within accumulated other comprehensive loss in the consolidated financial statements.

Recently Adopted Accounting Pronouncements

No accounting pronouncements were adopted during the nine months ended September 30, 2021.

Newly Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right of use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of ASU 2016-02, the FASB issued codification updates in July 2018, ASU 2018-11 “Leases (Topic 842) – Targeted Improvements (“ASU 2018-11”) and in March 2019, ASU 2019-01 “Leases (Topic 842) – Codification Improvements. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which delayed the effective date for non-public companies to annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the effects of adopting ASU 2016-02, and all updates, on its consolidated financial statements, but expects that it will result in a significant increase in the assets and liabilities recorded on the consolidated balance sheet.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses” (“ASU 2016-13”). ASU 2016-13 adds to U.S. GAAP an impairment model known as the current expected credit loss (“CECL”) model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. In November 2019, the FASB issued ASU 2019-10 which delayed the effective date for non-public companies to annual reporting periods beginning after December 15, 2022, including interim periods within the fiscal year beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the effects of adopting ASU 2016-13 will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU, including subsequently issued updates, offers temporary optional expedients and exceptions for applying U.S. GAAP to modifications to agreements such as loans, debt securities, derivatives, and borrowings which reference LIBOR or another reference rate that is expected to be discontinued by December 31, 2021. The expedients and exceptions provided by the standard do not apply to modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 that an entity has elected certain optional expedients for and are retained through the end of the hedging relationship. The ASU is effective until December 31, 2022 when the replacement for LIBOR is expected to be completed. The interest rate on the Company’s Seller Note (matures June 2022) and MSLP Term Loan and Second Lien Loan (both mature in November 2025), are linked to LIBOR. The Company is in the process of evaluating options for transitioning away from the senior credit facility’s use of LIBOR and expects to be completed by the time LIBOR is phased out. Due to the settlement of all variable interest rate debt on November 5, 2021 with proceeds from the Inotiv Merger, the Company does not anticipate any impact from this new standard.

Management does not believe that any other recently issued but not yet effective accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

In June 2019, the Company undertook a plan to sell or dispose of certain assets comprising the remaining CRS businesses in Germany, Spain and Israel (together the “CRS business”). Exiting the CRS business will result in the Company focusing solely on its research models and services business. The Company is actively marketing the CRS business and completed the sale of its Germany and Spain CRS businesses in July 2019 and November 2019, respectively. Envigo signed a letter of intent (“LOI”) dated February 3, 2021 to sell its CRS Israel business along with its RMS Israel business. On October 6, 2021, the Company signed a Share Purchase Agreement ("SPA") and the sale is expected to close in early 2022. See Note 5 below for a more detailed discussion of the proposed sale.

Assets and Liabilities Classified as Held For Sale

The Company classifies assets as held for sale (or disposal groups comprised of assets and liabilities) which are expected to be recovered primarily through sale rather than through continuing use. They are stated at the lower of carrying amount or fair value less costs to sell. Upon reclassification, the Company ceases to depreciate or amortize non-current assets classified as held for sale.

Based upon this criteria, the Company’s CRS Israel business met the requirements of reporting as assets held for sale. Accordingly, the long-term assets of CRS Israel were evaluated for impairment in 2019 when originally designated as held for sale. As of September 30, 2021 and December 31, 2020, the assets and liabilities of the Company’s Israel CRS business are presented as assets held for sale in the consolidated balance sheet.

Discontinued Operations

A discontinued operation is a component of the Company’s business that represents a separate major line of business or geographical area of operation that has been disposed of or is held for sale and has experienced a strategic shift that will have a major effect on the Company’s operations and financial results. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the statement of operations is revised as if the operation had been discontinued from the first period presented.

In 2019, the Company determined that the CRS business met the criteria for assets and liabilities held for sale and discontinued operations presentation. Accordingly, the consolidated statements of operations presents the CRS businesses as discontinued operations for the nine months ended September 30, 2021 and the year ended December 31, 2020. Presented in the tables below are details of assets and liabilities and income (loss) related to the discontinued business, along with certain information for the consolidated statement of cash flows.

Income (loss) from discontinued operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 were as follows:

The Company elected to not revise its consolidated statements of cash flows for discontinued operations. The table below provides selected cash flow items to assist in understanding the impact of the discontinued operations on the Company’s cash flows.

Envigo signed a LOI dated February 3, 2021 to sell its ownership interest Israel RMS and CRS businesses to the management team of the Israel businesses for $6,650. The sale includes the Company’s 100% ownership in RMS Israel and RMS Israel’s 62.5% ownership interest in CRS Israel. The management team currently owns the 37.5% non-controlling ownership position in CRS Israel. While the LOI was signed in February 2021, based upon the status of sale at December 31, 2020, the RMS Israel net assets and liabilities to be sold were evaluated for assets held for sale (“AHFS”) classification. Based upon a review of the AHFS criteria under ASC 360, it was determined that the net assets and liabilities of Israel RMS met the criteria for assets held for sale as of December 31, 2020 and, since the sale is expected to be completed within the next 12 months, are aggregated into separate current assets and liabilities held for sale lines on the consolidated balance sheets. As discussed in Note 4 above, CRS Israel had previously met the criteria for assets held for sale and discontinued operations and are presented as discontinued operations at both September 30, 2021 and December 31, 2020. On October 6, 2021, the Company signed a SPA with the management team. The transaction is expected to close in early 2022.

On December 21, 2020, the Company completed the sale of its colony of Indian Origin Rhesus located in Alice, Texas for $20,000. The sale included 1,305 NHPs including 588 animals available for sale or to be available for sale and 717 brood stock. Under a separate boarding agreement with the purchaser, the colony is anticipated to remain at the Company’s Alice, Texas facility under the care and maintenance of the Company. The initial term of the boarding agreement ended in July 2021 and was subsequently extended under a multi-year agreement. The sale of the animal colony and the boarding agreement value and pricing was not negotiated dependent upon the other and have been executed on an arm’s-length basis. While the colony remains at the Company’s Alice facility, the change in control of the colony took effect on December 21, 2020, which was also the date the performance obligation under the sales agreement was met. The revenue related to providing on-going maintenance and care services to the colony will be recognized monthly as the services are preformed and billed in arrears.

The table below reflects the proceeds and gain on the sale of inventory and brood stock included in the transaction.

The proceeds from the sale of the colony was allocated in accordance with ASC 606. The revenue allocated to the sale of inventory was based upon current market pricing for NHPs, as of the date of the transaction. The portion of the proceeds allocated to the sale of property, plant and equipment took into consideration the long-term productive nature of the brood stock, historical and forecasted pricing, and the premium to the purchaser of having an in-house supply of animal models.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Bresso

In February 2020, the Company made the decision to restructure certain of its operations in Europe including the cessation of certain activities in Italy and the transfer of other activities to facilities in other countries in which it operates. The customers serviced by the Italy RMS operations will continue to be serviced by the Company’s other European operations and no overall decrease in revenues is anticipated. In April 2020, due to the COVID-19 pandemic, negotiations concerning and formal steps for the closure and transition of Italy RMS operations were suspended. In September 2020, restructuring efforts were resumed including negotiations with local trade unions on a plan to close and relocate the existing offices and the reduction of 31 employees and notification to employees of anticipated separation date and employee severance benefits. The restructuring plan includes the following phases:

As of September 30, 2021, the following restructuring activities have been completed:

The upgrade to the heating and ventilation system at the Netherlands facility has been completed as of September 30, 2021.

For the nine months ended September 30, 2021, a restructuring credit of $60 was recorded including $85 for the reversal of severance accruals related to retained employees and is included in other operating expenses on the consolidated statements of operations.

For the year ended December 31, 2020, restructuring costs of $936 have been incurred and are included in other operating expenses on the consolidated statements of operations. The expense during the year ended December 31, 2020 includes $768 for severance and related taxes and $168 of relocation, closure and winddown costs. At December 31, 2020, the Company had accruals of $110 for employee severance benefits and related taxes paid in early 2021.

Haslett and Boyertown

During 2020, the Company’s management approved a plan to close and relocate its operations in Haslett, Michigan and Boyertown, Pennsylvania into its existing facility in Denver, Pennsylvania (“Denver facility”). The plan was officially announced in January 2021 and is expected to be completed in 2022. To accommodate the relocation, the Company will be investing approximately $9,750 for capital expenditures in the Denver facility, including construction and equipment related costs, of which $3,739 has been expended as of September 30, 2021. In addition, costs to complete the closure and relocation activities, including severance and employee retention costs, is estimated to be $443. The restructuring will be completed in three primary phases as follows:

The Phase I relocation of the Haslett small animal colony was completed in the first quarter of 2021. The operations at both the Haslett chicken colony and Boyertown locations will continue to operate as usual during the relocation period. Property, plant and equipment will be evaluated for transfer to the Denver facility.

Termination and Retention Benefits

In January 2021, subsequent to the restructuring plan announcement, employees at the Haslett and Boyertown sites were provided individual letters describing separation and relocation timing, and termination and retention benefits. Total employees impacted was 32 including 15 at Haslett related to the small animals colony, 8 in Haslett related to the chicken colony and 9 in Boyertown. In accordance with ASC 420, Exit or Disposal Cost Obligations, the benefit letters provided to impacted employees were evaluated and determined to meet the communication criteria of ASC 420. In addition, the termination benefit letters were reviewed to identify any services periods required in order to receive the termination, transition and/or retention benefits. Accordingly, any benefits requiring a service period of longer than three months will be accrued over the required service period.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

As of September 30, 2021, 15 employees at the Haslett facility have been terminated and one employee left of their own accord. The remaining employees are scheduled to continue in their roles until the relocation is complete in 2022 at which time the employees will either relocate to the Denver site or transition to other sites within the Company.

During the nine months ended September 30, 2021, retention benefits of $310 were incurred. These expenses are included in other operating expenses in the consolidated statements of operations.

The following table is a rollforward of severance and retention benefit obligation accruals included in accrued payroll and other benefits on the consolidated balance sheets. Termination and benefits costs accrued as of September 30, 2021 are expected to be paid within the next 12 months.

Other Closure and Relocation Costs

In accordance with ASC 420, other closure and relocation costs are treated as period costs and expenses as incurred. During the nine months ended September 30, 2021, no other closure and relocation costs were incurred. Expenses subsequent to September 30, 2021 will be included in other operating expenses in the consolidated statements of operations.

Long-Term Assets

As of December 31, 2020, the property, plant and equipment of the Haslett and Boyertown sites was evaluated for recoverability of carrying value either through sale or through continued operations during the relocation period and continued operations at the Denver facility. Based upon this review, the carrying value of depreciable assets were determined to be recoverable through continued operations during the relocation period and continued operations at the Denver facility. The carrying value of land at the Boyertown location was determined to be recoverable through sale based upon market values from acquisition of the site in December 2019. However, due to the location, limited market and specialized nature of the Haslett site, the recoverability of the carrying value of land was determined to be impaired and an impairment charge of $300 was recorded at December 31, 2020. During the nine months ended September 30, 2021, accelerated depreciation of $96 was recorded on property, plant and equipment that is not anticipated to be relocated to the Denver site, but was deemed to have its carrying value recoverable during the relocation period.

On October 4, 2019, the Company entered into a five-year master service agreement with Vanguard Supply Chain Solutions LLC (“Vanguard”) whereby Vanguard provides transportation services for the Company’s research models and Teklad products in the US and Canada. Prior to the agreement, the Company utilized internal resources to provide the majority of its transportation services in the US and Canada. The agreement requires the Company to be Vanguard’s only customer for two years. The agreement includes a plan that converts the warehousing and transportation services to Vanguard over a nine-phase plan between December 2019 and June 2021.

Previously, on July 1, 2019, the Company had entered into an agreement with Vanguard which required the Company to prepay $420. The prepayments would service as working capital to ensure the seamless transition of outsourced services to Vanguard. The prepayments will be repaid to the Company in the form of deductions from billings on a sliding scale between 2020 and 2027.

As each site transitions to Vanguard, the Company has sold certain assets to Vanguard and entered into sublease agreements for facility space and vehicles currently leased by the Company. The sublease costs are treated as a pass-through cost to Vanguard equal to the Company’s lease cost. As of September 30, 2021, all sites have been transitioned to Vanguard.

The Company has no ownership interest in Vanguard, has no role in the management of Vanguard and is not a guarantor of any of Vanguard obligations, nor is required to provide on-going financial support to Vanguard.

Under ASC 810, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and is required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

The Company holds variable interests in the Vanguard as a result of:

The following table provides details of the Vanguard assets and liabilities as of September 30, 2021 and December 31, 2020 that have been consolidated into the Company’s consolidated balance sheets.

The following table provides details of the Vanguard operating results that have been consolidated into the Company’s consolidated statements of operations.

The consolidated assets and liabilities as of September 30, 2021 and December 31, 2020 and operating results for the nine months ended September 30, 2021 and the year ended December 31, 2020 presented above have been adjusted to eliminate any intercompany transactions between Envigo and Vanguard and to record non-controlling interests in Vanguard equity and results of operations.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Products. Product revenues included research models, diets and bedding, bioproducts and transgenic models and services. Research models revenue represents the commercial production and sale of research models, principally purpose-bred rats and mice for use by researchers, and large-animal models from the EGSI acquisition. Diets and bedding revenues represent laboratory animal diets, bedding, and enrichment products under the Company’s Teklad product line. Bioproducts revenues represents the sale of serum and plasma, whole blood, tissues, organs and glands, embryo culture serum and growth factors. Transgenic revenues represent genetically altered research models and associated services. Research models and diets and bedding include freight costs associated with the delivery of the product to customers.

Services. Services revenues primarily represents per diem charges for the boarding of customer-owned animals.

Contract Balances from Contracts with Customers

The timing of revenue recognition, billings and cash collections results in billed receivables (client receivables), contract assets (unbilled receivables) and contract liabilities (deferred revenue and customer contracts) on the consolidated balance sheets. The Company’s payment terms are generally 30 days in the United States and consistent with prevailing practice in international markets. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a customer is conditioned other than the passage of time. Client receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

The following table provides information about client receivables and contract assets and liabilities from contracts with customers.

Net revenue for the nine months ended September 30, 2021 includes $6,619 which was included in contract liabilities at December 31, 2020. Net revenue for the year ended December 31, 2020 includes $3,419 which was included in contract liabilities at December 31, 2019.

The Company and its subsidiaries are parties to a number of transactions with related parties.

Financing

The Company has a portion of the Main Street Term Loan and Second Lien Loan owing to a related party in the amount of $7,007 and $6,440, net of unamortized original issuance discount and debt issuance costs, as of September 30, 2021 and December 31, 2020, respectively. The loans mature on November 4, 2024. There are scheduled payments on the Main Street Term Loan, while the Second Lien Loan is repayable in full at maturity. The loans bear interest at a rate of 3.0% and 13.5% above LIBOR, respectively, payable quarterly in arrears. Under both loans, interest accrued in the first year will be capitalized as payment in kind (“PIK”). See Note 15 for a more detailed description of the loans. During the nine months ended September 30, 2021, the Company recorded interest expense of $81 and $605, attributable to the related party portion of the Main Street Term Loan and Second Lien Loan, respectively. During the year ended December 31, 2020, the Company recorded interest expense of $12 and $107, attributable to the related party portion of the Main Street Term Loan and Second Lien Loan, respectively. The consolidated statements of operations and consolidated balance sheets have been classified to present the interest expense and loan amounts as related party. As discussed in Note 1, on November 5, 2021, all outstanding balances of the Main Street Term Loan and Second Lien Loan were paid in full including the related party portions.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

Management Agreement

The Company is party to a management agreement (the “Management Agreement”) with certain of its indirect shareholders , Jermyn Street Associates LLC and Savanna Holdings LLC (the “Providers”), under which the Providers are obligated to: (a) provide general monitoring and management services; (b) identify, support, negotiate and analyze acquisitions and dispositions by the Company or its subsidiaries; (c) support, negotiate and analyze financing alternatives including in connection with acquisitions, capital expenditures, refinancing of existing indebtedness and equity issuances; (d) monitor finance functions, including assisting with the preparation of financial projections and compliance with financing agreements; (e) identify and develop growth strategies; and (f) other monitoring services that the Providers and the Company agree upon. In consideration for the above-mentioned services, the Providers are entitled to compensation in the aggregate amount of $2,250 per annum, plus expenses. During the nine months ended September 30, 2021 and the year ended December 31, 2020, $1,691 and $2,272, respectively, was charged to selling, general and administrative expense in the consolidated statement of operations. As of September 30, 2021 and December 31, 2020, $0 and $313, respectively, was outstanding and recorded in accounts payable on the consolidated balance sheets.

The Management Agreement remains in full force and effect so long as the Providers and their respective affiliates collectively own at least 20% of the voting membership or other equity interests in the Company; provided that (i) the Management Agreement terminates upon the sale of all or substantially all of the Company’s assets, and (ii) the Providers may terminate the agreement upon 30 days’ notice to the Company. Under the Management Agreement, the Company indemnifies the Providers against all claims, liabilities, losses, damages and expenses as a result of any action, suit, proceeding or demand against the Providers by a third party, other than those resulting from the gross negligence or willful misconduct of the Providers.

Subsequent to the merger of the Company into Inotiv on November 5, 2021, as discussed in Note 1, the Management Agreement is no longer in force.

Transportation and Warehousing Services

In October 2019, Envigo RMS, LLC (“Envigo U.S.”) entered into a master services agreement with Vanguard Supply Chain Solutions LLC (“Vanguard”) to provide transportation and warehousing services for the Company’s operations in the U.S. and Canada for animal models and Teklad products. Prior to this agreement, the Company had utilized internal resources to transport its animal models and transport and warehouse its Teklad products. The master services agreement transitions these services from internal to Vanguard over 9 phases beginning in December 2019 and which was completed in June 2021. Each transition phase includes the:

In conjunction with the transition, notes related to the sale of equipment were executed in the amount of $286 for assets sold to Vanguard. The notes are due November 2024 with schedule monthly payments of $2 commencing in January 2022. Interest is only payable on past due installment payments.

In addition, Envigo and Vanguard entered in a prepayment agreement that required Envigo to make prepayments to Vanguard to secure supply as its exclusive transportation and warehousing services provider. As of December 31, 2019, prepayments of $420 had been made, of which $270 and $346 remained prepaid at September 30, 2021 and December 31, 2020, respectively.

Due to the consolidation of Vanguard as a Variable Interest Entity, the prepaid balances and notes related to sale of equipment are eliminated for consolidation.

During the nine months ended September 30, 2021 and the year ended December 31, 2020, the Company incurred transportation and warehousing costs of $8,984 and $4,997, respectively, under this agreement.

Other

Hal Harlan is a stockholder and director of the Parent. The Company has lease agreements with entities owned by Hal Harlan for certain of its facilities under which the Company paid rent of $271 and $321 for the nine months ended September 30, 2021 and the year ended December 31, respectively. As of September 30, 2021 and December 31, 2020, $3 and $0, respectively, was outstanding and recorded in accounts payable on the consolidated balance sheets.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020 

DOLLARS IN (000’S)

The Company purchases medicated diets and bedding from an entity owned by Hal Harlan. Purchases from this entity were $1,357 and $2,036 in the nine months ended September 30, 2021 and the year ended December 30, 2020, respectively. The Company also sold $108 and $141 of diets and bedding to this entity in the nine months ended September 30, 2021 and year ended December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, $89 and $96, respectively, was outstanding and recorded in accounts payable on the consolidated balance sheets.

Timothy Mayhew, an advisor to an equity holder in the Parent, receives annual fees of $250 for his services as a director, plus expenses. Hal Harlan, an advisor to an equity holder in the Parent, receives annual fees of $250 for his services as a director, plus expenses. During the nine months ended September 30, 2021 and year ended December 31, 2020, $375 and $792, respectively, was charged to selling, general and administrative expense in the consolidated statements of operations. As of September 30, 2021 and December 31, 2020, $750 and $625, respectively, was outstanding and recorded in accounts payable on the consolidated balance sheets.

During the year ended December 31, 2020, the Company recorded $2,040 for the amortization of fair value write-up of acquired finished goods inventory from the LabCorp Transaction. The amortization is included in cost of sales in the consolidated statements of operations. The fair value write-up of acquired finished goods inventory was fully amortized as of December 31, 2020.

Depreciation expense totaled $5,720 and $8,136 for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. During the nine months ended September 30, 2021 and the year ended December 31, 2020, $5,499 and $7,631, respectively, was included in cost of sales, with the remainder included in selling, general and administrative in the consolidated statement of operations.

The Company recorded losses on disposal of property, plant and equipment of $499 and $608 during the nine months ended September 30, 2021 and the year ended December 31, 2020, which are recorded in cost of goods sold. During the year ended December 31, 2020, $1,770 representing the net book value of NHP brood stock is included in the gain on sale of animal colony (see Note 6 for further discussion). In addition, during the year ended December 31, 2020, the Company recorded an impairment of $300 on the carrying value of the land of one of its facilities. See Note 7 – Restructuring – Haslett and Boyertown for a more detail discussion.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020

DOLLARS IN (000’S)

NOTE 13. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

Goodwill represents the difference between the purchase price and the fair value of net tangible and identifiable net intangible assets acquired in business combinations when accounted for using the purchase method of accounting.

Goodwill is not amortized but is tested for impairment at the reporting unit level on an annual basis. The Company previously adopted ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” in the prior year. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative impairment test, in which the Company compares the fair value of its reporting unit to their carrying values. If the carrying values of the net assets assigned to the reporting unit exceed the fair values of the reporting unit, an impairment charge is booked but this must not be greater than the total amount of goodwill allocated to that reporting unit.

At March 31, 2020, due to the negative impact that COVID-19 was having on the Company’s business, the Company performed a quantitative impairment test using a discounted cash flow model to compare the fair value of the Company’s reporting unit to the carrying value of net assets assigned to the reporting unit. This analysis concluded that the carrying value exceeded the fair value of the reporting unit and an impairment charge of $39,679 was recorded. The impairment loss of $39,679 is included in loss on impairment of goodwill and intangible assets in the consolidated statement of operations for the year ended December 31, 2020. The impairment recorded in the year ended December 31, 2020 fully impaired the goodwill balance of $39,679 that was recorded at December 31, 2019.

Intangible Assets, Net

Identifiable intangible assets are amortized over the period of their expected benefit, unless they were determined to have indefinite lives. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the discounted future cash flows are found to be less than the carrying amount of the asset group. If such assets are considered to be impaired, a charge is recorded to reduce the carrying amount of the asset to fair value and the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

At March 31, 2020, due to the negative impact that COVID-19 was having on the Company’s business, the Company performed a quantitative impairment test using a discounted cash flow model to compare the fair value of the Company’s customer relationships and intellectual property intangible assets to their carrying values. This analysis concluded that the carrying value of certain intellectual property intangible assets exceeded their fair value and impairment charges totaling $9,827, net of accumulated amortization of $3,657, were recorded. The impairment loss of $9,827 is included in loss on impairment of goodwill and intangible assets in the consolidated statement of operations for the year ended December 31, 2020. Due to the continued impact of COVID-19 on the Company’s results of operations, at June 30, 2020, the Company performed a quantitative impairment test for recoverability comparing undiscounted cash flows to the carrying value of Company’s customer relationships and intellectual property intangible assets. The analysis concluded that undiscounted cash flows exceeded the carrying value of both the intellectual property and customer relationships intangibles and no further impairment was needed. As of September 30, 2021, there were no new indicators of impairment. The accumulated amortization for intellectual property in the September 30, 2021 and December 31, 2020 tables presented below have been reduced by $3,657 representing the accumulated amortization written off associated with impairment. There were no indicators of impairment as of December 31, 2021.

Amortization expense for intangibles for the nine months ended September 30, 2021 and year ended December 31, 2020 was $1,950 and $2,549, respectively. Amortization expense for the Company’s intangible assets expected to be recorded for each of the next five years, and collectively thereafter, is as follows:

Seller Note

On June 3, 2019, to fund the EGSI acquisition, the Company issued the $110,000 Seller Note. The Seller Note, prior to the Seller Note Amendment discussed below, had scheduled quarterly principal payments of $500 beginning September 3, 2020 through June 3, 2021, and $1,000 beginning September 3, 2021 through June 3, 2022, with the balance due at maturity on June 3, 2022. Interest is paid quarterly in arrears and is based upon LIBOR plus 5.5% for June 3, 2019 through June 2, 2020, LIBOR plus 7.5% for June 3, 2020 through June 2, 2021, and LIBOR plus 8.5% for June 3, 2021 through June 3, 2022. Debt issuance costs (“DIC”) of $350 were capitalized and were being amortized on the effective interest basis over the term of the debt. The Seller Note is guaranteed by certain of its consolidated subsidiaries. Due to the floating rate nature of the Seller Note, the carrying value is considered fair value. The Company is in compliance with all covenants as of September 30, 2021 and December 31, 2020. The Seller Note is secured by substantially all of the assets of the Company, excluding the assets of the CRS business which are classified as discontinued operations.

On January 23, 2020, the Parent and the Holder executed a first amendment to the Seller Note whereby the principal balance of the Seller Note was reduced by $532 for an indemnification claim under the LabCorp transition agreement. The principal reduction was applied to the $500 scheduled payment due September 30, 2020, with the remaining $32 applied to the scheduled payment due December 31, 2020.

On June 15, 2020, the Parent and the Holder executed a second amendment to the Seller Note whereby the principal balance of the Seller Note was reduced by $602 for an indemnification claim under the LabCorp transition agreement. The principal reduction was applied to the $468 scheduled payment due December 31, 2020, with the remaining $134 applied to the scheduled payment due March 31, 2021.

On November 4, 2020, in conjunction with the issuance of the MSLP and Second Lien Credit Agreements, discussed below, the Company executed Amendment No 3. To the Floating Rate Senior Secured Note Due 2022 (“Seller Note Amendment”). The Seller Note Amendment, among other things:

On November 16, 2020, with proceeds from the Main Street Term Loan, the Company made a $40,000 voluntary prepayment of the outstanding balance under the Seller Note. This unscheduled repayment was reviewed for potential debt extinguishment accounting under ASC 470 – 50, Debt – Modifications and Extinguishments. Based upon this review, the prepayment was determined to have triggered a partial extinguishment of debt. As a result of this partial extinguishment, a gain on extinguishment of debt of $633 was recorded during the year ended December 31, 2020. The gain on extinguishment is comprised of $701 for the write off of interest accrued under the effective interest method which will no longer be paid, partially offset by the proportional write-off of $68 of unamortized DIC. The principal payment of $40,000 was redeemed at carrying value, so no gain or loss on the repayment was included in the gain on extinguishment of debt.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020

DOLLARS IN (000’S)

Envigo incurred capitalizable costs associated with the Seller Note Amendment of $223, these costs along with the remaining unamortized DIC of $117 from the issuance of the Seller Note will be amortized on a straight-line basis over the remaining term of the debt.

On September 14, 2021, the Parent and the Holder executed a fourth amendment to the Seller Note whereby the principal balance of the Seller Note was reduced by $503 for an indemnification claim under the LabCorp transition agreement. The principal reduction was applied to the outstanding balance.

Paycheck Protection Program Loans

On March 27, 2020, in response to the economic impact of COVID-19, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act, as amended from time to time, the CARES Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation, increase limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. In addition, the CARES Act created a new lending program (the “Paycheck Protection Program” or “PPP”) under Section 7(a) of the Small Business Act (15 USC 636) to provide low-interest loans to certain small businesses (generally those with 500 or fewer employees, with specific provisions allowing participation for certain employers with more than 500 employees that operate in certain industry groups) and self-employed individuals for the purpose of covering payroll and other eligible expenses for a 24-week period. All or a portion of the PPP loans may be forgiven by the U.S. Small Business Administration (“SBA”) upon application by the recipient of such loans in accordance with SBA requirements to the extent the recipient uses the funds for eligible expenses and maintains its workforce as specified in the Act. PPP loans that are not forgiven must be repaid within five years. The Act provides that PPP loan forgiveness is excluded from the recipient's gross income. Any loans not forgiven would accrue interest at 1% per annum.

On May 4, 2020, EGSI, a wholly-owned subsidiary of the Company, received a PPP loan in the amount of $2,924. On May 11, 2020, Envigo RMS LLC (“Envigo RMS”), a wholly-owned subsidiary of the Company, received a PPP loan in the amount of $8,102. The EGSI and Envigo RMS PPP Loans have a two-year maturity. On May 5, 2020, the Company’s consolidated VIE received a PPP loan of $346. The VIE PPP Loan has a two-year maturity. EGSI, Envigo RMS and the consolidated VIE anticipate paying or incurring eligible expenses totaling the full amounts borrowed. Each of EGSI, Envigo RMS and the consolidated VIE also anticipates that it will maintain its workforce in accordance with the CARES Act. Despite the Company’s good-faith belief that it properly satisfied all eligibility requirements for the PPP loans, there has been increasing scrutiny of loans over $2 million, which may be subject to audit. The US Department of Justice has also brought criminal charges against certain borrowers under the PPP loan program that it suspects of engaging in fraud. On August 10, 2021 and September 7, 2021, EGSI and Envigo RMS, respectively, received loan forgiveness. As a result, gains on forgiveness of debt of $2,961 and $8,209 for EGSI and Envigo RMS, respectively, were recorded during the nine months ended September 30, 2021. The consolidated VIE received loan forgiveness on March 5, 2021. As a result, a gain on forgiveness of debt of $346 was recorded during the nine months ended September 30, 2021. We continue to assess the impact that the CARES Act may have on our business and currently, we are unable to determine the impact that the CARES Act will have on our financial condition, results of operations, or liquidity.

The PPP loans also provides for customary events of default, including, among others, events of default relating to failure to make payments, bankruptcy, breaches of representations, and material adverse effects. Additionally, the PPP loans are subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act. The Company may also be subject to CARES Act-specific lookbacks and audits that may be conducted by other federal agencies, including several oversight bodies created under the CARES Act. These bodies have the ability to coordinate investigations and audits and refer matters to the Department of Justice for civil or criminal enforcement and other actions.

Main Street Lending Program

On November 4, 2020, the Company submitted an application through the Main Street Lending Program (“MSLP”) for a loan of $50,000 under the MSPLF Credit Agreement, collectively the Main Street Term Loan. The Main Street Term Loan was funded on November 16, 2020. The proceeds from the Main Street Term Loan, net of an original issuance discount (“OID”) of 2%, was used for the early paydown of $40,000 of the Seller Note, with the remainder to provide additional working capital. The Main Street Term Loan has a maturity date of November 4, 2025 and bears interest at LIBOR plus 300 basis points, with a LIBOR floor of 0%. Interest in the first year will be treated as PIK, will be capitalized to the loan and will accrue interest as described above. There are no scheduled payments during the first two years of the loan, with scheduled payments of $7,500, $7,500 and $35,000 due in years three, four and five, respectively. The Main Street Term Loan is secured by a security interest in the assets of the Company. Due to the floating rate nature of the Main Street Term Loan, the carrying value approximates fair value. Envigo incurred DIC of $1,317 associated with the issuance of the Main Street Term Loan. The DIC along with the OID of $1,000 will be amortized on an effective interest basis over the term of the debt. A portion of the borrowings under the MSPLF Credit Agreement is owing to a related party. Accordingly, borrowings of $2,465 and $2,415, net of unamortized DIC and OID, are presented as related party debt, net at September 30, 2021 and December 31, 2020, respectively.

ENVIGO RMS HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND YEAR ENDED DECEMBER 31, 2020

DOLLARS IN (000’S)

Second Lien Credit Agreement

On November 4, 2020, the Company entered into a Second Lien Credit Agreement (“Second Lien Loan”) through a private lending organization for a loan of $6,000. The Second Lien Loan was funded on November 13, 2020. The proceeds from the loans, net of an original issuance discount of 5%, will be used to provide additional working capital and fund costs associated with the Main Street Term Loan and the Second Lien Loan. The loan has a maturity date of November 4, 2025 and bears interest at LIBOR plus 1350 basis points, with a LIBOR floor of 1%. Interest in the first year will be treated as PIK, will be capitalized to the loan and will accrue interest as described above. There are no scheduled payments during the term of the loan, with the total loan balance, including PIK interest, due at maturity. The Second Lien Loan is secured by a second priority security interest in the assets of the Company. Due to the floating rate nature of the Second Lien Loan, the carrying value approximates fair value. Envigo incurred DIC of $440 associated with the issuance of the Second Lien Loan. The DIC along with the OID of $300 will be amortized on a straight-line basis over the term of the debt. A portion of the borrowings under the Second Lien Loan is owing to a related party. Accordingly, borrowings of $4,542 and $4,025, net of unamortized DIC and OID, are presented as related party debt, net at September 30, 2021 and December 31, 2020, respectively.

Inotiv Merger

As discussed in Note 1, on November 5, 2021, with proceeds from the Inotiv Merger, the outstanding balances, plus any interest due at that date, of the Seller Note, Main Street Term Loan and the Second Lien Loan were paid off. Any unamortized original issuance discount and debt issuance costs were written off and recorded as a loss on debt extinguishment.

Economic Injury Disaster Loan (“EIDL Loan”)

On October 8, 2020, Envigo’s consolidated VIE received an EIDL Loan of $141 from the SBA. The EIDL program is another COVID 19 economic assistance program provided under the Cares Act. The loan has a 30-year maturity with monthly scheduled payments (principal and interest) totaling $8 per year beginning one year from the issuance date. The loan bears interest at 3.75% payable monthly in arrears.

Restrictive Covenants

The MSPLF Credit Agreement includes a minimum interest coverage ratio of 1.00:1.00 through December 31, 2021 and 1.25:1.00 thereafter. The Company was in compliance with the minimum interest coverage ratio at December 31, 2020. Due to the early pay off of the Main Street Term Loan, as discussed above, no minimum interest coverage ratio calculation was required as of September 30, 2021.

Scheduled Principal Payments

Scheduled payments for the next five years required under Company’s debt obligation are as follows: