Greetings and welcome to Inotiv Inc.'s Third Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kalle Ahl of The Equity Group. Thank you, please go ahead.

Thank you, Donna and good afternoon everyone. Inotiv, Inc.’s third quarter fiscal 2021 financial results were released today after the market closed. A copy of the earnings release can be found in the Investors section of the Company's website at www.inotivco.com. As a matter of formality, I need to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the Company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements and the Company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the Company's SEC filings for further guidance on this matter. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures is included in the Company's financial results press release and corresponding Form 8-K. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz, Chief Strategy Officer. Bob will begin with some opening remarks after which Beth will present a summary of the Company's financial results. Then, we will open the call for questions. Now, it's my pleasure to turn the call over to Bob.

All right, thank you, Kalle and good afternoon to everyone. Thank you for joining us today. This quarter we continued to make significant progress executing our strategy to build a complete suite of contract research services to expand the entire drug discovery and preclinical development continuum. With expanded in-house capabilities we increasingly are engaging clients earlier in the drug discovery process and serving their needs more comprehensively during the full journey to clinical development. Our recent success has been supported by three strategic growth pillars. One is the acquisitions our strategic assets, two the expansion of existing operations and services, and three focus of startup with new operations and services. First, I'll talk about the acquisitions, regarding the acquisitions. This quarter we meaningfully enhanced our service offerings, scaled Inotiv's business with the acquisitions of HistoTox Labs and Bolder BioPATH which closed on April 30 and May 3, respectively. These acquisitions now comprise our Boulder Colorado operations and both delivered strong debut performances for Inotiv, contributing approximately $4.3 million combined revenue during May and June 2021, which corresponds to an annualized revenue run rate of approximately $25.8 million. Strategically the Bolder acquisitions expand our histopathology and nonclinical pharmacology services are bringing us highly complementary client base predominantly consisting of emerging biopharma companies, many of which focus on cell and gene therapy. We are pleased with the progress of the integration of HistoTox and Bolder BioPATH and we are already capitalizing on existing cross-selling opportunities that will further bolster Inotiv's overall growth. We are very optimistic that these acquisitions will create substantial value for our clients and shareholders much likely accomplished with the purchase of Seventh Wave in July 2018, Smithers Avanza in May 2019 and Pre-Clinical Research Services in December 2019. After the quarter ended, we also announced the acquisition of…

Thanks Bob. Good afternoon. In the third quarter of fiscal 2021, our revenue increased 45.2% to $22.9 million from $15.8 million in the comparable prior year period, driven by internal growth of $2.9 million and two months of incremental revenue contribution for HistoTox Labs and Bolder BioPATH totaling $4.3 million. Service revenue -- Service segment revenue in the third quarter of fiscal 2021 increased 47.6% to $21.9 million from $14.9 million in the comparable prior year period. Service gross margin increased to 33% in the third quarter of fiscal 2021 from 31.9% in the comparable prior year period, reflecting the greater utilization of recently expanded capacity. Product segment revenue increased 6%, $968,000 in the third quarter of fiscal 2021 from $913,000 in the comparable prior year period, reflecting increase in analytical instruments which was partially offset by decrease in Culex in-vivo sampling systems. Product gross margin increased to 43.7% in the third quarter of fiscal 2021 from 35.6% in the comparable prior year period, driven by expense reductions implemented in the last half of fiscal year 2020 and improved margins on existing sales. Operating loss in the third quarter of fiscal 2021 totaled $1.7 million compared to an operating loss of $477,000 in the prior year period reflecting increased strategic investments in operating expenses to support future revenue growth including $890,000 [ph] of incremental acquisition and integration cost, $404,000 of higher non-cash stock compensation expense and $59,000 of higher start-up costs. This quarter's growth-oriented investment in G&A includes recruiting and relocation expense, higher compensation expense including non-cash stock compensation and transaction costs related to acquisitions of HistoTox Labs and Bolder BioPATH. All combined, adjusted corporate unallocated G&A, much of which was growth oriented, totalled approximately 13.5% of revenue in the third quarter of fiscal 2021 compared to approximately 16.6% of…

Thank you. [Operator Instructions] Our first question is coming from Kyle Bauser of Colliers Securities. Please go ahead.

Great. Hi everyone, great updates and congrats on phenomenal results again. Maybe I'll start with margin contribution from the Bolder and HistoTox acquisitions. I know you spell out the sales contributions from both firms for the two months, which were well above our estimates, but can you talk about the margin contribution and how we might target EBITDA margins over the coming quarters as well?

Hi Kyle, this is Bob, and yes, we gave the sales, yes, I think it is 25.8, I believe. We generally don't give margin contributions by site, but then since we just acquired these sites, I'm obviously well aware of it. Well we're what we what we expected. The margin contribution, the EBITDA contribution from both bottom lines is about 32%. So I think the sales and the contributions exceeded our original expectations and we're very pleased with that.

Great, appreciate that, and I appreciate the breakout of unallocated G&A in the press release. It looks like it bumped up a little bit from the acquisitions, recruiting, relocation, et cetera. Can you kind of speak about G&A, just on a macro level how you're thinking about it, where you think it can go, and how much leverage we could get there with scale?

Well, I think as I've said in the past, I believe our unallocated corporate G&A will come down to 6% to 7% from a reoccurring standpoint. We do have a lot going on in our G&A right now, as we are very active -- have been very active raising capital. We've been very active in the M&A market, which generated some additional fees, consulting fees, and M&A activity fees. And then we have also started new businesses, and we've recruited leaders for those businesses. So I believe that this time we have tried to in our release separate out of some of those service segment business and separate out some of the, what are the startup costs, and what are the M&A integration costs, so we can do a little bit better job probably picking out what's reoccurring and what's not reoccurring in the unallocated corporate G&A. At this time, we think this is a great opportunity for us to grow. We believe we can grow faster than we have and to do that we're going to need to buy capacity and build capacity, and build services and that's what we are focused on doing.

Got it, definitely, and maybe you could talk a little bit about what you're targeting for an organic growth rate, and if we layer in inorganic growth from M&A, what sort of incremental amount could we get on top of that? I know the underlining biotech market in terms of R&D spend is typically around 20%, just kind of curious how that's looking and what you're targeting?

In terms of our organic growth and inorganic growth?

Yes.

Well, I think the last three years we have been in excess of 35%. I don’t, we've not really given any go forward information, but I think that that is what I think we're on a run rate to do about that this year again. And I think continuing that will obviously be something that we're expecting to do. So other than that I don't think we give really, any go forward guidance, and I can't really project the inorganic growth because I'd be projecting the acquisitions and I don't think we can give any M&A guidance on our strategy other than that, we're going to remain active.

No, that makes sense, and maybe just on the M&A strategy, again in general terms, maybe you could just talk about how you're prioritizing targets? How many do you typically examine at any given time? And, if you find a company with similar corporate culture, are you prioritizing that over, maybe expanding the geographic footprint, just kind of wondering how you're prioritizing M&A in general?

Well, let's say the corporate culture providing the same mindset that we have, providing service to a client and corporate culture is very critical and how could we achieve our goals with that acquisition. We want that acquisition to make sure that they very much believe in our strategy. And you will note by the last couple that we did, the sellers took stock back in our company. So obviously, they're a big believer in what we are doing, and we'd like to like them bet on our future also. So, any one time I -- we're looking at multiple things, talking to multiple people. But to give a certain number I hate to do that, but I will tell you that we've got, as you can see we've developed quite a team to be able to do multiple things at once. And it's great to have these team members on board to be able to stretch ourselves a little further to look at more things, do more things, startup more things, all simultaneously. This is no longer a wonder to me. I am sure this is a fairly deep team of talented people who are really committed to looking at how we can grow as well as continue to take care of what we have acquired, and what we've put together. So right now, I know that we're working at a pretty quick pace. I don't know if that's always sustainable, but I'm really pleased with the group that we have and the commitment that they've made and what they've been able to accomplish.

Yes, certainly a lot going on, I'm wondering when you find time to sleep over there, the book-to-bill ratio 1.5. Again, I guess, how sustainable is that or was that artificially high because of the Bolder and HistoTox acquisitions maybe not getting up to 100%. I am just kind of curious how we should think about that going forward?

I will let -- the Bolder operations the work is a little different, comes and goes pretty quickly. So we don't have as usually, that doesn't have as big a backlog as the remaining operations. So most of the book-to-bill came in the arena without Bolder. So, if you were to back up Bolder and you looked at the book-to-bill, I think it was closer to 17. It wasn't, I would have never projected that we could have done 15 on that kind of growth that we had in sales. So, is it sustainable. I don't know, I would have never projected the year that we had and the month that we have. I will tell you that it is currently very strong, but we never know what we're going to wake up to until tomorrow. So, right now, obviously very pleased and I think we along with the rest industry are seeing an increasing backlog which means work is being scheduled out much further.

Got it now, and I appreciate that, and maybe just last question. How is the build out of the St. Louis facility going, I forgot if you gave a timeline on this? Thank you.

Well, what I mentioned in the call is that it's scheduled for completion in the first part of calendar 2022 or the second quarter of fiscal 2022. So we're targeting January, February that being up in operation. What I did not mention is what we're looking to do right now is can we open up a phase of it starting in October, and we're trying to break it down in phases, so we maybe can achieve some capacity growth before January next year. I think the demand is there and so we're doing what we can to accelerate this. So if we can get in and start using some of the facility in October, but it won't be completed really if we can stay on track until January of next year, and I'm very pleased with the contractors right now. They've been able to stay on track. I know it's not always easy in today's construction market.

I agree, no it is great, perfect. Well, thank you for the updates and congrats on the results again.

Thank you.

Thank you. [Operator Instructions] Our next question is coming from Dave Windley of Jefferies. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Bob, this is related to a couple of your answers already, but I was wondering how much capacity you have in your existing footprint? In your last answer you talked about opening part of the St. Louis early, but what do you, you answered with St. Louis in or out, I don’t have a preference, but I'm wondering how much revenue you could add in your in your network without acquisition?

Okay. [Indiscernible] I getting another question, stay away from revenue to try to articulate this, if you look at the last quarter, I think we were 22 and in Bolder, so if we had a fourth quarter of Boulder operations, we'd probably been close to $25 million on a annualized basis, so we were about $100 million run rate. I do believe that with some of the moves we've made in the last quarter, that we've opened up capacity in some areas. So I think we could see some additional capacity right now and hopefully in Gaithersburg and at St. Louis, maybe Fort Collins, West Lafayette. So, I think that we're continuing to look at ways to expand, but I'm hopeful that we are going to see that we have some opportunities to see some growth this quarter in some of those areas with things that we're currently doing and bringing on board. So I wouldn't say it's not sitting at 20% to 30% of open capacity today, but that our goal is to continue to open up that 25% to 30% with what we're doing with our facilities, and the things that we're leasing and equipment that we've recently purchased. I would say that it's possible that we could see a little bit of increased capacity this quarter from last quarter.

Understood, so it sounds like the book-to-bill that you mentioned is very high, very attractive. It sounds like, and you mentioned in the last answer that the clients are booking further out into the future. So, if I take your capacity comments and those comments together, it does sound like you're working to open capacity to be able to satisfy some of that demand as soon as possible, but some of the bookings are simply scheduling further out into the future. Is that a fair way to characterize it?

I think that yes, at this point, yes.

And then what about, sorry go ahead, sorry.

No, go ahead.

I was just going to ask, what about the labor side of the equation to satisfy the demand, are you able to find the scientific talent and staff people that you need in the labs and so forth to staff that capacity as you're bringing it on what does the labor market looks like for you?

We've had a lot of people in the last quarter, we brought on board we grew up to that 560 people, which is significantly up, and again that capacity we brought on another recruiter or two to continue to have that capacity, and are very pleased that we've been able to maintain a low turnover rate, but constantly, I think we do have several positions right now, and we're constantly striving to fill those things, and we're not any different than anybody else in today's market, it's a challenge to recruit. Fortunately, I think we have got a good company and a place that people want to come to work and I hope that we can continue to improve our culture and make it a better place to work. I think we could always do better. So, it is a challenge, I think we've done a fine job so far, but we're going have to keep it up, but the pressure to add people is not going to go away for us.

Got it, and a last question from me?

I'd like to say it is still, around low portion of 10% over the next three or four months.

It seems like a good problem to have. Last question for me would be around demand across, demand by service area. Are you seeing disproportionately strong demand in one or a couple of your service lines, or is it pretty strong, pretty balanced and strong across everything?

I think we have stayed fairly strong across everything at the moment. And one of the things that we have been able to do a better job with or I think we get more programs now than we have in the past. As we've added these additional services and we now have full breadth of services for different discovery through IT enabling programs. I mean I'll get it, much larger programs, and I think that's also driving our book-to-bill, as these programs involve all services. And we're doing, I think a much better job of starting to communicate internally and communicate with our clients and we can do all those services in-house.

Got it, that's very interesting. Thank you. Thanks for your answers.

Thank you, Dave.

Thank you. This brings us to the end of our question-and-answer session. I would like to turn the floor back over to Mr. Leasure for closing comments.

Hi guys. Thank you for participating in our call this afternoon, and please reach out to our Investor Relations firm, The Equity Group, if you're interested in scheduling a follow-up call. We look forward to reporting back to you in December when we release our fourth quarter fiscal 2021 financial results. I hope everybody has a good day. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.