Greetings. Welcome to Inotiv, Inc.’s Fourth 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] Please note, this conference is being recorded. I will now turn the conference over to your host Devin Sullivan, Senior Vice President of The Equity Group. You may begin.

Thank you, Kyle, and good afternoon, everyone. Inotiv, Inc.’s fourth 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 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, the 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 is my pleasure to turn the call over to Bob Leasure. Bob, please go ahead.

Thank you, Devin. Good afternoon, everyone. And thank you for joining us today. Sorry, we’re a little delayed this month. Fiscal 2021 was really a transformational year for Inotiv, reflecting our success. We expanded the existing operations and services, starting up new operations and services, acquiring strategic assets, raising capital, building really a very strong foundation for our future. And I’m very proud of the team and the results this quarter and this year. By broadening our suite of solutions and adding new talent to our team and achieving greater scale, we created an organization that more comprehensively supports our clients’ discovery and development objectives. Inotiv’s expanded platform also presents us with significant opportunities to cross sell solutions, drive revenue growth, and deliver improved operating margins. Inotiv rapidly transformed this past year, but one constant that has played a key role in our success is our client service oriented culture. I commend our growing team for the dedication to our customers, looking to constantly improve and for making the appropriate short-term decisions to ensure that we thrive over the long run. To recap some of this year’s notable milestones, I’ll start with the expansion of our existing operations and services. At West Lafayette, Indiana facility, we expanded vivarium capacity. In February, we received accreditation by the Association for Assessment and Accreditation of Laboratory Animal Care International. In St. Louis, we exercised our option to purchase the previously leased facility and have completed the first phase expansion of approximately 15,000 square feet, adding office, archives, and laboratory capacity. The St. Louis expansion gives us critical new technology and state-of-the-art laboratory capabilities to support our clients’ needs in DMPK, cell, molecular biology, pharmacology, toxicology, and histopathology, helping extend our reach into earlier stages of drug discovery. We opened the newly constructed scientific…

Thanks, Bob. Good afternoon. In the fourth quarter of fiscal 2021, our revenue increased 90.7% to $30.1 million from $15.8 million in the comparable prior year period, driven by internal growth of $6.7 million and incremental revenue contribution from HistoTox Labs, Bolder BioPATH and Gateway Pharmacology, which totaled $7.6 million. Service segment revenue in the fourth quarter of fiscal 2021 increased 93.3% to $29 million from $15 million in the comparable prior year period. Service gross margin increased to 34.2% in the fourth quarter of fiscal 2021 from 28.9% in the comparable prior year period, reflecting the greater utilization of recently expanded capacity. Products segment revenue increased 40.9% to $1.1 million to $1.1 million in the fourth quarter of fiscal 2021 from $782,000 in the comparable prior year period as instruments are used for a variety of research markets, including COVID-19-related research applications and universities are working at a higher capacity in 2021 compared to the fourth quarter of 2020, we saw greater impact from the COVID-19 pandemic. Product gross margin was 35.6% in the fourth quarter of fiscal 2021, compared to 36.6% in the comparable prior year period. Operating loss for the fourth quarter of fiscal 2021 totaled $3.4 million compared to an operating loss of $1.4 million in the prior year period, reflecting increased strategic investments in operating expenses to support future revenue growth, including $4.2 million of incremental acquisition and integration costs. $747,000 of higher non-cash stock compensation expense and $636,000 of higher startup costs. This quarters’ growth oriented investment in G&A includes recruiting and relocation expenses, higher compensation expenses, including non-cash stock compensation and transaction costs related to the acquisitions of HistoTox Labs, Bolder BioPATH, Gateway Pharmacology, Envigo and Plato BioPharma, the last two of which closed after quarter end. All combined, adjusted corporate unallocated G&A,…

[Operator Instruction] Our first question is from Kyle Bauser with Colliers Securities.

Thanks for all the updates. Just a phenomenal book-to-bill here. Can you talk just in general terms about how maybe price inflation and/or cross-selling with HistoTox and Bolder PATH influenced the strong book-to-bill quarter?

The Bolder BioPATH and HistoTox acquisitions closed in may. So, our sales cycle, it probably -- what we did in May is -- I think what happened this quarter was in process well before we did in May. I think some of the results this quarter and some of the book-to-bill this quarter were things that had been in process 12 to 18 months and things we’ve been putting in place over the last 12 months. This is not in the last four to five months. That being said, we may have had some short-term gains from some of the Bolder and HistoTox clients. But, I think it’s more of an indication of a very strong demand, our ability to open up some capacity, our plan to open up further capacity, and existing customers continue to expand the amount of work that they placed with us. I think that some of what Bolder BioPATH and the integration Bolder BioPATH and HistoTox are things that are going to continue to drive us in the future. But I doubt if we saw as much in the last quarter, because I know we closed those in May and I think some of those things that would close last quarter wouldn’t have been -- the larger projects would have been quoted in June and issued that quickly. So, we are seeing some benefits, obviously, and we’re routine some benefits that will impact future quarters, but I don’t know that it was -- it would have been that big that quickly. What was the second half of your question?

Just how pricing might have influenced?

There has been I think some inflation, over the summer, we saw obviously wage inflation take place that we addressed proactively and try to address quickly, as we saw it taking place, that we have tried to pass through some of that. That being said, certainly -- much of the results we had in Q4 were jobs that were quoted well before that inflationary period. I think it will -- it probably -- some inflation is obviously and some price increases definitely in the backlog as we look out. But we’re looking at a six to nine-month backlog, so not all of it would be in there, but there’s going to be some inflationary pressures resolve some of the price increases we saw -- I think we’ve been able to pass through over the last three or four months.

And then, on a pro forma basis for the combined company, how should we think about CapEx requirements going forward, in broad terms?

Well, I think, we have been aggressive in trying to address our ability to move our Company forward to prepare the Company that’s going to be the best Company in 2024 and 2025, and leading drug discovery and development. And we’ve also been very-disciplined in how we view use of our capital. As long as we can continue to find really good returns and which we’ve been able to on some of the capital we’ve invested, we don’t need to see it right away, but as long as we can see long-term good returns, we’re going to continue to be aggressive in investing. We succeeded with that strategy, I believe, in our discovery and safety assessment business at Inotiv. And with Envigo, I believe that they probably have not invested as aggressively as we have in the past. And so, I think that there are some low lying opportunities for some investments that can drive some pretty strong returns at Envigo in the future. So, I think we’ll be very-disciplined, but we’re looking forward to making some of those investments, and they’re making some of them now as we speak, some are deferred maintenance issues, but a lot of them have very strong returns.

Got it. I appreciate it. And then just lastly, how are you looking at new M&A targets? Obviously you had a very productive year for M&A. Are you looking to drive scale via geography? Are there other service areas that you think you can bring in house? And then, at what point does it make sense to evaluate clinical services, not preclinical, it’s still a little early, but just kind of curious about your thoughts there? Thank you.

Right now, we are focused on the preclinical market. We are not focused on clinical services, although we do have some clients that ask us to do some clinical bioanalytical work, that’s a small percent of our overall revenue, and we’ve not really focused on the pre -- on the clinical market, and nor are we doing that day. I won’t say never, but we are not doing it currently. As far as preclinical, we -- I think what’s been key to our strategy has been scale. And you can see our existing sites, the ones that we bought, the important sort of we’ve talked about all of them doubling and tripling in size and that scale has bought significant enhanced margins as we leveraged through our costs. So, we’ll continue to look for opportunities that provide scale. And we’ve obviously been aggressive in acquiring services. And now, I think we’re -- we could even consider looking at opportunities to drive market share. So, it’s something that we’ve done quite a bit in our early years. We took year 2019 and ‘20, we took about 12 months as we really focused on our infrastructure, but we’ve become much stronger I think. And I believe that -- I think the synergies that we can see from future acquisitions are probably much greater than they’ve ever been before. And so, we’re looking forward to continuing to look at opportunities and ways that we can grow our business.

Okay. Got it. Thanks for all the updates, and congrats on the strong quarter.

Thank you, Kyle.

Our next question is from Matt Hewitt with Craig-Hallum Capital Group. Please proceed with your question.

Thank you for taking the questions. And what an amazing year! You guys accomplished a ton. Just a few questions. First off, regarding the integrations, and you spoke to this a little bit. But, I’m curious, as you look at those integrations, is the primary benefit going to come via margin expansion, or do you see a better or more important aspect of those integrations in the level of service and the quality and timing of responses back to the customers? Is that the bigger opportunity within those integrations? It’s been all the above. The acquisitions we’ve looked at, we’ve looked at improving margins from growing the acquisitions and how can we invest in the companies that we’ve acquired to bring the scale and growth opportunities and being able to grow. Then, we also acquire clients, when we acquire the services. And we buy a lot of companies that are single service oriented. And now, we have all IND-enabling services under one roof. So, we’re able to take those clients and sell them all of our services, and that has helped grow our overall sales. And there’s a lot of our internal growth as we sell the clients we are acquiring all of our services. And then, very importantly, when we have scaled up and started new services or we acquire services, we inevitably then are -- we don’t have to outsource as much, our client doesn’t have to go through a third party. And when we can do that, we can control the timing much better, and we can help accelerate the speed at which they can do their discovery and development work. So, all three of those things are critical when we evaluate acquisitions. In addition, we’re always very interested in obtaining talent. But, when we look at acquisitions, it’s important that we can see the opportunity that we can scale. We want to be able to add value to what we are buying. And then, in addition, we look at how they can add value to our current customers and our other services, and that formula has worked extremely well for us. And I hope it to continue too in the future.

Separately, I’m just curious, and I realize it’s very early days. But regarding Envigo and some of the cross-selling opportunities there, what has been the initial response or feedback that you’ve been getting from some of their customers? Do you have anything anecdotally that you could point to as far as some initial wins on the cross-selling side?

We’ve had clients come to us now with the services that we have and ask us to quote, participate in their services and quoting their services. I don’t have a numeric number for you -- number for you that can tell you how much that has been so far. But we’re only four or five weeks into this. And we have, as you can see, a very robust backlog. At this point -- at times, we have actually no quoting jobs. We’ve had so much activity. Our quoting level has ramped up significantly. I would tell you, in the last four to five weeks, we have more than doubled our client service group that is handling the quotes. So, we have a significant amount of activity and -- that’s a great opportunity, great problem for us to have. And I’m really pleased that we’ve been able to retain some very talented people that have been able to grow that. But for us, we want to be really client service oriented and that means even returning timely, if somebody asks you to quote, and we’re ramping that up quickly to take advantage of all the opportunities that are coming to us at the moment. But, I don’t have any numeric, not anything for you right now that I can tell you what -- depending on what that is?

And that anecdotally is fine. I realize it’s early days. One last one from me, regarding you just touched on it a little bit there, but I think on the Envigo acquisition call that you hosted, you talked about one of the primary areas that you plan to invest in one of the things that you think can continue to help you differentiate from peers is your quality of service, and to do that, you have to maintain the right level of employees. I’m curious how has the hiring proceeded? Are you having success? And are there some areas that need a little bit more from a headcount perspective to meet your internal targets? Thank you.

Hiring, over the last three or four years at any one time, we’ve had, if we have 500 people, I’ve noticed we have 50 openings; if we have 1,000 people, we have 100 openings. Today, we have 1,800 to 1,900 people, we probably have 200 openings. Hiring in this market for our company, for any company and retention is hugely important. We’ve been very aggressive in our hiring and we will continue to be. I’m pleased with our ability to recruit. I think, the Envigo and some of the things we’ve done in the last year and adding services, we’ve got some great talent, and that talent’s been able to recruit additional talent. And it’s very rewarding when we even now get calls, people calling us, wanting one to be part of Inotiv for what we’re doing. So, that being said, we’re always onboarding people. We’re always looking for people. And matter of fact that the phone call was on for 30, 40 minutes before we had this call, today. It was all about what we’re doing to enhance our ability to recruit, retain, and train our people. And there’s a high degree of awareness in our company and we have time spend on that. It’s a critical resource for us. But we are -- if we’re going to continue to grow and you see our backlog and you can see our book-to-bill, if we’re going to continue to grow, and we have a very aggressive infrastructure build out and capital plan for next year, it’s going to require people and we’re going to need to be very aggressive and try to recruit those people to market -- from the market to our company.

Got it. Thank you very much, and congratulations on your progress.

Our next question is from Dave Windley with Jefferies. Please proceed with your question.

Hi. Good evening. Thanks for taking my question. Hi, Bob. In prior conversations, as a little bit of a follow-up to Matt’s question, but you had talked about kind of needing to have capacity in place before you thought you could really turn the sales force loose on the cross-selling opportunities that Envigo presents. And I thought that that capacity might have been a little bit physical capacity, but certainly was also that client service element that Matt touched on. Can you talk about -- you mentioned that you doubled that group. Can you give -- zoom out a little bit and give a little bit of a perspective on kind of where you stand on capacity and your ability to kind of go full steam ahead against the opportunities that Envigo presents?

Hi, Dave, and I’ll try to -- when we reported last quarter, we had $23 million or $24 million, and this quarter is $30 million, 20% growth. That’s fairly large in one quarter. If you’d asked me last quarter at this time, did we have the ability to do $30 million in sales? I probably would not have given that $30 million as it was even a capacity. So, I’m very pleased by how fast we are able to bring on capacity. That being said, I think, what we saw last quarter was what we could do. I would -- I couldn’t have asked them to do much more. That’s pretty good growth in one quarter for a service oriented business that we’re in. That being said, we are -- today, I outlined we have got a lot of brick-and-mortar coming on board with leases that we’ve just recently incurred, I think entered into, I think, in Rockville and [Indiscernible] Boulder. I would tell you that we’re looking at leasing additional space and a further expansion, major expansion at Fort Collins. We’re looking at buying a property, possibly in Maryland, and we’re looking at acquisitions in some acquisitions that hopefully they even have capacity. So, we’re going to probably continue to be very aggressive and ramping up that capacity. But, what we saw last quarter was probably about what I think we could have done with people we have. I think if you look back and look at our sales per person, so another good indication, we’re now achieving over 200,000 sales per person. If you go back a couple of years, we were 140,000, which gave you an idea we had a lot of capacity left. When we start going up to 200,000 and well over 200,000, 220,000 and 230,000 then we’re starting to use up a lot of that capacity that we were sitting on. So, we will open up more capacity this quarter. We’ll open up again next quarter, some more, and some of the new services are growing quickly. But I can’t really tell you that we can -- it’s not like we’re going to all of a sudden our capacity. Moving 20% a quarter is pretty -- we could do 10, but I’m not sure I would sit here and tell you 20% a quarter to open up is possible. But, with acquisitions and some of the things we’re doing, we’ve got some great opportunities. I will put it that way.

Excellent. I appreciate that answer. Another topic here around, again, this has been touched on a little bit around cross-selling. And you mentioned what I was going to touch on in IND-enabling capabilities and having all of those in-house. And it does seem like a level of your cross-sell is to not have to outsource or not have to send a client to other vendors for services that would be part of a study package. And then, the next level of out of cross-selling might be capturing the client in some of your discovery businesses and pulling those through into some of your safety businesses. Are you able to do both of those now, or is one the predominant kind of level of discussion with the client at this point?

We were able to do both of those. And I’d also say, we’re seeing some of our safety and assessment customers now moving some of their discovery work to us. So, it’s happening across the board. But, I’ll give you an example. We opened up SEND data reporting. SEND data reporting, if we were outsourcing it, we may be quoted 12 weeks, and we don’t make a lot of margin on that -- outsourcing that. If we move now and a client now has a need to move quickly, we can get that down to four weeks or less. That’s taking a lot of time just out of that one segment -- just out of that reporting, that was critical. Same when we did safety pharmacology. So, all of these things are significant benefits to our clients. And I would say that the acquisitions we’ve done and the services brought in are all really specifically listening to our clients. When I got here four years ago, it was going to be about returning a phone call. It was listening to our clients. All of our things we’re building in-house are listening to clients and their concerns about our time. And I think that our team has done a good job of building, in some cases even much faster than I thought. I think we saw revenue from a lot of the startups we did that and we’ve not seen any revenue yet from our genetic toxicology startup that we’re doing, but we could see some of that here in this quarter. And we’ll see, I think more next quarter. So, these services are really ramping up and we’re -- not only are they ramping up, we’re already expanding and growing them.

Last question for me around the labor inflation that you touched on, is that -- is your ability to price that through pretty real time, or is there a lag to like an annual repricing of rate cards and things like that?

Well, we have been able to I think pass on pretty real time versus making sure that we real-time increase the wages, because there was a lot of pressure there over the summer for entry level wages in particular. We can pass them on real time, and the client’s very understanding. But when they’re sitting on a 6- to 8-month backlog, that backlog is already priced at maybe a previous rate. So, what we’re closing today is closed at the increased pricing. At one point last year, and even today, we -- for some research models, we were very careful to do actually not even lock in a price. It was almost like it was going to be very real, like it’s new market pricing at the time this study is placed, because some of the costs of the research models were going up so quickly, specifically nonhuman primates. So, we tried to do what we could to make sure we could protect our ability to pass through those costs.

Got it. I appreciate those answers. Happy holidays. Have a good evening.

Same to you, Dave. Thank you.

We have reached the end of the question-and-answer session. And I will now turn the call over to Bob Leasure for closing remarks.

All right. Thank you everybody for participating in our call this afternoon. Obviously, we’re very pleased with the foundation we’ve set and really looking forward to 2022. 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 February, when we release our first quarter fiscal 2022 financial results. Have a good day, and thank you.

This concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.