Hello, and welcome to Inotiv Inc.'s First Quarter Fiscal 2023 Financial Results Conference Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Devin Sullivan. Please go ahead.

Thank you, Kevin, and thank you, everyone, for joining us today for Inotiv's fiscal 2023 first quarter financial results call. Before we begin, I'd like to remind everyone 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 also will 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 are included in the company's earnings release, which will be posted in the Investors section of the company's website at inotivco.com and is also available in the Form 8-K filed with the Securities and Exchange Commission today. 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, and then we'll open the call for questions from our analysts. It is now my pleasure to turn the call over to Bob Leasure, President and CEO of Inotiv. Bob, please go ahead.

Thank you, Devin, and good afternoon, everyone. I appreciate you taking time to join us today. It wasn't that long ago that we got together to discuss our year-end financial results, but we will try to keep remarks today brief. Our results for the first quarter came in as forecasted in our Q4 conference call. Revenues increased 45.8% to $122.8 million from $84.2 million in last year's first quarter and revenues for DSA and RMS business segments increased from last year's first quarter, although results at the RMS business were impacted by our decision to temporarily pause shipping NHPs from Cambodia following the recent allegations against our NHP supplier employees and government officials in that country. Adjusted EBITDA for the quarter was a negative $5.5 million, as compared to an adjusted EBITDA of $10.1 million in Q1 of fiscal 2023, driven by the effects of the temporary halt of NHP sales, inflationary pressures on product expenses, energy and wages and professional fees, [Technical Difficulty] related to NHP issues during the quarter, which impacted audit, legal and third-party professional fees totaling approximately $1.3 million. The last two quarters have presented some challenges for Inotiv due to the pause of NHP imports and sales, closure of other facilities and cost increases, and I remain grateful for the talent and hard work of our team, the part of our shareholders and the commitment of our customers. Although headwinds persist in certain aspects of our business, we believe the foundation we've set and the decisions and investments we have made during the last two quarters will make a stronger and better company. We expect to see the benefits in our performance for the balance of this year and in future years. The business is positioned to achieve above-market revenue growth rates and expansion in…

Thank you, Bob, and good afternoon, everyone. Total revenue for the 2023 first quarter rose to $122.8 million from $84.2 million in last year's first quarter, driven primarily by significant incremental revenue from our RMS segment and higher revenue in our DSA segment. DSA segment revenues grew 25.3% in the fiscal 2023 first quarter to $41.1 million up from $32.8 million in the fiscal 2022 first quarter, driven by an increase in the DSA revenue generated from ILS, which was acquired on January 10, 2022. The remaining increase was primarily driven by an increase in general toxicology services. Our RMS segment revenue in the fiscal 2023 first quarter was $81.7 million a 58.9% increase from $51.4 million in the same period last year. We closed the Envigo transaction on November 5, 2021, and therefore, the first quarter fiscal 2022 did not recognize a full quarter of revenue. The first quarter fiscal 2023 RMS segment revenue was lower than fiscal 2022 fourth quarter revenue due to shipping less units of Cambodian NHPs during the quarter. Our total gross profit was $21.7 million or 17.7% of revenue compared to total gross profit of $19.3 million or 22.9% of revenue in last year's first quarter. Gross profit for our DSA segment was $13.1 million or 31.9% of segment revenue compared to $12.2 million or 37.2% of segment revenue in last year's first quarter. The change was due primarily to laboratory capacity investments and costs associated with the successful recruitment of scientists to begin adding services and capacity which we expect to have available over the remaining period of fiscal 2023. RMS segment gross profit in the first quarter of fiscal 2023 was $8.6 million or 10.5% of RMS revenue compared to $7.1 million or 13.8% of RMS revenue in last year's first quarter.…

Thank you, Beth. And with that, I think we'll open it for questions, please.

Certainly, we’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Matt Hewitt from Craig-Hallum Capital Group. Your line is now live.

Good afternoon. Thank you for providing the update. I've got a handful of questions. Maybe first up, what was the organic growth in the quarter? Do you have that handy by chance?

Beth, do you have that -- I'm sorry, I don't have.

Yes, the organic growth for our DSA segment was about 38%, approximately $9.5 million.

Got it. Okay. That's helpful. And then as far as the cancellations are concerned, is that -- are those tied to the NHP situation? Or are there incremental cancellations that you're seeing going back to what your commentary last quarter where you had -- during the pandemic, you had customers coming in 12 months, 18 months ahead of anticipated services that were needed and hoping to have the molecule ready, but then you got to the go-live date and they weren't ready. Is that still the issue? Or are some of these cancellations tied to NHPs?

No, that is still the issue. The cancellations we saw in Q1 are in line with what we saw in Q3 and Q4 of fiscal ‘22, which before the NHP situation occurred.

Okay. And how much longer do you think you're going to have to kind of weather those headwinds from the extended time lines that you had from contracting?

Good question, Matt. We're look at that weekly, monthly right now. This quarter looks like it's not quite at the pace it was in the prior quarter so far. So we'll wait and see how this quarter goes and see if we see any improvement.

Got it. And then maybe a couple on the current NHP situation. Thank you for providing the update. It's good to hear that you're comfortable now at least shipping some of the existing inventory. Is there any way to quantify or give us a sense for how much inventory you have remaining from Cambodian and then as far as the testing process is concerned, maybe if you could provide us a little bit of color on that. Will the animals be tested when they leave Cambodia and again, once they reach the states here, what types of testing? Just any additional color there, I think, would be helpful. Thank you.

The first question, I think, we have never quantified how many NHPs we currently have in inventory. And we're not going to provide that information or how many available for shipping right now as we just have not provided that segment information. Second, as far as testing, we're looking into genetic and non-genetic approaches. And beyond that, we really don't care to comment. It will involve third parties and we're still working through those issues.

Understood. Right, thank you.

Thank you. Next question today is coming from Frank Takkinen from Lake Street Capital Markets. Your line is now live.

Hey, thanks for taking the questions. I wanted to start with one related to new bookings first. There was a sense last quarter that the cancellations were hitting the book-to-bill before some of the new bookings you were working on were crossing the goal line. Is that still the case? Are you still working on some larger new bookings? And do you expect that new bookings number to trend higher through the back half of the year, and we could start to see that book-to-bill tick back up as cancellations hopefully moderate.

Well, of course, that's what we hope to see. And so we'll continue to watch that closely. We hope to see the cancellations moderate and that is true. And we've made some changes. We've added some people to the marketing equation. We're adding some services. And so I think those will both enhance our ability to increase our sales and hopefully, our book-to-bill. So we'll see how those evolve over these next two or three months as these new services become available to us and as the changes in some of the additions, we've made take effect.

Okay. That's helpful. And then one on the NHP dynamic a little bit more. In relation to the Cambodian NHPs in inventory, can you speak to the expected cadence of confirmation of whether those were purpose-bred or not for those NHPs in inventory and how we could see that play out in the model over the remaining three quarters of the year?

All right. Can you say it again, Frank, can you say the question again?

Yes. Just trying to get a feel for when you expect to confirm whether or not the Cambodian NHPs in inventory are purpose-bred? Just trying to get a feel for the timing around that and when we could see some of those shift and hit the model?

As we are able to get comfortable ourselves, we are beginning to ship those, I think that's what we said. So we have begun to ship for those. So we are comfortable in shipping some of them. And we're also evaluating other processes and procedures before we ship on them. We're not aware of any wild costs that we are holding, but we're going to continue to do our due diligence and look for before we ship everything or anything and we get comfortable with each one. So it's just not a -- each one gets -- each one gets evaluated separately.

Okay. That's helpful. And then maybe last one, just as it relates to guidance, in line with expectations on the adjusted EBITDA loss for the first quarter, do you expect to flip back to a positive adjusted EBITDA next quarter and then grow that sequentially through year-end to hit that 75 figure? Or how do we -- how should we think about that cadence of EBITDA sequentially throughout the year?

Yes, we would. I think we have to put back deposit this quarter to be able to hit that cadence of $75 million for the year. But if you remember, Frank, we made a lot of changes -- we talked about in the last call. We had a reduction in workforce or some because we said we're going to stop some of the M&A work, to some of the -- we said that we're going to hire a lot less people. So that created some changes to take some cost out. We are still looking -- we did have substantial pricing increases, specifically in NHP, but also in other parts of the RMS business. We also are -- as we go about closing eventually eight, nine facilities and then we -- each one of those facilities has a pretty significant fixed cost infrastructure that we'll take out. And then we are also -- with us that will allow us to revamp our transportation system. So there are some pretty significant moves that are taking place that will allow us to go from what last quarter was to this quarter.

Okay, great. Thanks.

Thank you. Next question is coming from David Windley from Jefferies. Your line is now live.

Hi, good afternoon. Thanks for taking my question. I want to start on your testing of NHPs, Bob. The -- could you distinguish for us the difference at this point between the ones you're comfortable shipping and the ones you're not, what are you able to do to get comfortable with that. I'm thinking about the discussion about developing tests that sounds forward-looking. And so I'm wondering what tests are already developed that allow you to make those determinations.

Well, remember two things. We have existing inventory and then we have what are we going to do before we import again. So -- and we have not commented on what specific testing we are doing or we've not even comment on what third parties we're working with and what new testing may become available. So I do -- I will say that I think it will involve third parties. And so that's currently the evaluation. But we're not -- we have not openly talked about the test that we are performing or that we will be performing.

Okay. So your point about your first part in your answer, your current inventory -- am I interpreting that correctly that you believe -- I mean, you did say this before, I guess, that you don't believe you have any wild costs in your inventory. But I guess I'm assuming that you would need to confirm that in some way, am i interpreting that?

No, you are correct. Our intention is to continue to confirm that. So we're not taking anything for granted and regarding each and every one.

Okay. Okay. The -- sticking within RMS, you talked on the last call, you just mentioned it, I think, to Frank's question, that you took price in NHP, but also in non-NHP. Can you comment how those prices in the small animal part of the RMS business are sticking? How are those being accepted?

We've not -- those have all been accepted so far, they seem to be doing fairly well actually. We -- I think most of the market understood some of the cost increases that were taking place. And so they have been accepted. And so we're starting to see the benefits of that now.

Okay. Flipping over to DSA and the cancellations. I want to make sure I'm clear that when we talk about the clients that had booked well in advance, and then the test article is not ready, I'm interpreting in so much as those are culminating in a cancellation as opposed to a delay, I'm interpreting that to be either the client abandon that molecule or that family of molecules like they didn't work in the discovery or other activities leading up to the preclinical tests or they've decided to -- that there's enough time lag that they decided to cancel and maybe come back later. I guess what I'm interested in is do you believe these are delays where the business could come back to you at a later date? Or should we interpret those cancellations has gone?

Good question. We're interpreting something we are getting some that are delays and then they reschedule. But those do happen, and we do rescheduled. We don't call rescheduling a cancellation as the orders still exist. I do think that the market is being much more cautious in how they spend their money. And I think the cost of capital went up significantly and have people reevaluate how they want to go forward and what changes the market may make. I think we're seeing all the above. So -- but when we see a cancellation free cash flow, they choose to bring it back, then that's great, but we're not holding out an open spot or we're not leaving into the backlog and assuming it's going to come back. And so if we -- if they rebook a new study going forward, it would be a new order going forward. And the cancellation we're aware of it is a cancellation, and it's not -- it's taken out of the log.

Got it. Okay. I appreciate that clarification. Last question for me is around the pricing on the DSA side. So from our previous conversations, I believe, and your answer is confirmed today that most of your activity in DSA is more small animal oriented or lab or related lab. I guess I'm wondering, in light of the book-to-bill the last couple of quarters, what are you seeing from a DSA pricing environment as clients are scrutinizing what they want to do more closely? And is that an area where you would say price is actually favorable versus a quarter or 2 ago? Or is that an area where in order to fill the backlog, you may need to consider a little bit of selective price-cutting to attract business.

I've not seen us discounting on our service business. And I think the challenges to the market is that with this supply and demand issue with the large animals, being [K9s] (ph), NHPs, there's really a shortage of both. And so I think as a result, the pricing has stayed fairly strong. I don't think we're in a position right now where the bottleneck is by various rooms or maybe people as it has been in the past, but it may be now access to the research models. And so I think that's where the pricing is probably stayed high. Again, we're fairly small compared to some of our competitors and how many rooms we have available. But we've stayed fairly busy, and I think we have seen our pricing stay fairly strong as a result of that. Because again, we're just a small piece of a very big market. And we do these. So that's probably helped us a little bit.

Got it. Got it. Appreciate the answers. Thanks very much.

Thank you.

Thank you. Next question is coming from Tim Daley from Wells Fargo. Your line is now live.

Great, thanks you for the question. So Bob, I appreciate the update on the various NHP pieces around the RMS growth this year. But just digging a bit more into one of Dave's questions, you did note that the price increases for non-NHPs have been accepted by the market, but I just wanted to confirm that the magnitude is consistent with what you're communicating on the last call. In January, I think you sized that around 5% to 25% for the year. Is that still the plan?

Depending on the research model, that was the range. So blended, it may only be a 7% to 10% range and a blended overall. But there are some 5’s and some as much as 25, yes.

All right. Great. And then just a bit on the health of the broader customer base. So the cancellation demand positives that you all have been commenting on, is this dynamic still isolated to capital market-dependent biotechs? Or how have you seen it spread into other customer types?

Well, as you know, a lot of our -- in our DSA business, over 90% of our sales are biotech-related. So we mainly see it related to the biotech market.

Alright, great. Thank you again for the time. Appreciate it.

Thank you.

We reached end of our question-and-answer session. I'd like to turn the floor back over to Bob for any further closing comments.

All right, thank you. It's been a challenging two quarters, but really, I think that we as an organization have come through this very well and made some very tough decisions and I think we're going to be a much, much better company for some of the tough decisions that we have made and continue to make. So again, thank you, everybody, for your time today. I look forward to our next quarterly call and hopefully in April. Thank you very much.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.