NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts, unless otherwise indicated)
1. DESCRIPTION OF THE BUSINESS
Inotiv, Inc. and its subsidiaries (“we,” “our,” “us,” "the Company,” “Inotiv”) began operating in 1975 as Bioanalytical Systems, Inc. Bioanalytical Systems, Inc. was incorporated in 1974 and we completed our initial public offering in 2000. On March 18, 2021, the Company filed Articles of Amendment to the Company’s Second Amended and Restated Articles of Incorporation, as amended, and amended its Second Amended and Restated Bylaws, as amended, to reflect a corporate name change from Bioanalytical Systems, Inc. to Inotiv, Inc. Our stock is traded on the Nasdaq Stock Market LLC under the symbol “NOTV.” We are headquartered in West Lafayette, Indiana. Our headquarters mailing address is 2701 Kent Avenue, West Lafayette, Indiana, 47906, and the telephone number at that location is (765) 463-4527. Our Internet site is www.inotivco.com. The information contained on our website is not a part of this Report and is not incorporated by reference herein.
Operational Update
During the twelve months ended September 30, 2023, our focus for our business within the Research Models and Services ("RMS") segment included navigating the global non-human primate ("NHP") market and executing on our site optimization plans. Our site optimization activities are discussed further in Note 11 - Restructuring and Assets Held for Sale. On November 16, 2022, the Company became aware that the U.S. Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) had criminally charged employees of the principal supplier of NHPs to the Company, along with two Cambodian government officials, with conspiring to illegally import NHPs into the U.S. from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021 (the "November 16, 2022 event"). 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 a limited amount of 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. We have focused on working with our suppliers and developing a long-term solution to establish procedures we can be comfortable assuring ourselves, and our customers, we only provide purpose bred NHPs from Cambodia. We have scientists inside and outside our organization working towards establishing new testing procedures for importing purpose bred Cambodian NHPs and meeting the needs of drug discovery and development in the U.S. In the meantime, we continued to import from countries outside of Cambodia to satisfy demand at our DSA business segment and to our RMS clients.
The Company believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and comply with minimum liquidity and financial covenant requirements under its debt covenants pursuant to its Credit Agreement for at least the next twelve months. The forecasted operating cash flows include the shipping of the Company's existing Cambodian NHP inventory. See Note 7 - Debt to our consolidated financial statements for further information about the Company’s existing credit facilities and requirements under its debt covenants. The Company’s liquidity needs and compliance with covenants depend, among other things, on its ability to source and sell NHPs, its ability to fill its expanded DSA capacity, its ability to generate cash from other operating activities and its ability to manage its forecasted capital expenditures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The Company consolidates a variable interest entity (“VIE”) as a result of the Envigo acquisition. The VIE does not materially impact our net assets or net (loss) income.
The Company accounts for noncontrolling interests in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”). ASC 810 requires companies with noncontrolling interests to disclose such interests as a portion of equity but separate from the parent’s equity. The noncontrolling interests’ portion of net income (loss) is presented on the consolidated statements of operations.
Comprehensive loss for the year and period presented is comprised of consolidated net loss plus the change in the cumulative translation adjustment equity account and the adjustments, net of tax, for the current year actuarial gains (losses) and prior service costs in connection with the Company’s defined benefit plan.
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 (loss). The Company records gains and losses from re-measuring intercompany loans in other income (expense) in the consolidated statement of operations. Translation adjustments are excluded from the determination of net income (loss) and are recorded as a separate component of equity within accumulated other comprehensive loss in the consolidated financial statements. Foreign exchange losses recorded in other income (expense) on the statements of operations for the fiscal years ended September 30, 2023 and 2022 were $1,682 and $1,907, respectively.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation, including the presentation of the loss on debt extinguishment in other non-cash operating activities within the Statement of Cash Flows, other assets within Note 8 - Supplemental Balance Sheet Information the presentation of the components of deferred tax assets and liabilities and the presentation of certain line items within the reconciliation of the effective income tax rate within Note 15 - Income Taxes. These reclassifications had no effect on the reported results of operations.
Segment Reporting
The Company reports its results in two reportable segments: Discovery and Safety Assessment ("DSA") and RMS. The Company’s DSA reportable segment includes services required to take a drug through the early development process including discovery services, which are non-regulated services to assist clients with the identification, screening, and selection of a lead compound for drug development, regulated and non-regulated (Good Laboratory Practice ("GLP") and non-GLP) safety assessment services and internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company’s BASi product line. The Company’s RMS reportable segment includes research models, research model services and Teklad diets and bedding, biological products ("bioproducts") and Genetically Engineered Models and Services (“GEMS”). Research models include the commercial production and sale of small research models, the supply of large research models and bioproducts, including serum and plasma, whole blood, tissues, organs and glands, embryo culture serum and growth factors. Research Model Services include GEMS, which includes the performance of contract breeding and other services associated with genetically engineered models, client-owned animal colony care, and health monitoring and diagnostics services related to research models.
Use of Estimates
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) 606, the Company disaggregates its revenue from clients into two revenue streams, service revenue and product revenue. At contract inception, the Company assesses the services and/or products promised in the contract with the clients to identify performance obligations in the arrangements. In accordance with ASC 606, the Company determines appropriate revenue recognition by completing the following steps: (i) identifying the contract(s) with a client; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when or as the Company satisfies a performance obligation.
Service revenue
DSA
The Company enters into contracts with clients to provide drug discovery and development services. The Company also offers archive storage services to its clients. The Company’s fixed fee arrangements may involve nonclinical research services (e.g., toxicology, pathology, pharmacology), bioanalytical, and pharmaceutical method development and validation, nonclinical research services and the analysis of bioanalytical and pharmaceutical samples. For bioanalytical and pharmaceutical method validation services and nonclinical research services, revenue is recognized over time using the input method based on the ratio of direct costs incurred to total estimated direct costs. For contracts that involve in-life study conduct, method development or the analysis of bioanalytical and pharmaceutical samples, revenue is recognized over time when samples are analyzed or when services are performed. In determining the appropriate amount of revenue to recognize over time, the Company forecasts remaining costs related to the contracts with clients. In order to forecast the remaining costs, the Company reviews the billings compared to original cost estimates, meets with project managers and updates cost estimates in relation to any scope changes requested by the client.
The Company generally bills for services on a milestone basis. These contracts represent a single performance obligation and due to the Company’s right to payment for work performed, revenue is recognized over time. Research services contract fees received upon acceptance are deferred until earned and classified within fees invoiced in advance on the consolidated balance sheets. Unbilled revenues represent revenues earned under contracts in advance of billings and are classified within trade receivables and contract assets on the consolidated balance sheets.
Our service contracts typically establish a fixed fee to be paid for identified services. In most cases, some percentage of the contract costs is paid in advance. While we are performing a contract, clients often adjust the scope of services to be provided based on interim project results. Fees are adjusted accordingly. Generally, our fee-for-service contracts are terminable by the client upon written notice of 30 days or less for a variety of reasons, including the client’s decision to forego a particular study, the failure of product prototypes to satisfy safety requirements, and unexpected or undesired results of product testing. Cancellation or delay of ongoing contracts may result in fluctuations in our annual results. We are generally able to recover, at a minimum, our invested costs plus an appropriate margin when contracts are terminated.
RMS
The Company provides GEMS, which include the performance of contract breeding and other services associated with genetically engineered models, client-owned animal colony care, and health monitoring and diagnostics services related to research models. For contracts that involve creation of a specific type of animal, revenue is recognized over time with each milestone as a separate performance obligation. The Company is due payment for work performed even if subsequent milestones are unable to be met. Contract breeding revenue and client-owned animal colony care revenue are recognized over time and are billed as per diems. Health monitoring revenue and diagnostic services revenue are recognized once the service is performed.
Product revenue
DSA
DSA product revenue includes internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company’s BASi product line. These products can be sold to multiple clients and have alternative uses. Both the transaction sales price and shipping terms are agreed upon in the client order. For these products, all revenue is recognized
at a point in time, generally when title of the product and control is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation.
RMS
Product revenue includes research models, diets and bedding and bioproducts. Research models revenue represents the commercial production and sale of research models. Diets and bedding revenue represents laboratory animal diets, bedding, and enrichment products under the Company’s Teklad product line. Bioproducts revenue represents the sale of serum and plasma, whole blood, tissues, organs and glands, embryo culture serum and growth factors. Product revenue is recognized at the point in time when the Company’s performance obligations with the applicable clients 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 client. The performance obligations, including associated freight to deliver products, are met based on agreed upon terms, which are generally 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 clients pay for the product is less than one year.
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.
Restricted Cash
Restricted cash generally consists of amounts held by our creditors.
Trade receivables and contract assets, net of allowances for credit losses
The Company records trade receivables and contract assets, net of an allowance for credit losses. A contract asset is recorded when a right to consideration in exchange for goods or services transferred to a client is conditioned other than upon the passage of time. Trade receivables are recorded separately from contract assets since only the passage of time is required before consideration is due. The allowance for credit losses is determined each fiscal quarter based on the creditworthiness of its clients, historical collection patterns and economic conditions. Amounts deemed to be uncollectible are reserved or written off against the allowance.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables from clients in the biopharmaceutical, contract research, academic, and governmental sectors. The Company believes its exposure to credit risk is minimal, as the majority of the clients 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 fiscal year ended September 30, 2023, one client related to the RMS segment accounted for 22.0% of total revenue. During the fiscal year ended September 30, 2022, one client related to the RMS segment accounted for 28.2% of total revenue. During the fiscal year ended September 30, 2023, no vendor accounted for greater than 10.0% of the sum of cost of services and cost of products. During the fiscal year ended September 30, 2022, one vendor related to the RMS segment accounted for 19.7% of the sum of cost of services and cost of products.
Fair Value of Financial Instruments
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
•Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
•Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
•Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are disclosed in Note 7 – Debt and Note 9 – Post-Employment Benefits.
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. Valuation of NHPs is determined utilizing specific identification methodology and all other inventory valuation is determined utilizing standard costs, approximating average costs. 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.
Property and Equipment
Property and equipment, net, including improvements that significantly add to productive capacity or extend useful life, are carried at cost and are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Leasehold buildings and improvements are depreciated over the lesser of its estimated useful life or remaining lease term. The cost of normal, recurring, or periodic repairs and maintenance activities related to property and equipment is expensed as incurred.
When the Company disposes of property and equipment, it removes the associated cost and accumulated depreciation from the related accounts on its consolidated balance sheet and includes any resulting gain or loss recorded in other (expense) income, net in the accompanying consolidated statements of income.
The Company generally depreciates the cost of its property and equipment using the straight-line method over the estimated useful lives of the respective assets as follows:
| | | | | |
| Asset | Estimated Useful Lives |
| Land | Indefinite |
| Land improvements | 5 - 20 |
| Buildings and building improvements | 10 - 40 |
| Machinery and equipment | 7 - 10 |
| Furniture and fixtures | 7 - 10 |
| Computer hardware and software | 3 - 5 |
| Vehicles | 3 - 5 |
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The Company allocates the amounts that it pays for each acquisition to the assets acquired, liabilities assumed and noncontrolling interests based on their fair values at the dates of acquisition, including identifiable intangible assets, which typically represents a significant portion of the purchase price.
Goodwill and Intangible Assets
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to the fair value. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing
the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets. Customer relationship intangible assets are the most significant identifiable definite-lived asset acquired. To determine the fair value of the acquired customer relationships, the Company typically utilizes the multiple period excess earnings model (a commonly accepted valuation technique), which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue growth rates, operating income (loss) margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital.
Goodwill represents the difference between the purchase price and the fair value of assets acquired and liabilities assumed when accounted for using the acquisition method of accounting. Goodwill is not amortized, but reviewed for impairment on an annual basis, utilizing an assessment date of September 30th, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting units below their carrying amounts.
The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative 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 the quantitative test, the Company compares the fair value of its reporting units to their carrying values. The estimated cash flows used to determine the fair value of the reporting units used in the impairment test requires significant judgment with respect to revenue growth, EBITDA margin, and weighted average cost of capital. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units an impairment loss equal to the difference would be recorded. See Note 6 - Goodwill and Intangible Assets for further discussion related to goodwill impairment charges during the fiscal years ended September 30, 2023 and September 30, 2022.
Definite-lived intangible assets are amortized over the pattern in which the economic benefits of the intangible assets are utilized and qualitatively reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. If quantitative determination of recoverability is required, recoverability of assets to be held and used is determined by the Company at the level for which there are identifiable cash flows by comparison of the carrying amount of the assets to future undiscounted net cash flows utilizing forecasted revenue growth, EBITDA margin, and capital expenditures before interest expense and income taxes expected to be generated by the assets. If the carrying amount exceeds the outcome of the analysis of undiscounted cash flows, impairment is measured through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the definite-lived intangible assets, the definite-lived intangible assets are written-down to their fair values.
The Company amortizes the cost of its intangible assets utilizing the straight-line method over the estimated useful lives of the definite-lived intangible assets as follows:
| | | | | | | | |
| Asset | | Estimated Useful Lives
(in years) |
| Customer relationships | | 5 - 13 |
| Intellectual property | | 5 - 20 |
| Other | | 0 - 15 |
Long-lived Tangible Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. Long-lived assets to be disposed of are carried at fair value less costs to sell.
Leases
At the commencement of a contract, the Company determines if a contract meets the definition of a lease. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if the contract conveys the right to control the use of an identified asset for a period of time. The Company assesses throughout the period of use whether the Company has the following: (1) the right to obtain substantially all of the economic benefits from use of the identified asset, and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments.
The Company leases laboratory, manufacturing and production facilities and office space (real estate) and vehicles under non-cancellable operating and finance leases. The carrying value of the Company’s right-of-use lease assets is substantially concentrated in its real estate leases, while the volume of lease agreements is primarily concentrated in vehicle leases. The Company’s policy is to not record operating leases with an original term of twelve months or less on the consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term.
In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. These adjustments are treated as variable lease payments and recognized in the period in which the obligation for these payments was incurred. Only when lease components and their associated non-lease components are fixed are they accounted for as a single lease component and are recognized as part of a right-of-use asset and liability.
Most real estate leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 5 years. Certain lease agreements contain options to purchase the leased property and options to terminate the lease. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when it is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised, or is not at the Company’s option. The Company determines whether the reasonably certain threshold is met by considering all relevant factors, including company-specific plans and economic outlook.
Lease income is considered contra-expense within operating expenses.
Pension Costs
As a result of the Envigo acquisition, the Company has a defined benefit pension plan for one of its U.K. subsidiaries.
The projected benefit obligation 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 sheets 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, using 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 9 – Post-Employment Benefits).
Stock-Based Compensation
The Company may grant stock options, restricted stock and restricted stock units (“RSUs”) to employees and to non-employee directors under stock-based compensation plans. Stock-based compensation is recognized as an expense in the consolidated statements of operations based on the grant date fair value, adjusted for forfeitures when they occur, over the requisite service period.
For stock options, restricted stock and RSUs that vest based on service periods, the Company uses the straight-line method to allocate compensation expense to reporting periods.
The fair value of stock options granted is calculated using the Black-Scholes option-pricing model. Our assumptions are based on historical information and professional judgment is required to determine if historical trends may be indicators of future outcomes. We estimated the following key assumptions for the binomial valuation calculation:
•Risk-free interest rate: The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.
•Expected volatility: The Company uses our historical share price volatility on our common shares for our expected volatility assumption.
•Expected term: The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
•Expected dividends: The Company assumes that we will pay no dividends.
Fees Invoiced in Advance
Fees invoiced in advance are considered to be contract liabilities. A contract liability is recorded when consideration is received, or such consideration is unconditionally due, from a client prior to transferring goods or services to the client under the terms of a contract. Contract liabilities are recognized as revenue after control of the products or services is transferred to the client and all revenue recognition criteria have been met.
Fees invoiced in advance includes payments received in advance of the incurrence of cost toward a contract with a client and client prepayments, which are typically used to secure supply of certain animal models and to provide early payment for data or safety assessment services until earned and classified within fees invoiced in advance on the consolidated balance sheets. The fees invoiced in advance are typically credited against sales invoices when products are sold or as services are completed.
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.
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 determines 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.
As of November 5, 2021, with the acquisition of Envigo, the Company adopted an accounting policy regarding the treatment of taxes due on future inclusion of non-U.S. income in U.S. taxable income under the Global Intangible Low-Taxed Income provisions as a current period expense when incurred.
New Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). Amendments in this ASU simplify accounting for certain financial instruments with characteristics of
liabilities and equity, including convertible instruments and contracts on an entity's own equity. The amendments remove the separation models for convertible debt instruments with cash conversion features and convertible instruments with beneficial conversion features. Consequently, a convertible debt instrument will be accounted for as a single liability at its amortized cost and convertible preferred stock will be accounted for as a single debt or equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives.
The amendments also modify the accounting for certain contracts in an entity's own equity that are currently accounted for as derivatives because of specific settlement provisions. Lastly, the earnings per share ("EPS") calculation is being amended to (i) require entities to use the if-converted method for all convertible instruments and include the effect of potential share settlement; (ii) clarify that the average market price for the period should be used in the computation of the diluted EPS denominator; and (iii) require entities to use the weighted-average share count from each quarter when calculating the year-to-date weighted average share count for all potentially dilutive securities. In the first fiscal quarter of 2022, the Company adopted ASU 2020-06). As a result of the approval of the increase in authorized shares on November 4, 2021 (see Note 13 – Equity), the Convertible Senior Notes conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as of November 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income taxes (“ASU 2019-12”), to reduce the complexity of accounting for income taxes, including providing a model under which an entity can consider recording a deferred tax asset (“DTA”) in certain situations previously prohibited. The previous guidance in ASC 740-10-25-4 prohibited recognition of a DTA for a subsequent step-up in the tax basis of goodwill that is related to the portion of goodwill from a prior business combination for which a deferred tax liability (“DTL”) was not initially recognized, in most cases. Under the new approach, an entity can consider a list of factors in determining whether the step-up in tax basis is related to the business combination that caused the initial recognition of goodwill or to a separate transaction. The amendments are effective for public business entities for fiscal years beginning after December 15, 2020. The Company’s adoption of this standard in fiscal year 2022 did not have a significant impact on the consolidated financial statements and related disclosures.
3. BUSINESS COMBINATIONS
The Company accounts for acquisitions in accordance with ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired, liabilities assumed and non-controlling interests to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred; (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense (benefit). ASC 805 requires that any excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.
Plato BioPharma Acquisition
On October 4, 2021, the Company completed the acquisition of Plato BioPharma, Inc. (“Plato”) to expand its market reach in early-stage drug discovery. Consideration for the Plato acquisition consisted of (i) $10,530 in cash, including working capital and subject to customary purchase price adjustments, (ii) 57,587 of the Company’s common shares valued at $1,776 based on the closing stock price of the Company’s common shares as reported by Nasdaq on the closing date and (iii) seller
notes to the former shareholder of Plato in an aggregate principal amount of $3,000. This business is reported as part of the Company’s DSA reportable segment.
The following table summarizes the final determination and allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| October 4, 2021 |
| Assets acquired and liabilities assumed: | |
| Cash | 1,027 | |
| Trade receivables and contract assets | 853 | |
| Prepaid expenses and other assets | 133 | |
| Property and equipment | 1,127 | |
| Operating lease right-of-use assets, net | 2,272 | |
| Goodwill | 9,279 | |
| Intangible assets | 4,800 | |
| Accounts payable | (113) | |
| Accrued expenses and other liabilities | (343) | |
| Operating lease liabilities | (2,272) | |
| Deferred tax liabilities | (1,457) | |
| $ | 15,306 | |
Property and equipment is mostly composed of lab equipment, furniture and fixtures, and computer equipment. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately eight years on a straight-line basis. The estimated fair values of the identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Plato acquisition as a result of book-to-tax differences primarily related to the intangible assets.
Envigo RMS Holding Corp. Acquisition
On November 5, 2021, the Company completed the acquisition of Envigo RMS Holding Corp. ("Envigo") by merger of a wholly owned subsidiary of the Company with and into Envigo to expand its market reach in early-stage drug discovery. The aggregate consideration paid to the holders of outstanding capital stock in Envigo in the merger consisted of cash of $217,808, including adjustments for net working capital, and 8,245,918 of the Company’s common shares valued at $439,590 using the opening price of the Company’s common shares on November 5, 2021. In addition, the Company assumed certain outstanding Envigo stock options, including both vested and unvested options, that were converted to the right to purchase 790,620 Company common shares at an exercise price of $9.93 per share. The stock options were valued at $44.80 per option utilizing a Black-Scholes option valuation model with the inputs below. The total value of options issued was $35,418, of which $18,242 was excluded from the purchase price as those options were determined to be post-
combination expense. The previously vested stock options are reflected as purchase consideration of approximately $17,176. This business is reported as part of the Company’s RMS reportable segment.
| | | | | |
| Stock price | $ | 53.31 | |
| Strike price | $ | 9.93 | |
| Volatility | 75.93 | % |
| Expected term | 3.05 |
| Risk-free rate | 0.62 | % |
The Company recognized transaction costs related to the acquisition of Envigo of $7,700 for the fiscal year ended September 30, 2022. These costs were associated with legal and professional services related to the acquisition and are reflected within other operating expenses in the Company’s consolidated statements of operations.
Envigo and RSI (as defined and described below) were combined and recorded revenue of $346,641 and a net loss of $196,919 for the twelve months ended September 30, 2022.
The following table summarizes the final determination and allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| November 5, 2021 |
| Assets acquired and liabilities assumed: | |
| Cash | 2,488 | |
| Restricted cash | 435 | |
| Trade receivables and contract assets | 43,566 | |
| Inventories | 40,000 | |
| Prepaid expenses and other current assets | 17,373 | |
| Property and equipment | 106,338 | |
| Operating lease right-of-use assets, net | 13,229 | |
| Goodwill | 282,768 | |
| Intangible assets - customer relationships | 251,000 | |
| Intangible assets - intellectual property | 49,000 | |
| Other assets | 7,676 | |
| Accounts payable | (25,832) | |
| Accrued expenses and other liabilities | (11,665) | |
| Fees invoiced in advance | (7,047) | |
| Current portion on long-term operating lease | (4,371) | |
| Long-term operating leases, net | (8,634) | |
| Other liabilities | (5,339) | |
| Deferred tax liabilities | (77,291) | |
| Noncontrolling interest | 880 | |
| $ | 674,574 | |
Inventory is comprised of small and large animal research models, including NHPs, and Teklad diet and bedding. The fair value was determined using a comparative sales methodology, in which the intent is to ensure that the acquirer only recognizes profits associated to value added subsequent to the acquisition date.
Property and equipment is mostly composed of land, buildings and equipment (including lab equipment, furniture and fixtures, caging and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired customer relationship intangible assets are being amortized over a weighted-average estimated useful life of approximately 12.5 years on a straight-line basis and the acquired intellectual property associated with the ability to produce and care for the research models is being amortized over a weighted-average estimated useful life of approximately 8.8 years. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, gross margin, EBITDA, customer survival rate and royalty rates), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Envigo acquisition as a result of book-to-tax differences primarily related to the intangible assets, step up on the fair value of inventory and property and equipment. Within the deferred tax liability, $2,222 of acquired foreign net operating losses are offset by an uncertain tax benefit of $1,861.
Goodwill, which is derived from the expanded client base, the ability to provide products and services for the entirety of discovery and nonclinical development within one organization, and to ensure supply for internal use, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and $50,428 is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Robinson Services, Inc. Acquisition
On December 29, 2021, the Company completed the acquisition of the rabbit breeding and supply business of Robinson Services, Inc. (“RSI”). The acquisition was another step in Inotiv’s strategic plan for building its RMS business. The aggregate consideration consisted of (i) $3,250 in cash and (ii) 70,633 of the Company’s common shares valued at $2,898 based on the closing stock price of the Company’s common shares as reported by Nasdaq on the closing date. This business is reported as part of the Company’s RMS reportable segment.
The following table summarizes the final determination and allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| December 29, 2021 |
| Assets acquired and liabilities assumed: | |
| Customer relationship | 4,700 | |
| Non-compete agreement | 300 | |
| Supply agreement | 200 | |
| Goodwill | 948 | |
| $ | 6,148 | |
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 7.5 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
Integrated Laboratory Systems, LLC Acquisition
On January 10, 2022, the Company completed the acquisition of Integrated Laboratory Systems, LLC (“ILS”). ILS is a provider of services specializing in nonclinical and analytical drug discovery and development services. Consideration for the ILS acquisition consisted of (i) $38,993 in cash, including adjustments for net working capital, and inclusive of $3,800 previously held in escrow for purposes of securing any amounts payable by the selling parties on account of indemnification obligations, purchase price adjustments, and other amounts payable under the merger agreement, (ii) 429,118 of the Company’s common shares valued at $14,466 based on the opening stock price of the Company’s common shares as reported by Nasdaq on the closing date and (iii) the effective settlement of a preexisting relationship of $(15). This business is reported as part of the Company's DSA reportable segment.
ILS recorded revenue of $16,881 and a net loss of $(1,075) for the twelve months ended September 30, 2022. The driver of the net loss was the amortization of intangible assets.
The following table summarizes the final determination and allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| January 10, 2022 |
| Assets acquired and liabilities assumed: | |
| Cash | 797 | |
| Trade receivables, contract assets and other current assets | 4,730 | |
| Property and equipment | 4,436 | |
| Operating lease right-of-use assets, net | 4,994 | |
| Goodwill | 25,283 | |
| Intangible assets | 22,300 | |
| Accounts payable | (1,165) | |
| Accrued expenses and other liabilities | (905) | |
| Fees invoiced in advance | (2,472) | |
| Operating lease liabilities | (4,554) | |
| $ | 53,444 | |
Property and equipment is mostly composed of lab equipment, furniture and fixtures, computer equipment and leasehold improvements. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately nine years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, EBITDA, and customer survival rate), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
Orient BioResource Center, Inc. Acquisition
On January 27, 2022, the Company completed the acquisition of OBRC from Orient Bio, Inc., a preclinical contract research organization and animal model supplier based in Seongnam, South Korea (“Seller”). OBRC is a primate quarantine and holding facility. Consideration for the OBRC acquisition consisted of (i) $26,522 in cash, including certain
adjustments, (ii) 677,339 of the Company’s common shares valued at $18,410 based on the closing stock price of the Company’s common shares as reported by Nasdaq on the closing date, (iii) the effective settlement of a preexisting relationship of $1,017 and (iv) a payable owed by OBRC to the Seller in the amount of $3,325. The preexisting relationship represents the return of fees invoiced in advance and paid to OBRC by the Company prior to the acquisition offset by the payment of trade receivables by the Company to OBRC. As these were settled at the stated value, no gain or loss was recorded as a result of the settlement of this preexisting relationship. The payable does not bear interest and was initially required to be paid to the Seller on the date that is 18 months after the closing. On April 4, 2023, the Company extended by one year the maturity of the seller payable pursuant to the stock purchase agreement with the Seller of OBRC. Refer to Note 7 – Debt for further information related to amendments of the terms of the payable due to the Seller. The Company will have the right to set off against the payable any amounts that become payable by the Seller on account of indemnification obligations under the purchase agreement. This business is reported as part of the Company's RMS reportable segment.
OBRC recorded revenue of $35,726 and net income of $5,808 for the fiscal year ended September 30, 2022.
The following table summarizes the final determination and allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| January 27, 2022 |
| Assets acquired and liabilities assumed: | |
| Cash | 5,481 | |
| Trade receivables and contract assets | 2,025 | |
| Inventories | 9,400 | |
| Prepaid expenses and other current assets | 2,609 | |
| Property and equipment | 8,336 | |
| Goodwill | 18,624 | |
| Intangible assets | 13,400 | |
| Accounts payable | (552) | |
| Accrued expenses and other liabilities | (285) | |
| Fees invoiced in advance | (6,548) | |
| Deferred tax liabilities | (3,216) | |
| $ | 49,274 | |
Inventory is comprised of NHP research models. The fair value was determined using a comparative sales methodology, in which the intent is to ensure that the acquirer only recognizes profits associated to value added subsequent to the acquisition date.
Property and equipment is mostly composed of land, building and equipment. The fair value of property and equipment was determined using a combination of cost and market-based methodologies.
Intangible assets primarily relate to customer relationships and technology associated with the ability to produce and care for the research models. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 10.1 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds
the fair value of the net assets acquired and is not deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s RMS reportable segment.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the OBRC acquisition as a result of book-to-tax differences primarily related to the intangible assets and step up on the fair value of inventory.
Histion, LLC Acquisition
On April 25, 2022, the Company completed the acquisition of Histion, LLC (“Histion”), which is a strategic element of the Company’s expansion of its specialized pathology services. Consideration for the Histion acquisition consisted of (i) $950 in cash, subject to working capital adjustments, (ii) 17,618 of the Company’s common shares valued at $364 based on the closing stock price of the Company’s common shares as reported by Nasdaq on the closing date and (iii) unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433.
Protypia, Inc. Acquisition
On July 7, 2022, the Company entered into a Stock Purchase Agreement with Protypia, Inc. (“Protypia”), which is a strategic element of the Company’s expansion of its mass spectrometry-based bioanalytical offerings providing for the acquisition by the Company of all of the outstanding stock of Protypia on that date. Consideration for the Protypia stock consisted of (i) $9,460 in cash, subject to certain adjustments, (ii) 74,997 of the Company’s common shares valued at $806 based on the opening stock price of the Company’s common shares as reported by Nasdaq on the closing date and (iii) $600 in seller notes.
The following table summarizes the final determination and allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| July 7, 2022 |
| Assets acquired and liabilities assumed: | |
| Goodwill | 6,002 | |
| Intangible assets | 5,600 | |
| Other liabilities, net | (84) | |
| Deferred tax liabilities | (652) | |
| $ | 10,866 | |
Intangible assets primarily relate to customer relationships and technology associated with the ability to perform specialized protein and peptide mass spectrometry analysis. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 8.1 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues and EBITDA), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Goodwill, which is derived from the enhanced scientific expertise and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s DSA reportable segment.
In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Protypia acquisition as a result of book-to-tax differences primarily related to the intangible assets.
Pro Forma Results
The Company’s unaudited pro forma results of operations for the fiscal year ended September 30, 2022, assume that the acquisitions had occurred as of October 1, 2021, are set forth below. Pro forma information for the twelve months ended September 30, 2023, is not presented here, as the statement of operations for the twelve months ended September 30, 2023, includes all business combinations. The following pro forma amounts are based on available information of the results of operations prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisitions been completed on October 1, 2021.
The unaudited pro forma information is as follows:
| | | | | |
| Fiscal Year Ended
September 30, 2022 |
| Total revenues | $ | 593,622 | |
| |
| Net loss | $ | (141,601) | |
4. REVENUE FROM CONTRACTS WITH CLIENTS
DSA
The DSA segment generates service revenue through drug discovery and development services. The DSA segment generates product revenue through internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company’s BASi product line. Refer to Note 2 – Summary of Significant Accounting Policies for further discussion of DSA revenue and related accounting policies.
RMS
The RMS segment generates products revenue through the commercial production and sale of research models, diets and bedding and bioproducts. The RMS segment generates service revenue through GEMS, client-owned animal colony care, and health monitoring and diagnostics services related to research models. Refer to Note 2 – Summary of Significant Accounting Policies for further discussion of RMS revenue and related accounting policies.
Contract Assets and Liabilities from Contracts with Clients
The timing of revenue recognition, billings and cash collections results in billed receivables (trade receivables), contract assets (unbilled revenue), and contract liabilities (client deposits and deferred revenue) on the consolidated balance sheets.
The following table provides information about contract assets (trade receivables and unbilled revenue, excluding allowances for credit losses), and fees invoiced in advance (client deposits and deferred revenue):
| | | | | | | | | | | |
| Balance at
September 30,
2023 | | Balance at
September 30,
2022 |
| Contract Assets: Trade receivables | $ | 77,618 | | | $ | 88,867 | |
| Contract Assets: Unbilled revenue | 17,211 | | | 17,474 | |
| Contract liabilities: Client deposits | 36,689 | | | 39,222 | |
| Contract liabilities: Deferred revenue | 18,933 | | | 29,420 | |
When the Company does not have the unconditional right to advanced billings, both advanced client payments and unpaid advanced client billings are excluded from deferred revenue, with the advanced billings also being excluded from client receivables. The Company excluded approximately $10,220 and $2,647 of unpaid advanced client billings from both client receivables and deferred revenue as of September 30, 2023 and September 30, 2022, respectively.
The Company expects a majority of deferred revenue to be recognized as revenue in fiscal year 2024.
Changes in the contract asset and the contract liability balances during the twelve months ended September 30, 2023 include the following:
•A change in the time frame for a right for consideration to become unconditional – Approximately 86% of unbilled revenue as of September 30, 2022, was billed during fiscal year 2023.
•A change in the time frame for a performance obligation to be satisfied – Approximately 80% of contract liabilities as of September 30, 2022, were recognized as revenue during fiscal year 2023.
Allowance for Credit Losses
The Company’s allowance for credit losses was $7,446 and $6,268 at September 30, 2023 and 2022, respectively. A summary of activity in our allowance for credit losses is as follows:
| | | | | | | | | | | |
| Fiscal Years Ended
September 30, |
| 2023 | | 2022 |
| Opening balance | $ | 6,268 | | | $ | 668 | |
| Acquired | — | | | 4,406 | |
| Charged to expense | 1,271 | | | 1,220 | |
| Uncollectible invoices written off | (107) | | | (26) | |
| Amounts collected | 14 | | | — | |
| Ending balance | $ | 7,446 | | | $ | 6,268 | |
5. SEGMENT AND GEOGRAPHIC INFORMATION
As a result of our strategic acquisition of Envigo in November 2021, which added a complementary research model platform, our full spectrum solutions span two segments: DSA and RMS.
Through our DSA segment, we support the discovery, non-clinical and clinical development needs of researchers and clinicians for primarily small molecule drug candidates, but also including biotherapeutics and biomedical devices. Our scientists have the 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 scientists engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research from small start-up biotechnology companies to some of the largest global pharmaceutical companies.
Through our RMS segment, we offer access to a wide range of high-quality small and large research models for basic research and drug discovery and development, as well as specialized models for specific diseases and therapeutic areas. We combine deep animal husbandry expertise and expanded access to scientists across the discovery and preclinical continuum, which reduces nonclinical lead times and provides enhanced project delivery. In conjunction with our DSA segment, we have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and have access to innovative genetically engineered models and services solutions. We have long-standing relationships with our principal clients, which include biopharmaceutical companies, contract research organizations ("CRO"), and academic and government organizations.
Segment Information
Revenue and other financial information by segment for the fiscal years ended September 30, 2023 and September 30, 2022 are as follows:
During the fiscal years ended September 30, 2023 and September 30, 2022, the RMS segment recognized intersegment revenue of $8,793 and $7,250, respectively, related to sales to the DSA segment. The following table presents revenue and other financial information by reportable segment for the fiscal years ended September 30, 2023 and 2022:
| | | | | | | | | | | |
| Fiscal Year Ended
September 30,
2023 | | Fiscal Year Ended
September 30,
2022 |
| Revenue | | | |
| DSA: | | | |
| Service revenue | $ | 180,348 | | | $ | 161,113 | |
| Product revenue | 4,742 | | | 4,176 | |
| RMS: | | | |
| Service revenue | 43,465 | | | 41,865 | |
| Product revenue | 343,870 | | | 340,502 | |
| $ | 572,425 | | | $ | 547,656 | |
| | | |
| Operating Income (Loss) | | | |
| DSA | $ | 15,246 | | | $ | 22,330 | |
| RMS | (24,904) | | | (189,346) | |
| Unallocated Corporate | (71,802) | | | (96,436) | |
| $ | (81,460) | | | $ | (263,452) | |
| | | |
| Interest expense | (43,019) | | | (29,704) | |
| Other income (expense) | 237 | | | (59,293) | |
| Loss before income taxes | $ | (124,242) | | | $ | (352,449) | |
| | | | | | | | | | | |
| Fiscal Year Ended
September 30,
2023 | | Fiscal Year Ended
September 30,
2022 |
| Depreciation and amortization: | | | |
| DSA | $ | 16,371 | | | $ | 13,553 | |
| RMS | 38,288 | | | 35,771 | |
| Unallocated Corporate | 58 | | | — | |
| $ | 54,717 | | | $ | 49,324 | |
| | | |
| Capital expenditures: | | | |
| DSA | $ | 13,314 | | | $ | 16,224 | |
| RMS | 14,189 | | | 20,076 | |
| $ | 27,503 | | | $ | 36,300 | |
As a result of the application of ASC 805 for the Envigo and OBRC acquisitions, we recognized $679 and $10,246 of amortization of inventory step-up during the fiscal years ended September 30, 2023 and September 30, 2022, respectively, which were reflected in the RMS reportable segment.
During the fiscal years ended September 30, 2023 and 2022, we recognized goodwill impairment charges of $66,367 and $236,005, respectively, which were reflected in the RMS reportable segment. Refer to Note 6 - Goodwill and Intangible Assets for further discussion of the goodwill impairment charge.
During the fiscal years ended September 30, 2023 and 2022, we recognized $7,844 and $24,202, respectively, of non-cash stock-based compensation expense, which were reflected in unallocated corporate expenses, and a loss of $0 and $56,714, respectively, on fair value remeasurement of embedded derivative, which were reflected in other (expense) income. Other unallocated corporate operating expenses include compensation and other employee-related expenses, certain external professional fees, insurance, information technology-related fees and acquisition and integration costs.
The following represents total assets by segment:
| | | | | | | | | | | |
| Fiscal Year Ended
September 30,
2023 | | Fiscal Year Ended
September 30,
2022 |
| DSA | $ | 304,015 | | | $ | 280,308 | |
| RMS | 552,515 | | | 682,592 | |
| $ | 856,530 | | | $ | 962,900 | |
Geographic Information
The following represents revenue originating in entities physically located in the identified geographic area:
| | | | | | | | | | | |
| Fiscal Year Ended
September 30,
2023 | | Fiscal Year Ended
September 30,
2022 |
| United States | $ | 482,630 | | | $ | 471,886 | |
| Netherlands | 54,088 | | | 42,361 | |
| Other | 35,707 | | | 33,409 | |
| $ | 572,425 | | | $ | 547,656 | |
Long-lived assets shown below include property and equipment, net. The following represents long-lived assets where they are physically located:
| | | | | | | | | | | |
| As of
September 30, | | As of
September 30, |
| 2023 | | 2022 |
| United States | $ | 178,021 | | | $ | 173,417 | |
| Netherlands | 6,656 | | | 5,824 | |
| Other | 6,391 | | | 6,958 | |
| $ | 191,068 | | | $ | 186,199 | |
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a rollforward of the Company’s goodwill for the fiscal years ended September 30, 2023 and 2022:
| | | | | |
| Balance as of October 1, 2021 | $ | 51,927 | |
Acquisitions - DSA1 | 39,531 | |
Acquisitions - RMS2 | 302,346 | |
| Impairment - RMS | (236,005) | |
| Foreign exchange impact - RMS | 26 | |
Balance as of September 30, 20223 | $ | 157,825 | |
Acquisitions - DSA1 | 2,828 | |
| Impairment - RMS | (66,367) | |
Balance as of September 30, 20233 | $ | 94,286 | |
1Goodwill for DSA acquisitions relates to the acquisitions in fiscal 2022 and measurement period adjustments during fiscal 2023 related to the fiscal 2022 acquisitions, as disclosed in Note 3 - Business Combinations
2Goodwill for RMS acquisitions relates to the fiscal 2022 acquisitions, as disclosed in Note 3 - Business Combinations.
3The accumulated impairment loss for the RMS segment was $302,220 at September 30, 2023 and $235,853 at September 30, 2022..
Fiscal Year 2023
The increase in goodwill during fiscal year 2023 related primarily to measurement period adjustments in the DSA segment from the acquisition of Protypia, partially offset by goodwill impairment related to the RMS reporting unit (which is reported within the RMS segment).
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”). During December 2022, the Company determined that as a result of the November 16, 2022 event, which led to the Company’s decision to refrain from selling or delivering any of its Cambodian NHPs held in the U.S. at that time, the uncertainty related to the Company’s ability to import NHPs from Cambodia and the decrease in its stock price, the carrying value of goodwill as of December 31, 2022, was required to be quantitatively evaluated. The carrying value of the Company’s goodwill by reporting unit was determined utilizing the income approach. Based on the Company’s quantitative goodwill impairment test, the fair value of the RMS reporting unit was less than the RMS reporting unit’s carrying value. As a result, a goodwill impairment loss of $66,367 was recorded within the RMS segment.
Fiscal Year 2022
The increase in goodwill during fiscal year 2022 primarily related to the acquisitions of Plato, ILS, Histion and Protypia in the DSA reporting unit and Envigo, RSI and OBRC in the RMS reporting unit, offset by goodwill impairment related to the RMS reporting unit. See Note 3 - Business Combinations for further discussion of these business combinations.
As a part of the annual goodwill assessment, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative impairment test. As a result of the qualitative analysis, the Company determined that as a result of the sustained reduction in our stock price during the fiscal year ended September 30, 2022, the carrying value of our goodwill as of fiscal year end must be quantitatively evaluated. The carrying value of the Company’s goodwill by reporting unit was determined utilizing the income approach. Based on the Company’s quantitative goodwill impairment test, which was performed in the fourth quarter of fiscal year 2022, the fair value of the RMS reporting unit was less than the RMS reporting unit’s carrying value. As a result, goodwill impairment losses of $236,005 were recorded.
Intangible Assets
The following table displays intangible assets, net by major class:
| | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Carrying
Amount, Gross | | Accumulated
Amortization | | Carrying
Amount, Net |
| Customer relationships | $ | 316,820 | | | $ | (54,711) | | | $ | 262,109 | |
| Intellectual property | 56,337 | | | (12,234) | | | 44,103 | |
| Other | 4,837 | | | (2,621) | | | 2,216 | |
| $ | 377,994 | | | $ | (69,566) | | | $ | 308,428 | |
| | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Carrying
Amount, Gross | | Accumulated
Amortization | | Carrying
Amount, Net |
| Customer relationships | $ | 318,896 | | | $ | (26,990) | | | $ | 291,906 | |
| Intellectual property | 56,997 | | | (5,767) | | | 51,230 | |
| Other | 4,806 | | | (2,056) | | | 2,750 | |
| $ | 380,699 | | | $ | (34,813) | | | $ | 345,886 | |
The decrease in intangible assets, net during fiscal year 2023 related primarily to the amortization of all intangible assets, partially offset by foreign exchange rate impact. The increase in intangible assets, net during fiscal year 2022 related primarily to the acquisitions of Envigo, ILS and OBRC, partially offset by the amortization of all intangible assets.
Amortization expense of definite-lived intangible assets for fiscal years ended 2023 and 2022 was $34,681 and $30,888, respectively. As of September 30, 2023, estimated amortization of intangible assets for each of the next five fiscal years and in the aggregate thereafter is expected to be as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RUL1 (in years) | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Totals |
| Customer relationships | 9.9 | | $ | 27,774 | | | $ | 27,774 | | | $ | 27,712 | | | $ | 27,526 | | | $ | 27,393 | | | $ | 123,930 | | | $ | 262,109 | |
| Intellectual property | 6.9 | | 6,446 | | | 6,446 | | | 6,446 | | | 6,446 | | | 6,446 | | | 11,873 | | | 44,103 | |
| Other | 6.4 | | 534 | | | 524 | | | 367 | | | 124 | | | 109 | | | 558 | | | 2,216 | |
| Total | 9.4 | | $ | 34,754 | | | $ | 34,744 | | | $ | 34,525 | | | $ | 34,096 | | | $ | 33,948 | | | $ | 136,361 | | | $ | 308,428 | |
1RUL (in years) represents the weighted average remaining useful life
7. DEBT
Long term debt as of September 30, 2023 and September 30, 2022 is detailed in the table below.
| | | | | | | | | | | |
| September 30, 2023 | | September 30, 2022 |
| Seller Note – Bolder BioPath (Related party) | 602 | | | 808 | |
| Seller Note – Preclinical Research Services | 541 | | | 615 | |
| Seller Note – Plato BioPharma | — | | | 1,470 | |
| Seller Payable - Orient BioResource Center | 3,649 | | | 3,488 | |
| Seller Note – Histion (Related party) | 229 | | | 369 | |
| Seller Note – Protypia (Related party) | 400 | | | 600 | |
| Economic Injury Disaster Loan | 140 | | | 140 | |
| Convertible Senior Notes | 110,651 | | | 104,965 | |
| Term Loan Facility, DDTL and Incremental Term Loans | 272,930 | | | 238,200 | |
| 389,142 | | | 350,655 | |
| Less: Current portion | (7,950) | | | (7,979) | |
| Less: Debt issuance costs not amortized | (11,397) | | | (11,999) | |
| Total Long-term debt | $ | 369,795 | | | $ | 330,677 | |
The following table summarizes the amount of maturities of our long-term debt for each of the next five fiscal years and thereafter:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
| Long-term debt | $ | 7,953 | | | $ | 3,541 | | | $ | 2,917 | | | $ | 263,951 | | | $ | 110,654 | | | $ | 126 | | | $ | 389,142 | |
Fair Value
As of September 30, 2023 and 2022, the fair value of the Company’s term loan facility, DDTL and incremental term loans was $251,200 and $200,460, respectively, based on market pricing. As the fair value is based on significant other observable inputs, it is deemed to be Level 2 within the fair value hierarchy.
As of September 30, 2023 and 2022, the fair value of the Convertible Senior Notes was $70,000 and $111,825, respectively, based on market pricing. As the fair value is based on significant other observable inputs, it is deemed to be Level 2 within the fair value hierarchy.
The book values of the Seller Notes and Seller Payable, which are fixed rate loans carried at amortized cost, approximate the fair value based on current market pricing of similar debt. As the fair value is based on significant other observable outputs, it is deemed to be Level 2 within the fair value hierarchy.
Until November 4, 2021, the embedded derivative conversion feature of the 3.25% Convertible Senior Notes due 2027 (the “Notes”) was subject to fair value measurement on a recurring basis as they included unobservable and significant inputs in determining the fair value. The Company utilized a single factor trinomial lattice model to determine the related fair value of the embedded derivative convertible feature of the Notes at November 4, 2021, and the inputs used included a volatility 40.00%, a bond yield assumption of 10.44% and a remaining maturity period of 5.95 years.
Revolving Credit Facility
As of September 30, 2023 and September 30, 2022, the Company had a $0 and $15,000 outstanding balance on the revolving credit facility. Refer to the statements of cash flows for information related to borrowings and paydowns of the revolving credit facility during the twelve months ended September 30, 2023 and 2022.
Significant Transactions
On October 12, 2022, the Company drew its $35,000 delayed draw term loan (the “Additional DDTL”) allowed under the First Amendment to the Credit Agreement (“First Amendment”). A portion of the proceeds were used to repay the $15,000 balance on the Company’s revolving credit facility, while the remaining amount was drawn to fund a portion of the Company’s capital expenditures in fiscal year 2022 and those planned for fiscal year 2023.
On December 29, 2022 and January 9, 2023, the Company, the lenders party thereto, and Jefferies Finance LLC, as administrative agent (the “Agent”), entered into the Second and Third Amendments, respectively, to the Credit Agreement. Refer below for further information related to those amendments.
Term Loan Facility, DDTL and Incremental Term Loans
Credit Agreement
On November 5, 2021, the Company, certain subsidiaries of the Company (the “Subsidiary Guarantors”), the lenders party thereto, and the Agent, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a term loan facility in the original principal amount of $165,000, a delayed draw term loan facility in the original principal amount of $35,000 (available to be drawn up to 18 months from the date of the Credit Agreement) (the “Initial DDTL” and together with the Additional DDTL, the “DDTL”) and a revolving credit facility in the original principal amount of $15,000. On November 5, 2021, the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the delayed draw term loan facility or the revolving credit facility.
The Company could have elected to borrow on each of the loan facilities at either an adjusted LIBOR rate of interest or an adjusted prime rate of interest. Adjusted LIBOR rate loans accrued interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The LIBOR rate had to be a minimum of 1.00%. The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%. Adjusted prime rate loans accrue interest at an annual rate equal to the prime rate plus a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio. The initial adjusted prime rate of interest was the prime rate plus 5.25%. For the term loan facility, interest expense was accrued at an effective rate of 10.41% and 9.83% for the fiscal years ended September 30, 2023 and 2022, respectively.
The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving credit facility and (ii) a fee based on a percentage per annum equal to 1.00% on the average daily undrawn portion of the commitments in respect of the delayed draw loan facility. In each case, such fee shall be paid quarterly in arrears.
Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to 1.00% of their respective original principal amounts. The Company shall also repay the term loan facility on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time. Voluntary prepayments were subject to a 1.00% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
The Company is required to maintain a Secured Leverage Ratio of not more than 4.25 to 1.00 for the Company's fiscal quarters through the fiscal quarter ended June 30, 2023, 3.75 to 1.00 beginning with the Company’s fiscal quarter ending September 30, 2023, and 3.00 to 1.00 beginning with the Company’s fiscal quarter ending March 31, 2025. The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio was 1.00 to 1.00 during the first year of the Credit Agreement and is 1.10 to 1.00 from and after the Credit Agreement’s first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
Utilizing proceeds from the Credit Agreement on November 5, 2021, the Company repaid all indebtedness and terminated the credit agreement related to the First Internet Bank of Indiana (“FIB”) credit facility and recognized an $877 loss on debt extinguishment during the twelve months ended September 30, 2022.
On January 7, 2022, the Company drew $35,000 on the Initial DDTL. Amounts outstanding under the Initial DDTL accrued interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%. For the Initial DDTL, interest expense was accrued at an effective rate of 10.41% and 9.89% for the fiscal years ended September 30, 2023 and 2022, respectively.
First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and the Agent entered into the First Amendment to the existing Credit Agreement. The First Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $40,000 (the “Incremental Term Loans”) and the Additional DDTL in the original principal amount of $35,000, which amount is available to be drawn up to 24 months from the date of the First Amendment. The Incremental Term Loans and any amounts borrowed under the Additional DDTL are referred to herein as the “Additional Term Loans”. On January 27, 2022, the Company borrowed the full amount of the Incremental Term Loans, and on October 12, 2022, the Company borrowed the full $35,000 under the Additional DDTL.
Amounts outstanding under the Additional Term Loans accrued interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%. For the Additional DDTL, interest expense was accrued at an effective rate of 10.57% for the fiscal year ended September 30, 2023.
The Additional Term Loans require annual principal payments in an amount equal to 1.00% of the original principal amount. Voluntary prepayments of the Additional Term Loans were subject to a 1.00% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
The Company shall also repay the term loans on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio.
The Additional Term Loans are secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of the Additional Term Loans is guaranteed by each of the Subsidiary Guarantors.
The Additional Term Loans will mature on November 5, 2026.
Second Amendment to Credit Agreement
On December 29, 2022, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement.
The Second Amendment provided for, among other things, an extension of the deadline for the Company to provide to the lenders the audited financial statements for the Company’s fiscal year ended September 30, 2022 and an annual budget for 2023; the Company satisfied these requirements by the extended deadline. The Second Amendment added a requirement that the Company provide, within 30 days after the end of each month, an unaudited consolidated balance sheet, statement of income and statement of cash flows as of the end of, and for, such month, as well as a “key performance indicator” report. The Second Amendment also requires that, within 10 business days after the end of each month, the Company will provide a rolling 13-week cash flow forecast prepared on a monthly basis. The Second Amendment further provides that, upon the request of the Required Lenders (as defined in the Credit Agreement), the Company will permit a financial advisor designated by the Required Lenders to meet with management of the Company to discuss the affairs, finances, accounts and condition of the Company during the six-month period following the effective date of the Second Amendment. In addition, the Second Amendment requires the Company to deliver an updated organization chart and certain supplemental information regarding the Company’s subsidiaries in connection with each quarterly report required pursuant to the Credit Agreement.
Under the Second Amendment, the Company could have elected to borrow on each of the loan facilities at either an adjusted term secured overnight financing rate (“Term SOFR”) rate of interest or an alternate base rate of interest. Term SOFR loans accrued interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448% and 0.42826%, depending on the term of the loan (“Adjusted Term SOFR”); provided that,
Adjusted Term SOFR could never be less than 1.00%, and (ii) a margin of between 6.00% and 6.50%, depending on the Company’s then current Secured Leverage Ratio (as defined in the Credit Agreement). Alternate base rate loans could accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%, (b) the Agent’s prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00% (the “Second Amendment Alternate Base Rate”); provided that, the Second Amendment Alternate Base Rate could never be less than 2.00%, plus (ii) a margin of between 5.00% and 5.50%, depending on the Company’s then current Secured Leverage Ratio.
The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement, if any of the conditions precedent set forth in Section 4.02 of the Credit Agreement cannot be satisfied, including, without limitation, the making of the representation and warranty that as of the date of the most recent audited financial statements delivered to the Agent, no event, change, circumstance, condition, development or occurrence has had, or would reasonably be expected to result in, either individually or in the aggregate, a Material Adverse Effect (as defined in the Credit Agreement).
In addition, the Second Amendment provided that, no later than January 13, 2023 (or such later date as the Required Lenders shall agree in their discretion), the Company shall (i) appoint a financial advisor on terms reasonably acceptable to the Required Lenders and the Company for a term of at least six months, (ii) provide a 13-week budget to the Agent, and (iii) deliver a perfection certificate supplement updating certain information previously provided with respect to each of the Company and the Subsidiary Guarantors, including information regarding certain collateral and other assets owned by such parties. The Company timely satisfied each of these requirements.
Third Amendment to Credit Agreement
On January 9, 2023, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Third Amendment (“Third Amendment”) to the Credit Agreement. The Third Amendment provides that, among other things, during the period beginning on January 9, 2023 and, subject to the terms of the Credit Agreement, ending on the date on which financial statements for the Company’s fiscal quarter ending March 31, 2024 are delivered or are required to be delivered, as long as no event of default has occurred (the “Amendment Relief Period”):
•the Cambodian NHP-related matters, to the extent existing and disclosed to the lenders prior to December 29, 2022, shall not constitute a Material Adverse Effect under the Credit Agreement and will not restrict the Company’s ability to request credit extensions under the revolving credit facility;
•the use of borrowings under the revolving credit facility is limited to funding operational expenses of the Company in the ordinary course and cannot be used for the making or funding of investments, permitted acquisitions or restricted payments, payments or purchases with respect to any indebtedness, bonuses or executive compensation, or judgments, fines or settlements; and
•additional limitations are imposed on the Company under the Credit Agreement, including restrictions on permitted asset sales, a prohibition on making permitted acquisitions, and significant limitations on the ability to incur additional debt, make investments and make restricted payments.
The Third Amendment provides that from and after the date thereof, no incremental facilities under the Credit Agreement may be established or incurred. The Third Amendment also provides for additional mandatory prepayments of borrowed amounts following the receipt by the Company of certain cash receipts, including proceeds from certain equity issuances and cash received by the Company not in the ordinary course of business. Under the Third Amendment, after any draw on the revolving credit facility, the Company’s cash and cash equivalents held on hand domestically within the U.S. cannot exceed $10,000.
Under the Third Amendment, the Company may elect to borrow on each of the loan facilities accruing interest at either an adjusted Term SOFR or an alternate base rate of interest. Term SOFR loans shall accrue interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448% and 0.42826%, depending on the term of the loan, provided that, the Adjusted Term SOFR shall never be less than 1.00% per annum, plus (ii) an applicable margin of 6.75% per annum for term loans maintained as SOFR loans or 9.50% per annum for revolving loans maintained as SOFR loans. Alternate base rate loans shall accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%, (b) the Agent’s prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00% (the “Alternate Base Rate”), provided that, the Alternate Base Rate is
subject to a floor of 2.00% per annum plus (ii) an applicable margin of 5.75% per annum for term loans maintained as Alternate Base Rate loans or 8.50% per annum for revolving loans maintained as Alternate Base Rate loans.
The fee consideration payable by the Company for each consenting lender party to the Third Amendment is: (i) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender; (ii) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in cash upon the occurrence of certain prepayments of the term loan under the Credit Agreement; and (iii) 7.00% of the aggregate amount of the revolving commitments held by each consenting revolving lender, to be paid in cash upon the occurrence with certain permanent reductions of the revolving loans under the Credit Agreement
Acquisition-related Debt (Seller Notes)
In addition to the indebtedness under the Credit Agreement, certain of the Company’s subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.
As part of acquisition of Pre-Clinical Research Services, Inc. ("PCRS"), the Company issued an unsecured subordinated promissory note payable to the PCRS seller in the initial principal amount of $800. The promissory note bears interest at a rate of 4.50% per annum with monthly payments of principal and interest and a maturity date of December 1, 2024.
As part of the acquisition of Bolder BioPATH, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Bolder BioPATH in an aggregate principal amount of $1,500. As part of the working capital adjustment in March 2022, a reduction of the promissory note of $470 was recorded. The promissory notes bear interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of May 1, 2026.
As part of the acquisition of Plato, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Plato in an aggregate principal amount of $3,000. The promissory notes bear interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of June 1, 2023. The promissory notes were paid in full as of June 1, 2023.
As part of the acquisition of OBRC, the Company agreed to leave in place a payable owed by OBRC to the Seller in the amount of $3,700, which the Company determined to have a fair value of $3,325 as of January 27, 2022. The payable does not bear interest and was originally required to be paid to the Seller 18 months after the closing date of January 27, 2022. The Company has the right to set off against the payable any amounts that become payable by the Seller on account of indemnification obligations under the purchase agreement. On April 4, 2023, the Company and the Seller entered into a First Amendment to extend the maturity date of the payable to July 27, 2024. This extension did not affect the rights and remedies of any party to the stock purchase agreement, nor alter, modify or amend or in any way affect any of the terms and conditions, obligations, covenants or agreements contained in the stock purchase agreement.
As part of the acquisition of Histion, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433. The promissory notes bear interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of April 1, 2025.
As part of the acquisition of Protypia, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Protypia in an aggregate principal amount of $600. The promissory notes bear interest at a rate of 4.50% per annum, with monthly interest payments and principal payments on July 7, 2023, and on the maturity date, January 7, 2024.
Convertible Senior Notes
On September 27, 2021, the Company issued $140,000 principal amount of the Notes. The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 27, 2021, among the Company, the Company’s wholly-owned subsidiary, BAS Evansville, Inc., as guarantor (the “Guarantor”), and U.S. Bank National Association, as trustee (the “Indenture”). Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $15,000 principal amount of the Notes. The Notes issued on September 27, 2021 included $15,000 principal amount of the Notes issued pursuant to the full exercise by the initial
purchaser of such option. The Company used the net proceeds from the offering of the Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of the Envigo acquisition and related fees and expenses.
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by the Guarantor.
The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2022. The Notes will mature on October 15, 2027, unless earlier repurchased, redeemed or converted. Before April 15, 2027, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 15, 2027, noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company’s election. The initial conversion rate is 21.7162 common shares per $1 principal amount of Notes, which represents an initial conversion price of approximately $46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
As of September 30, 2023 and September 30, 2022, there were $4,172 and $5,060, respectively, in unamortized debt issuance costs related to the Notes. For the year ended September 30, 2023, the total interest expense was $11,089, including coupon interest expense of $4,515, accretion expense of $5,686, and the amortization of debt discount and issuance costs of $888. For the year ended September 30, 2022, the total interest expense was $10,624, including coupon interest expense of $4,613, accretion expense of $5,162, and the amortization of debt discount and issuance costs of $849.
The Notes are redeemable, in whole and not in part, at the Company’s option at any time on or after October 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130.00% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common shares.
The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least $20,000; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has
expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes.
If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company or the Guarantor (and not solely with respect to a significant subsidiary of the Company or the Guarantor) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then the trustee, by notice to the Company, or noteholders of at least 25.00% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
In accordance with ASC 815, at issuance, the Company evaluated the convertible feature of the Notes and determined it was required to be bifurcated as an embedded derivative and did not qualify for equity classification. The convertible feature of the Notes is subject to fair value remeasurement as of each balance sheet date or until it meets equity classification requirements and is valued utilizing Level 3 inputs as described below. The discount resulting from the initial fair value of the embedded derivative will be amortized to interest expense using the effective interest method. Non-cash interest expense during the period primarily related to this discount.
In the first quarter of 2022, the Company adopted Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). The update simplifies the accounting for convertible debt instruments and convertible preferred shares by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. As a result of the approval of the increase in authorized shares on November 4, 2021 (see Note 13 – Stockholders Equity and Loss Per Share), the Note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as of November 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital.
Based upon the above, the Company remeasured and reclassified to additional paid-in capital the fair value of the embedded derivative as of November 4, 2021, which resulted in a fair value measurement of $88,576 and a loss on remeasurement included in other income (loss) for the fiscal year ended September 30, 2022of $56,714.
Former Credit Agreement
On October 4, 2021, the Company entered into a Third Amendment to Amended and Restated Credit Agreement (the “FIB Amendment”), which amended the Amended and Restated Credit Agreement between the Company and FIB, as amended (the “FIB Credit Agreement”). Pursuant to the FIB Amendment, FIB consented to the acquisition by the Company of Plato by merger of Plato with a wholly owned subsidiary of the Company and the subsequent merger of the surviving corporation of that merger with another wholly owned subsidiary of the Company. In addition, the FIB Amendment amended the FIB Credit Agreement to (i) add the promissory notes to be issued to former Plato shareholders in the Plato acquisition as permitted indebtedness, which notes were issued by the surviving company, guaranteed by the Company and subordinated in favor of FIB, and (ii) add references to the Plato acquisition to certain provisions of the FIB Credit Agreement relating to subordination agreements, representations and warranties, and certain covenants to permit the Plato acquisition to occur. The FIB Amendment included agreements by the Company to obtain certain landlord waivers within 30 days of the closing of the Plato acquisition and to deliver to FIB signed subordination agreements.
The Company consummated the Envigo acquisition and repaid all of its obligations under the FIB Credit Agreement in November 2021.
8. SUPPLEMENTAL BALANCE SHEET INFORMATION
As of September 30, 2023 and 2022, one client of the RMS segment made up 13.6% and 20.4% , respectively, of the Company's total trade receivables balance.
Trade receivables and contract assets, net consisted of the following:
| | | | | | | | | | | |
| September 30,
2023 | | September 30,
2022 |
| Trade receivables | $ | 77,618 | | | $ | 88,867 | |
| Unbilled revenue | 17,211 | | | 17,474 | |
| Total | 94,829 | | | 106,341 | |
| Less: Allowance for credit losses | (7,446) | | | (6,268) | |
| Trade receivables and contract assets, net of allowances for credit losses | $ | 87,383 | | | $ | 100,073 | |
Inventories, net consisted of the following:
| | | | | | | | | | | |
| September 30,
2023 | | September 30,
2022 |
| Raw materials | $ | 2,259 | | | $ | 1,757 | |
| Work in progress | 124 | | | 186 | |
| Finished goods | 4,439 | | | 4,933 | |
| Research Model Inventory | 52,524 | | | 68,055 | |
| Total | 59,346 | | | 74,931 | |
| Less: Obsolescence reserve | (3,244) | | | (3,490) | |
| Inventories, net | $ | 56,102 | | | $ | 71,441 | |
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | |
| September 30,
2023 | | September 30,
2022 |
| Advances to suppliers | $ | 19,247 | | | $ | 30,292 | |
| Prepaid research models | 4,300 | | | 3,575 | |
| Tax-related receivables | 1,813 | | | 366 | |
| Note receivable | 1,226 | | | — | |
| Other | 6,822 | | | 8,250 | |
| Prepaid expenses and other current assets | $ | 33,408 | | | $ | 42,483 | |
The composition of other assets is as follows:
| | | | | | | | | | | |
| September 30,
2023 | | September 30,
2022 |
| Long-term advances to suppliers | $ | 3,681 | | | $ | 2,894 | |
| Funded status of defined benefit plan | 3,036 | | | 1,573 | |
| Other | 3,362 | | | 3,057 | |
| Other assets | $ | 10,079 | | | $ | 7,524 | |
The composition of property and equipment, net is as follows:
| | | | | | | | | | | |
| September 30,
2023 | | September 30,
2022 |
| Land and land improvements | $ | 30,710 | | | $ | 20,025 | |
| Buildings and building improvements | 120,932 | | | 110,572 | |
| Machinery and equipment | 81,372 | | | 68,628 | |
| Furniture and fixtures | 3,223 | | | 1,905 | |
| Other | 3,664 | | | — | |
| Construction in progress | 25,804 | | | 40,519 | |
| Total Cost | 265,705 | | | 241,649 | |
| Accumulated depreciation | (74,637) | | | (55,450) | |
| $ | 191,068 | | | $ | 186,199 | |
Accrued expenses consisted of the following:
| | | | | | | | | | | |
| | September 30,
2023 | | September 30,
2022 |
| Accrued compensation | $ | 12,966 | | | $ | 17,460 | |
| Non-income taxes | 4,596 | | | 1,200 | |
| Accrued interest | 2,975 | | | 5,228 | |
| Other | 5,239 | | | 11,913 | |
| Accrued expenses and other liabilities | $ | 25,776 | | | $ | 35,801 | |
The composition of fees invoiced in advance is as follows:
| | | | | | | | | | | |
| | September 30, 2023 | | September 30, 2022 |
| Client deposits | $ | 36,689 | | | $ | 39,222 | |
| Deferred revenue | 18,933 | | | 29,420 | |
| Fees invoiced in advance | $ | 55,622 | | | $ | 68,642 | |
9. POST EMPLOYMENT BENEFITS
Defined Benefit Plan
As a result of the Envigo acquisition, the Company has a defined benefit plan in the U.K., the Harlan Laboratories UK Limited Occupational Pension Scheme (the "Pension Plan"), which operated through April 2012. As of April 30, 2012, the accumulation of plan benefits of employees in the Pension Plan was permanently suspended and therefore the Pension Plan was curtailed.
The following tables summarize the changes in the benefit obligation funded status of the Pension Plan and amounts reflected in the Company’s consolidated balance sheets as of September 30, 2023 and 2022.
| | | | | | | | |
| Fiscal Year Ended
September 30, | Fiscal Year Ended
September 30, |
| 2023 | 2022 |
| | |
| Accumulated benefit obligation: | $ | 12,957 | | $ | 12,812 | |
| | |
| Change in projected benefit obligation: | | |
| Projected benefit obligation, beginning of period | $ | 12,812 | | $ | 24,302 | |
| Interest cost | 733 | | 381 | |
| Benefits paid | (570) | | (595) | |
| Foreign currency translation adjustment | 1,235 | | (3,370) | |
| Actuarial gains | (1,253) | | (7,906) | |
| Projected benefit obligation at end of period | 12,957 | | 12,812 | |
| | |
| Change in fair value of plan assets: | | |
| Fair value of plan assets, beginning of period | $ | 14,385 | | $ | 21,269 | |
| Actual loss on plan assets | (427) | | (3,948) | |
| Employer contributions | 1,226 | | 1,059 | |
| Foreign currency translation adjustment | 1,379 | | (3,400) | |
| Benefits paid | (570) | | (595) | |
| Fair value of plan assets, end of period | 15,993 | | 14,385 | |
| Funded status | $ | 3,036 | | $ | 1,573 | |
The net periodic benefit costs, which are presented within general and administrative expenses, under the Pension Plan were as follows:
| | | | | | | | |
| Fiscal Year Ended
September 30, | Fiscal Year Ended
September 30, |
| 2023 | 2022 |
| Components of net periodic benefit expense: | | |
| Interest cost | 733 | | 381 | |
| Expected return on assets | (798) | | (744) | |
| Amortization of prior gain | (152) | | — | |
| Net periodic benefit cost | $ | (217) | | $ | (363) | |
Gains Related to Changes in Benefit Obligation
The actuarial gains during the twelve months ended September 30, 2023 were primarily due to increased discount rate assumptions as a result of the continued trend of rising interest rates and updated plan cash commutation factors. The actuarial gains during the twelve months ended September 30, 2022 were due to a significant increase in the discount rate
as a result of rising interest rates in the U.K. The remainder of the changes in both periods were cumulative translation adjustments and reductions in assets as a result of overall deterioration in markets, driven by increasing interest rates.
Assumptions
The major assumptions used in determining the net periodic benefit costs for the fiscal year ended September 30, 2023 and 2022:
| | | | | | | | |
| Fiscal Year Ended
September 30, | Fiscal Year Ended
September 30, |
| 2023 | 2022 |
| Discount rate | 5.33 | % | 1.85 | % |
| Expected return on plan assets | 4.96 | % | 4.01 | % |
Our expected return on plan asset assumption, used to determine benefit obligations, is based on historical long-term rates of return on investments. Many factors, including portfolio allocation, target portfolio allocation and expected expenses, are evaluated during the process of determining the expected return on plan assets.
Discount rates were determined for the defined benefit retirement plan at the measurement date to reflect the yield of a portfolio of high-quality bonds matched against the timing and amounts of projected future benefit payments.
At September 30, 2023, we are increasing our long-term rate of return assumption to 4.85% for pension plan assets. The major assumptions used in determining benefit obligations were as follows:
| | | | | | | | |
| Fiscal Year Ended
September 30, | Fiscal Year Ended
September 30, |
| 2023 | 2022 |
| Discount rate | 5.67 | % | 5.33 | % |
| Rate of compensation increases | 0.00 | % | 0.00 | % |
Pension Plan Assets
The Company maintains target allocation percentages among various asset categories based on an investment policy designed to achieve long-term objectives of return, while mitigating downside risk and considering expected cash flows. The Company’s investment policy is reviewed from time to time to ensure consistency with long-term objectives.
Plan assets distribution was as follows:
| | | | | | | | |
| Fiscal Year Ended
September 30, | Fiscal Year Ended
September 30, |
| 2023 | 2022 |
| Cash | 3.31 | % | 24.90 | % |
| Equity securities | 2.35 | | 6.20 | |
| Debt securities | 91.23 | | 49.50 | |
| Real estate mutual fund | 1.20 | | 5.90 | |
| Other | 1.91 | | 13.50 | |
| Total | 100.00 | % | 100.00 | % |
The fair value of total plan assets by asset category and fair value hierarchy levels as of September 30, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value as of
September 30, 2023 | | Fair Value Measurements at Reporting Date Using: |
| | Level 1 | | Level 2 | | Level 3 |
| Cash | $ | 431 | | | $ | 431 | | | $ | — | | | $ | — | |
| Fixed income securities: | | | | | | | |
| Investment grade corporate bonds | 14,184 | | | — | | | 14,184 | | | — | |
| Other types of investments: | | | | | | | |
| Multi-asset fund | 1,378 | | | — | | | 1,378 | | | |
| Total | $ | 15,993 | | | $ | 431 | | | $ | 15,562 | | | $ | — | |
The method of calculation of the fair value of each level of investment is described in Note 2 - Summary of Significant Accounting Policies.
The fair value of total plan assets by asset category and fair value hierarchy levels as of September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value as of
September 30, 2022 | | Fair Value Measurements at Reporting Date Using: |
| | Level 1 | | Level 2 | | Level 3 |
| Cash | $ | 409 | | | $ | 409 | | | $ | — | | | $ | — | |
| Fixed income securities: | | | | | | | |
| Investment grade corporate bonds | 4,408 | | | — | | | 4,408 | | | — | |
| Other types of investments: | | | | | | | |
| Multi-asset fund | 9,568 | | | — | | | 9,568 | | | — | |
| Total | $ | 14,385 | | | $ | 409 | | | $ | 13,976 | | | $ | — | |
The method of calculation of the fair value of each level of investment is described in Note 2 - Summary of Significant Accounting Policies.
Pension Funding and Payments
During the fiscal year ended September 30, 2023, the Company contributed $1,226 to the Pension Plan and does not expect to contribute any amounts to the Pension Plan within the next twelve months.
Estimated pension benefit payments expected to be paid in cash in each of the next five years and in the aggregate for the following five years thereafter are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
| Projected Benefit Payments | $ | 786 | | | $ | 661 | | | $ | 787 | | | $ | 985 | | | $ | 827 | | | $ | 4,142 | | | $ | 8,188 | |
Defined Contribution Plans
The Company has defined contribution benefit plans that cover its employees in the U.S., U.K. (the Group Personal Pension Plan) and the Netherlands. Defined contribution benefit expense for the twelve months ended September 30, 2023 and 2022 were $4,596 and $3,312, respectively.
10. OTHER OPERATING EXPENSE
Other operating expense consisted of the following: | | | | | | | | | | | |
| Fiscal Year Ended
September 30, |
| 2023 | | 2022 |
| Acquisition and integration costs | $ | 1,228 | | | $ | 16,120 | |
Restructuring costs1 | 4,625 | | | 8,564 | |
| Startup costs | 6,858 | | | 5,687 | |
| Other costs | 5,826 | | | 1,300 | |
Acquisition-related stock compensation costs2 | — | | | 23,014 | |
| $ | 18,537 | | | $ | 54,685 | |
1Restructuring costs represent costs incurred in connection with our site closures and site optimization strategy. See Note 11 – Restructuring and Assets Held for Sale for additional information.
2Refer to Note 3 - Business Combinations for further discussions around acquisition-related stock compensation costs related to the acquisition of Envigo.
11. RESTRUCTURING AND ASSETS HELD FOR SALE
During June 2022, the Company approved and announced a plan to close its facility in Cumberland, Virginia. Further, the Company’s restructuring and site optimization plan includes the following sites, which were identified for relocation of operations: Dublin, Virginia, Gannat, France, Blackthorn, U.K., RMS St. Louis, Missouri, Spain, Boyertown, Pennsylvania, and Haslett, Michigan.
For the fiscal years ended September 30, 2023 and 2022, the Company incurred expenses that qualified as exit and disposal costs under GAAP. For the fiscal year ended September 30, 2023, the costs were immaterial and the Company does not expect further material charges as a result of the closures and planned site consolidations. For the fiscal year ended September 30, 2022, costs included employee severance and other costs related to workforce reductions (“employee-related”) of $2,159 and other exit costs (“other”) of $5,351, which primarily related to inventory write-downs related to the exit of the Cumberland facility and costs to maintain the facilities until each facility had been exited. Exit and disposal costs were charged to other operating expense. During the fiscal year ended September 30, 2022, payments of $764 and $3,276 were made for employee-related and other costs, respectively. The remaining exit and disposal costs in fiscal 2022 were non-cash expenses. As of September 30, 2023 and 2022, the liability balance for exit and disposal costs that qualify as employee-related exit and disposal costs was $585 and $1,395, respectively. As of September 30, 2023, the property and equipment related to the facilities at Haslett, Cumberland, Gannat, Blackthorn and Spain were presented within assets held for sale.
Cumberland and Dublin
During June 2022, the Company approved and announced a plan to close its facility in Cumberland, Virginia (“Cumberland facility”) and to close and relocate its operations in Dublin, Virginia (“Dublin facility”) into its other existing facilities, as a part of the Company’s restructuring and site optimization plan. The Cumberland facility exit was also a part of the settlement, as further described in Note 16 – Contingencies. The Cumberland facility exit was completed in September 2022 and the Dublin facility transition was completed in November 2022. The Company determined that the carrying value exceeded the fair value of the real property at the Cumberland and Dublin facilities less costs to sell. As a result, asset impairment charges of $890 and $1,054 were recorded within the RMS reportable segment during the fiscal years ended September 30, 2023 and 2022, respectively. The real property of the Cumberland facility initially met the criteria for assets held for sale as of March 31, 2023 and continued to meet the criteria for assets held for sale as of September 30, 2023. The operations at both the Cumberland facility and the Dublin facility were within the RMS reporting segment.
Gannat, Blackthorn, Spain and RMS St. Louis
During the fiscal year ended September 30, 2023, the Company completed its consultation with employee representatives at the Gannat and Blackthorn facilities and the closures of both facilities were approved. The consolidation of operations at Gannat with the operations in Horst, the Netherlands was completed in June 2023, and the consolidation of the operations at the Blackthorn facility with the operations in Hillcrest, U.K. is expected to be complete by the end of March 2024. In July 2023, the Company decided to close its Spain facility. The exit of the facility in Spain was completed in September 2023 and was sold subsequent to year-end in November 2023. As of June 30, 2023, the real property of the Gannat and
Blackthorn facilities initially met the criteria for assets held for sale, the real property of the Spain facility initially met the criteria for assets held for sale as of September 30, 2023, and all three facilities continued to meet the criteria for assets held for sale as of September 30, 2023. The RMS St. Louis facility closed in June 2023 and the GEMS operations at the RMS St. Louis facility were relocated to the DSA St. Louis facility and other operational facilities. The operations at the Gannat, Blackthorn, Spain and RMS St. Louis facilities were within the RMS reportable segment.
Boyertown and Haslett
Prior to the acquisition of Envigo, the Boyertown and Haslett facilities were identified for relocation of operations to the Denver, Pennsylvania facility. The exits of the Boyertown and Haslett facilities were completed in March 2023. The Boyertown facility was sold in September 2023. The real property of the Haslett facility initially met the criteria for assets held for sale as of March 31, 2023, and continued to meet the criteria for assets held for sale as of September 30, 2023.
Israel
As of December 31, 2022, the assets and liabilities related to the Israel RMS and Israel CRS businesses (the “Israeli Businesses”) initially met the held for sale criteria and, in August 2023, the Company sold its ownership interest in the Israeli Businesses, which were previously reflected in the RMS reportable segment.
Consideration for the sale consisted of (i) $1,000 in cash, (ii) an excess cash adjustment of $316, (iii) real property valued at $3,700, and (iv) a promissory note receivable in the aggregate amount of $2,453. The promissory note bears interest at a rate of 5.00% per annum, with quarterly payments of interest and principal payments on the first anniversary of the closing date and at maturity on August 29, 2025. The sale includes the Company’s 100.00% ownership in Israel RMS and Israel RMS’s 62.50% ownership interest in Israel CRS. Prior to the sale, the management team owned a 37.50% non-controlling ownership position in Israel CRS. The gain of $1,377 on the sale is presented within other income (expense). The combined (loss) income before taxes of the Israeli Businesses for fiscal years ended September 30, 2023 and 2022, was $62 and $4,245, respectively.
12. LEASES
Right-of-use ("ROU") lease assets and lease liabilities that are reported in the Company’s consolidated balance sheets are as follows:
| | | | | | | | | | | |
| September 30, 2023 | | September 30, 2022 |
| Operating ROU assets, net | $ | 38,866 | | | $ | 32,489 | |
| | | |
| Current portion of operating lease liabilities | 10,282 | | | 7,982 | |
| Long-term operating lease liabilities | 29,614 | | | 24,854 | |
| Total operating lease liabilities | $ | 39,896 | | | $ | 32,836 | |
The increase in right-of-use lease assets and lease liabilities in the twelve months ended September 30, 2023 was primarily due to entering into leases for two facilities in Maryland. The increase in right-of-use lease assets and lease liabilities in the twelve months ended September 30, 2022 was primarily attributable to acquisitions as described in Note 3 - Business Combinations and further increased due to entering into the lease for our facility in Rockville, Maryland.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s leases for the twelve months ended September 30, 2023 and 2022 were:
| | | | | | | | | | | |
| Fiscal Year Ended
September 30, |
| 2023 | | 2022 |
| Operating lease costs: | | | |
| Fixed operating lease costs | $ | 11,790 | | | $ | 9,415 | |
| Short-term lease costs | 175 | | | 108 | |
| Lease income | (3,039) | | | (2,067) | |
The Company serves as lessor to a lessee in six facilities. The gross rental income and underlying lease expense are presented net in the Company’s consolidated statements of operations. The gross rent receivables and underlying lease liabilities are presented gross in the Company’s consolidated balance sheets.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Fiscal Year Ended
September 30, |
| 2023 | | 2022 |
| Cash flows included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 11,252 | | | $ | 8,540 | |
| | | |
| Non-cash lease activity: | | | |
| ROU assets obtained in exchange for new operating lease liabilities | $ | 15,831 | | | $ | 31,697 | |
The weighted average remaining lease term and discount rate for the Company’s operating leases as of September 30, 2023 and 2022 were:
| | | | | | | | | | | |
| Fiscal Years Ended
September 30, |
| 2023 | | 2022 |
| Weighted-average remaining lease term (in years) | | | |
| Operating lease | 6.71 | | 5.58 |
| Weighted-average discount rate (in percentages) | | | |
| Operating lease | 9.36 | % | | 6.90 | % |
Lease duration was determined utilizing renewal options that the Company is reasonably certain to execute.
As of September 30, 2023, maturities of operating lease liabilities for each of the following five years and a total thereafter were as follows:
| | | | | |
| Operating Leases |
| 2024 | $ | 10,797 | |
| 2025 | 9,060 | |
| 2026 | 7,995 | |
| 2027 | 6,119 | |
| 2028 | 4,752 | |
| Thereafter | 18,531 | |
| Total minimum future lease payments | 57,254 | |
| Less interest | (17,358) | |
| Total lease liability | 39,896 | |
13. STOCKHOLDERS EQUITY AND LOSS PER SHARE
All values within this Note 13 are not presented in thousands.
Stockholders’ Equity
Preferred Shares
As of September 30, 2023 and 2022, no preferred shares were outstanding.
Increase in Authorized Shares and Equity Plan Reserve
On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s Second Amended and Restated Articles of Incorporation to increase the number of authorized shares from 20,000,000 shares, consisting of 19,000,000 common shares and 1,000,000 preferred shares, to 75,000,000 shares, consisting of 74,000,000 common shares and 1,000,000 preferred shares. Approval of this matter by the Inotiv shareholders was a condition to the closing of the Envigo acquisition. The amendment was effective on November 4, 2021. On November 4, 2021, the Company’s shareholders approved an amendment to the Company’s 2018 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares available for awards thereunder by 1,500,000 shares and to make certain corresponding changes to certain limitations in the Equity Plan. See Note 14 - Stock-Based Compensation for further information about the Equity Plan.
Stock Issued in Connection with Acquisitions
During the fiscal years ended September 30, 2023 and 2022, 0 and 9,573,210 common shares, respectively, were issued in relation to acquisitions. See Note 3 – Business Combinations for further discussion of consideration for each acquisition.
Loss Per Share
The Company computes basic loss per share using the weighted average number of common shares outstanding. The Company computes diluted earnings per share using the if-converted method for preferred shares and convertible debt, if any, and the treasury stock method for stock options and restricted stock units.
| | | | | | | | | | | |
(in thousands) | Fiscal Years Ended
September 30, |
| 2023 | | 2022 |
Numerator: | | | |
| Consolidated net loss | $ | (104,902) | | | $ | (337,262) | |
| Less: Net income (loss) attributable to noncontrolling interests | 238 | | (244) |
| Net loss attributable to common shareholders | (105,140) | | | (337,018) | |
| | | |
Denominator: | | | |
| Weighted-average shares outstanding - Basic and Diluted | 25,641 | | 24,354 |
Anti-dilutive common share equivalents (1) | 5,763 | | 5,540 |
(1) Anti-dilutive common share equivalents are comprised of stock options, restricted stock units, restricted stock awards and 3,040,268 shares of common stock issuable upon conversion in connection with the convertible debt entered into on September 27, 2021.These common share equivalents were outstanding for the periods presented, but were not included in the computation of diluted loss per share for those periods because their inclusion would have had an anti-dilutive effect.
Accumulated Other Comprehensive Loss
Within the statement of operations, foreign exchange gains and losses are recognized as a result of translations of non-functional currencies. In relation to the translation into U.S. dollars, except for defined benefit pension costs of the Pension Plan, the assets and liabilities of foreign operations are translated using the current exchange rate. For those operations, changes in exchange rates generally do not affect cash flows; therefore, resulting translation adjustments are made in shareholders' equity rather than in the consolidated statements of operations. The Pension Plan relates to a U.K. subsidiary, which currently records a valuation allowance against its net deferred tax assets.
As a result, income tax effects on the net activity have not been presented related to each component of other comprehensive loss for the fiscal years ended September 30, 2023 and 2022.
14. STOCK-BASED COMPENSATION
Summary of Equity Plans and Activity
The Company has stock-based compensation plans under which employees and non-employee directors may be granted stock-based awards such as stock options, restricted stock (“RSAs”), and restricted stock units (“RSUs”).
During fiscal years 2023 and 2022, the following were share-based awards made to certain employees and their general terms and conditions are:
•Stock options, which entitle the holder to purchase a specified number of shares of common stock at an exercise price equal to the closing market price of common stock on the date of grant; typically vest over 3 years; and typically expire 10 years from date of grant or 30 days post-termination. In the case of the options issued in relation to the Envigo acquisition, the options expire 10 years from date of grant or 1 year post-termination.
•RSAs, which are shares granted at no cost on the grant date and typically vest over 2 years. With respect to RSAs, recipients do have voting rights on the stock during the vesting period.
•RSUs, which represent an unsecured promise to grant at no cost a set number of shares of common stock upon the completion of the vesting schedule, and typically vest from 1 to 5 years. With respect to RSUs, recipients do not have voting rights on the stock during the vesting period.
In March 2018, the Company's shareholders approved the amendment and restatement of the 2008 Stock Option Plan in the form of the Amended and Restated 2018 Equity Incentive Plan (as amended, the “Equity Plan”). Since March 2018, the Equity Plan has been amended three times:
(i)in March 2020, the Company's shareholders approved an amendment to increase the number of shares issuable under the Equity Plan by 700,000 shares and to make corresponding changes to the number of shares issuable as incentive options and as RSAs or RSUs;
(ii)in November 2021, the Company's shareholders approved an amendment to the Equity Plan to increase the number of shares available for awards thereunder by 1,500,000 shares and to make certain corresponding changes to the Equity Plan; and
(iii)in March 2022, the Company's shareholders approved an amendment to remove certain limitations on the number of stock options, stock appreciation rights, RSAs and RSUs that could be awarded to an employee participant in any fiscal year.
The Company currently grants equity awards from the Equity Plan. At September 30, 2023, 362,361 shares remained available for grants under the Equity Plan.
The Company recognizes expense for all awards subject to graded vesting using the straight-line attribution method. The Company adjusts stock-based compensation expense for forfeitures in the period that a forfeiture occurs. The Company expenses the estimated fair value of stock options over the vesting periods of the grants.
The following table provides stock-based compensation by the financial statement line item in which it is reflected:
| | | | | | | | | | | |
| Fiscal Years Ended
September 30, |
| 2023 | | 2022 |
| General and administrative | $ | 7,844 | | | $ | 5,960 | |
| Other operating expense | — | | | 23,014 | |
| Stock-based compensation, before income taxes | 7,844 | | | 28,974 | |
| Provision for income taxes | (311) | | | (5,123) | |
| Stock-based compensation, net of income taxes | $ | 7,533 | | | $ | 23,851 | |
No stock-based compensation related costs were capitalized in fiscal years 2023 and 2022.
The weighted-average assumptions used to compute the fair value of options granted under the Black-Scholes model for the fiscal years ended September 30, 2023 and 2022 were as follows:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Risk-free interest rate | 4.29 | % | | 1.24 | % |
| Dividend yield | — | % | | — | % |
| Volatility of the expected market price of the Company’s common shares | 100.59 | % | | 76.62 | % |
| Expected life of the options (years) | 3.57 | | 3.24 |
The volatility assumption used to determine the fair values of options granted for fiscal years 2023 and 2022 is based on historical stock price activity. Further, the assumptions presented for fiscal years 2023 and 2022 are inclusive of the options issued in relation to the Envigo acquisition. Refer to Note 3 - Business Combinations for further information related to those options.
A summary of the Company’s stock option activity and related information for the year ended September 30, 2023, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life | | Aggregate
Intrinsic
Value |
| (in thousands) | | | | (in years) | | (in thousands) |
| Outstanding as of September 30, 2022 | 1,949 | | $ | 12.54 | | | | | |
| Granted | 166 | | 8.42 | | | | | | |
| Exercised | (43) | | 2.53 | | | | | | |
| Cancelled | (325) | | 13.89 | | | | | | |
| Outstanding as of September 30, 2023 | 1,747 | | $ | 12.06 | | | 6.59 | | $ | 474 | |
| Exercisable as of September 30, 2023 | 1,310 | | $ | 10.50 | | | 5.90 | | $ | 474 | |
| Expected to vest as of September 30, 2023 | 437 | | $ | 16.73 | | | 8.67 | | $ | — | |
The weighted-average grant date fair value of stock options granted was $5.72 and $32.56 for fiscal years 2023 and 2022, respectively.
The total intrinsic value of options exercised during fiscal years 2023 and 2022 was $230 and $1,830, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the exercise price.
A summary of the Company’s RSA activity for the year ended September 30, 2023 is as follows:
| | | | | | | | | | | |
| Restricted
Shares (in thousands) | | Weighted-
Average
Grant Date
Fair Value |
| Outstanding (non-vested) – September 30, 2022 | 149 | | $ | 16.09 | |
| Granted | 16 | | $ | 6.56 | |
| Vested | (107) | | $ | 11.20 | |
| Forfeited | (17) | | $ | 17.60 | |
| Outstanding (non-vested) – September 30, 2023 | 39 | | $ | 25.03 | |
As of September 30, 2023, the total unrecognized compensation cost related to unvested restricted shares was $124 and is expected to be recognized over a weighted-average service period of 0.70 years. The total fair value of the restricted shares granted during the fiscal years ended September 30, 2023 and 2022 was $102 and $1,197, respectively. The total fair value of restricted shares vested during the fiscal years ended September 30, 2023 and 2022 was $620 and $4,580, respectively.
A summary of the Company’s RSUs for the year ended September 30, 2023 is as follows:
| | | | | | | | | | | |
| Restricted
Stock Units (in thousands) | | Weighted-
Average
Grant Date
Fair Value |
| Outstanding (non-vested) – September 30, 2022 | 551 | | $ | 23.82 | |
| Granted | 546 | | $ | 7.16 | |
| Vested | (137) | | $ | 24.28 | |
| Forfeited | (23) | | $ | 12.67 | |
| Outstanding (non-vested) – September 30, 2023 | 936 | | $ | 14.29 | |
As of September 30, 2023, the total unrecognized compensation cost related to unvested restricted stock units was $10,141 and is expected to be recognized over a weighted-average service period of 2.54 years. The total fair value of the restricted stock units granted during the fiscal years ended September 30, 2023 and 2022 was $3,908 and $13,067, respectively. The
total fair value of restricted stock units vested during the fiscal years ended September 30, 2023 and 2022 was $940 and $0, respectively.
15. INCOME TAXES
The components of loss before income taxes are presented below:
| | | | | | | | | | | |
| 2023 | | 2022 |
| | | |
| Loss before income taxes: | | | |
| U.S. | $ | (121,245) | | | $ | (338,565) | |
| Non-U.S. | (2,997) | | | (13,884) | |
| Total loss before income taxes | $ | (124,242) | | | $ | (352,449) | |
Significant components of our deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
| As of September 30, |
| 2023 | | 2022 |
| Deferred tax assets: | | | |
| Inventory | $ | 2,792 | | | $ | 1,461 | |
| Allowance for credit losses | 1,487 | | | 1,288 | |
| Accrued compensation and vacation | 515 | | | 2,574 | |
| Domestic net operating loss carryforwards | 8,813 | | | 8,837 | |
| Foreign net operating loss carryforwards | 11,302 | | | 8,276 | |
| Foreign tax credit carryforwards | 2,811 | | | 769 | |
| Unrealized foreign exchange | 400 | | | 1,191 | |
| Capital loss carryforward | 1,693 | | | — | |
| Stock compensation expense | 3,059 | | | 2,999 | |
| Business Interest Limitation | 10,615 | | | 3,137 | |
| Lease liabilities | 9,878 | | | 9,071 | |
| Goodwill | 9,468 | | | — | |
| Other | 356 | | | 608 | |
| Total deferred tax assets | 63,189 | | | 40,211 | |
| | | |
| Deferred tax liabilities: | | | |
| Prepaid expenses | (643) | | | (483) | |
| Lease ROU assets | (9,511) | | | (8,941) | |
| Accreted interest on convertible debt | (7,170) | | | (8,586) | |
| Basis difference for property and equipment | (12,689) | | | (12,300) | |
| Basis difference for intangible assets | (66,865) | | | (76,307) | |
| Goodwill | — | | | (267) | |
| Total deferred tax liabilities | (96,878) | | | (106,884) | |
| | | |
| Total net deferred tax liabilities | (33,689) | | | (66,673) | |
| | | |
| Valuation allowance for net deferred tax assets | (16,375) | | | (10,354) | |
| | | |
| Net deferred tax liabilities | $ | (50,064) | | | $ | (77,027) | |
Significant components of the benefit for income taxes were as follows for the years ended September 30, 2023 and 2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Current: | | | |
| Federal | $ | 4,490 | | | $ | 61 | |
| State and local | 967 | | | 496 | |
| Foreign | 944 | | | 1,674 | |
| Deferred: | | | |
| Federal | (20,560) | | | (12,494) | |
| State and local | (4,807) | | | (4,911) | |
| Foreign | (374) | | | (13) | |
| Income tax benefit | $ | (19,340) | | | $ | (15,187) | |
The effective income tax rate on continuing operations varied from the statutory federal income tax rate as follows:
| | | | | | | | | | | |
| Fiscal Years Ended September 30 |
| 2023 | | 2022 |
| Federal statutory income tax rate | 21.0 | % | | 21.0 | % |
| Increases (decreases): | | | |
| State and local income taxes, net of Federal tax benefit, if applicable | 3.3 | % | | 2.6 | % |
| Loss on Fair Value Remeasurement of Embedded Derivative | — | % | | (2.9) | % |
| Goodwill | (3.5) | % | | (16.4) | % |
| Impact of foreign operations | (0.3) | % | | 0.3 | % |
| Sale of Israel | (0.8) | % | | — | % |
| Other | 1.1 | % | | (0.7) | % |
| Valuation allowance changes | (5.2) | % | | 0.4 | % |
| Effective income tax rate | 15.6 | % | | 4.3 | % |
U.S. GAAP requires that valuation allowances should be established against deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. The Company assesses its deferred income taxes to determine if valuation allowances are required or should be adjusted. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
The Company’s U.S. tax reporting group has a cumulative three-year loss. The valuation allowance related to the Company’s U.S. tax reporting group as of September 30, 2023 and 2022 was $4,618 and $0, respectively, and the valuation allowance related to the Company's non-U.S. entities was $11,757 and $10,354, respectively, as the Company does not believe that certain deferred tax assets will be realized in the foreseeable future. Payments made in fiscal years 2023 and 2022 for income taxes, net of refunds, amounted to $7,146 and $479, respectively.
The Company’s non-U.S. subsidiaries’ cumulative undistributed earnings, projected as of September 30, 2023, are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or withholding taxes has been made in the accompanying consolidated financial statements. Further, a determination of the unrecognized deferred tax liability for the amount indefinitely reinvested is not practicable due to the complexities in the tax laws and assumptions we would have to make. As of November 5, 2021, with the acquisition of Envigo, the Company adopted an accounting policy regarding the treatment of taxes due on future inclusion of non-U.S. income in U.S. taxable income under the Global Intangible Low-Taxed Income provisions as a current period expense when incurred. Therefore, no deferred tax related to these provisions has been recorded as of September 30, 2023.
At September 30, 2023, the Company had domestic net operating loss carryforwards for federal tax purposes of $23,927, all of which may be carried forward indefinitely. State and local loss carryforwards totaled approximately $67,591. The majority expire from September 30, 2028 through 2042; however, approximately $21,911 may be carried forward
indefinitely, as they relate to states conforming to the provisions of the Tax Cuts and Jobs Act which allowed for an indefinite carryforward period of losses generated after December 31, 2017. The Company had non-U.S. net operating loss carryforwards of $44,412, which have been fully offset by valuation allowance. These losses may be carried forward indefinitely.
The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon regulatory examination based on the technical merits of the position. The amount of the benefit for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position. As of September 30, 2023, there were no material uncertain tax positions based on any federal or state tax position. In fiscal year 2022, the Company established an uncertain tax position of $1,861 in accordance with ASC 805-740 to directly offset acquired foreign net operating losses of $2,222 within the foreign net deferred tax liability. The position was settled during fiscal year 2023.
The Company is no longer subject to U.S. Federal tax examinations for years before 2018 or state and local for years before 2017, with limited exceptions. For federal purposes, the tax attributes carried forward could be adjusted through the examination process and are subject to examination 3 years from the date of utilization.
16. CONTINGENCIES
Litigation
Envigo RMS, LLC (“Envigo RMS”) is a defendant in a purported class action and a related action under California’s Private Attorney General Act of 2004 (“PAGA”) brought by Jacob Greenwell, a former non-exempt employee of Envigo RMS, on June 25, 2021 in the Superior Court of California, Alameda County. The complaints allege that Envigo RMS violated certain wage and hour requirements under the California Labor Code. PAGA authorizes private attorneys to bring claims on behalf of the State of California and aggrieved employees for violations of California’s wage and hour laws. The class action complaint seeks certification of a class of similarly situated employees and the award of actual, consequential and incidental losses and damages for the alleged violations. The PAGA complaint seeks civil penalties pursuant to the California Labor Code and attorney’s fees. On June 2, 2023, Envigo RMS and the plaintiff signed a Memorandum of Understanding (“MOU”) that sets forth the parties’ intent to settle these matters for $795 which includes attorneys’ fees. The MOU provides that the parties will negotiate and enter into a definitive settlement agreement, which will be subject to court approval. The MOU contains no admission of liability or wrongdoing by Envigo RMS. The MOU provides that, if the settlement is approved by the court, the settlement amount would be paid in four quarterly installments, with the first one to be funded after the court’s final approval of the settlement, and the following ones in the three subsequent quarters. While the timeline for final court approval is not yet determined, the Company took a reserve equal to the proposed settlement amount, which is included in accrued expenses and other liabilities.
On June 23, 2022, a putative securities class action lawsuit was filed in the United States District Court for the Northern District of Indiana, naming the Company and Robert W. Leasure and Beth A. Taylor as defendants, captioned Grobler v. Inotiv, Inc., et al., Case No. 4:22-cv-00045 (N.D. Ind.). The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and Rule 10b-5 promulgated thereunder, based on alleged false and misleading statements and material omissions regarding the Company’s acquisition of Envigo RMS and its regulatory compliance. On September 12, 2022, Oklahoma Police Pension and Retirement System was appointed by the Court as lead plaintiff. Thereafter, on November 14, 2022, the lead plaintiff filed an amended complaint against the same defendants, in addition to John E. Sagartz and Carmen Wilbourn, that asserted the same claims along with a claim under Section 14(a) of the Exchange Act. On November 23, 2022, the lead plaintiff filed a further amended complaint against the aforementioned defendants asserting the same claims as the amended complaint and further alleging that false and misleading statements and material omissions were made concerning the Company’s non-human primate business. The purported class in the operative complaint includes all persons who purchased or otherwise acquired the Company’s common stock between September 21, 2021 and November 16, 2022, and the complaint seeks an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief. On January 27, 2023, the defendants filed a motion to dismiss the amended complaint. That motion has been fully briefed since April 28, 2023, and is currently pending. While the Company cannot predict the outcome of this matter, the Company believes the class action to be without merit and plans to vigorously defend itself. We cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for this matter.
On September 9, 2022, a purported shareholder derivative lawsuit was filed in the United States District Court for the Northern District of Indiana, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Grobler v. Robert W. Leasure, et al., Case No. 4:22-cv-00064 (N.D. Ind.). The derivative action asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of
Section 14(a) of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance. On November 15, 2022, the Court entered an order staying the derivative action pending a resolution of a motion to dismiss in the securities class action.
On January 4, 2023, an additional shareholder derivative lawsuit was filed in the United States District Court for the Northern District of Indiana, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Burkhart v. Robert W. Leasure, et al., Case No 4:23-cv-00003 (N.D. Ind.). The derivative action asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets, as well as violations of Section 10(b), 21D and 14(a) of the Securities Exchange Act of 1934 arising out of the Company’s acquisition of Envigo and its regulatory compliance. On May 8, 2023, the Court entered an order staying the derivative action pending a resolution of a motion to dismiss in the securities class action.
On April 20, 2023, an additional shareholder derivative lawsuit was filed in the State of Indiana Tippecanoe County Circuit Court, naming Robert W. Leasure, Beth A. Taylor, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Whitfield v. Gregory C. Davis, et al., Case No. 79C01-2304-PL-000048 (Tippecanoe Circuit Court). The derivative action asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and waste of corporate assets arising out of the Company’s acquisition of Envigo and its regulatory compliance, and the Company’s non-human primate business. On June 20, 2023, the Court entered an order staying the derivative action pending resolution of a motion to dismiss in the securities class action.
On June 2, 2023, an additional shareholder derivative lawsuit was filed in the Indiana Commercial Court of Marion County, naming Robert W. Leasure, Beth A. Taylor, Carmen Wilbourn, Gregory C. Davis, R. Matthew Neff, Richard A. Johnson, John E. Sagartz, Nigel Brown, and Scott Cragg as defendants, and the Company as a nominal defendant, captioned Castro v. Robert W. Leasure, et al., Case No. 49D01-2306-PL-022213 (Marion Superior Court 1). The derivative action asserts claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets arising out of the Company’s acquisition of Envigo and its regulatory compliance, and the Company’s NHP business. On August 24, 2023, this derivative action was transferred to the Tippecanoe County Circuit Court and consolidated with the derivative action captioned Whitfield v. Gregory C. Davis, et al., Case No. 79C01-2304-PL-000048 (Tippecanoe Circuit Court). The consolidated action remains stayed pending resolution of a motion to dismiss in the securities class action.
While the Company cannot predict the outcome of these matters, the Company believes the derivative actions to be without merit and plans to vigorously defend itself. We cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters.
The Company is party to certain other legal actions arising out of the normal course of its business. In management's opinion, none of these actions will have a material effect on the Company's operations, financial condition or liquidity.
Government Investigations and Actions
The Company is subject to and/or involved in various government investigations, inquiries and actions, including those described below. Given their inherent uncertainty, the Company cannot predict the duration or outcome of the pending matters described below. An adverse outcome of any of the following matters could have a material adverse impact on the Company’s operations, financial condition, operating results and cash flows.
During the period from July 2021 through March 2022, Envigo RMS’s Cumberland facility was inspected on several occasions by the U.S. Department of Agriculture (“USDA”). USDA issued inspection reports with findings of non-compliance with certain USDA laws and regulations. Envigo RMS formally appealed certain of the findings, and made multiple remediations and improvements at the Cumberland facility, of which it kept USDA apprised.
On May 18, 2022, the U.S. Department of Justice (“DOJ”), together with federal and state law enforcement agents, executed a search and seizure warrant on the Cumberland facility. The warrant was issued by the U.S. District Court for the Western District of Virginia on May 13, 2022. In 2022, EGSI and Inotiv received grand jury subpoenas and other requests from the U.S. Attorney’s Office for the Western District of Virginia (“USAO-WDVA”) for documents and information related to the companies’ compliance with the Animal Welfare Act (“AWA”), the Clean Water Act (“CWA”), the Virginia State Water Control Law and local pretreatment requirements from January 2017 to present. On July 23, 2023, EGSI and Inotiv received a grand jury subpoena from USAO-WDVA for documents related to the Cumberland facility’s compliance with the Clean Air Act, Virginia Air Pollution Control Laws and Regulations, and local requirements from January 1, 2017 to present. Also on July 23, 2023, Inotiv received a grand jury subpoena from USAO-WDVA for documents and information related to the Company’s Alice, Texas facilities’ compliance with the CWA, the Texas State Water Control Law, and local pretreatment requirements from January 1, 2020 to present. Certain current and former employees have also
received subpoenas for testimony and documents related to these matters. The Company is continuing to cooperate with USAO-WDVA and other involved authorities, and is evaluating the potential to resolve the matter. While an unfavorable outcome is probable, the Company cannot predict whether or when it will be able to resolve the matter or reasonably estimate the range of loss.
As previously disclosed, on May 19, 2022, a civil complaint was filed by DOJ against Envigo RMS in the U.S. District Court for the Western District of Virginia alleging violations of the AWA at the Cumberland facility. On July 15, 2022, the court approved a settlement entered into by Envigo RMS, DOJ and the USDA in this civil case, which also comprised USDA’s administrative claims against Envigo RMS for the Cumberland facility, and the civil and administrative complaints were dismissed with prejudice on September 14, 2022. This matter is now fully resolved.
On June 15, 2021, EGSI, a subsidiary of the Company acquired in the Envigo acquisition, received a grand jury subpoena requested by the U.S. Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) for the production of documents related to the procurement of NHPs from foreign suppliers for the period January 1, 2018 through June 1, 2021. The subpoena relates to an earlier grand jury subpoena requested by the USAO-SDFL and received by EGSI’s predecessor entity, Covance Research Products, in April 2019. Envigo acquired EGSI from Covance, Inc., a subsidiary of Laboratory Corporation of America Holdings, in June 2019. As of the filing date of this report, the Company has not received any additional subpoenas related to this matter.
On January 27, 2022, EGSI acquired OBRC, which owns and operates a primate quarantine and holding facility located near Alice, Texas. In 2019, OBRC received grand jury subpoenas requested by the USAO-SDFL requiring the production of documents and information related to its importation of NHPs into the United States. On June 16, 2021, OBRC received a grand jury subpoena requested by the USAO-SDFL requiring the production of documents related to the procurement of NHPs from foreign suppliers for the period January 1, 2018 through June 1, 2021. The OBRC purchase agreement provides for indemnification of EGSI and its officers, directors and affiliates by the Seller, Orient Bio, Inc., for liabilities resulting from actions, inactions, errors or omissions of Orient Bio, Inc. or OBRC related to any period prior to the closing date. As of the filing date of this report, the Company has not received any additional subpoenas related to this matter.
On November 16, 2022 the Company disclosed that employees of the principal supplier of NHPs to the Company, along with two Cambodian government officials, have been criminally charged by the USAO-SDFL with conspiring to illegally import NHPs into the United States from December 2017 through January 2022 and in connection with seven specific imports between July 2018 and December 2021.
Consistent with Company policy, the Company is cooperating with USAO-SDFL in connection with the matters described herein.
On May 23, 2023, Inotiv received a voluntary request from the U.S. Securities and Exchange Commission (“SEC”) seeking documents and information for the period December 1, 2017 to the present regarding the Company, EGSI, and OBRC’s importation of NHPs from Asia, including information relating to whether their importation practices complied with the U.S. Foreign Corrupt Practices Act. The Company is cooperating with the SEC.
17. SUBSEQUENT EVENTS
On December 5, 2023, the Company entered into a transition services agreement with Vanguard Supply Chain Solutions ("VSCS"). Inotiv will be partnering with VSCS, one of the Company’s current providers of transportation services, to enable the in-house integration of Inotiv’s North American transportation operations. Through September 30, 2023, the Company included the operating results in our consolidated statement of operations, as VSCS was accounted for as a variable interest entity. The Company is assessing the transition for accounting and tax impacts, which would be included in the quarterly report for quarter ending December 31, 2023.