Good day, and welcome to the Inotiv Third Quarter Fiscal 2025 Earnings Call. [Operator Instructions] Please be advised today's program is being recorded. It is now my pleasure to turn the program over to Steve Halper of Life Science. You may begin.

Thank you, Aaron, and good afternoon, everyone. Thank you for joining today's quarterly call with Inotiv's management team. 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, including risks and uncertainties that could cause results to differ from forward-looking statements. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in the company's current and previous earnings releases, which has been posted to the Investors section of the company's website, www.inotiv.com, and is also available in the Form 8-K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of Inotiv's website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of the call. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our third fiscal quarter of 2025, and then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Steve, and good afternoon, everyone. During the third quarter, we made some announcements and saw some continuation of positive trends, which we could be very meaningful for our business going forward. On May 29, 2025, during our in-person Investor Day, we addressed in more detail our view of the critical issues facing our industry such as tariffs, NIH funding and the recent comments from the FDA related to new approach methodologies or NAMs. We also outlined our progress over the last 8 years as we have built our business and a more recent focus over the last 2 years on integration and optimization. And then we outlined our goals to improve our cash flow and margins. On June 2, 2025, we were informed by the SEC's division of enforcement that it concluded its investigation, which began in May of 2023 related to importation of nonhuman primates from Asia. Based on the information available to the division as of the date of its letter, the division does not intend to recommend an enforcement action by the SEC against Inotiv. As noted in our earnings release that just went out, based on current negotiations with the plaintiffs and the outstanding securities class action and shareholders' derivative lawsuits, we recorded a $10 million accrual for these lawsuits as of June 30, 2025, as well as a $10 million receivable due to the fact that we currently expect to recover the full amount of the accrual under our existing insurance policies. However, we must still reach a final agreement on the terms of any settlement and actual amounts may change. We will provide additional information once we have material updates to share. In June, we received updated ALAC accreditation for our NHP facilities in Texas. All of our RMS animal production facilities…

Thank you, Bob, and good afternoon, everyone. For the third quarter of fiscal 2025, total revenue was $130.7 million compared to $105.8 million in the third quarter of fiscal 2024. This was a $24.9 million or 23.5% increase in revenue from the prior year quarter, primarily driven by increased NHP revenue within our RMS segment. DSA revenue in the fiscal 2025 third quarter was $48.2 million compared to $44.2 million in Q3 fiscal year 2024. The year-over-year increase in DSA revenue was primarily driven by an increase in general toxicology services as well as an increase in biotherapeutic services and medical device services. Overall, net new DSA awards this quarter were $50.4 million, a 13% increase over Q2 of fiscal 2025 and a 25% increase over Q3 of fiscal 2024. We have also seen strong quoting and awards for the month of July, which has been a good start to our last fiscal quarter of 2025. The backlog conversion rate in the third quarter of fiscal 2025 was 35.5%, up from 31% in the prior year period. The DSA cancellations and negative change orders in the third quarter of fiscal 2025 were approximately 31% higher compared to the prior year third quarter. Cancellations in the trailing 12-month period were approximately 2% more than the prior trailing 12-month period. RMS revenue for the third quarter of fiscal 2025 of $82.5 million increased $21 million or 34.1% compared to Q3 fiscal year 2024. The increase in RMS revenue was primarily due to higher NHP volumes sold and higher average selling prices for NHPs compared to the prior year quarter. The overall operating loss for the third quarter of fiscal 2025 decreased $15.1 million from $20.8 million in the third quarter of fiscal 2024 to $5.7 million in Q3 of fiscal 2025, primarily…

[Operator Instructions] And we will take our first question from Matt Hewitt with Craig-Hallum Capital Group.

Congratulations on the progress. Maybe first up, it sounds like your cancellations or negative change orders are still a little bit elevated. Is it your expectation that you could start to see that decline as we get into the back half of the year, maybe into fiscal year '26? Or how are you thinking about that metric?

Well, I can't predict what's going to happen. But yes, they were elevated this past quarter. For the year, they're only up 2%, but the last quarter was a fairly big quarter of cancellations for us. So as you can probably figure out our book-to-bill on a gross basis was extremely large. And you take that book-to-bill on top of the increased sales we had, the 8% increase in sales we had and you take the cancellations, it was a very, very strong quarter for new bookings. I think we just have to -- we have to plan for cancellations to continue to be high. If they're not, that's great. But as a result, that means we need to have a higher gross book-to-bill and prepare for that. I think we have done a much better job over the last year, expecting that. And I think last quarter demonstrates now that if we -- if that's going to be a new normal for a while to have cancellations, I mean, our gross bookings and expectations for gross bookings have to go up. That's why we increased our sales force, increased our sales team. And right now, I think our organization is doing a good job of managing through that. However, as we've talked in the past, we sometimes get cancellations that can be 1 or 2 that can be fairly big because of the size of our company. So last quarter was pretty significant. This quarter looks to me like it right now, it started off much better, but we'll wait and see how that goes. But yes, I think we just got to prep -- that's a new normal and sell through it. We can't change it. We need to prepare for it.

Well, obviously, yes, your sales team is doing a phenomenal job if they're more than covering that. Maybe second would be what's up next for your site optimization? You've obviously made some significant progress on the checklist there. And I'm just curious, as you look at Q4, but more importantly, at fiscal '26, what's next on the site optimization side?

Well, I'd like to see less, and we have been trying to focus less on brick-and-mortar changes and more in some fine-tuning of what we have. So we have these 3 or 4 facilities we're moving now and one that we're significantly improving. That will be significant. We'll continue to improve our facilities in Dallas, Texas. as we increase the -- some of the service work we do down there that is increasing demand that we probably increase those facilities. And then right now, what we're looking at is how do we fine-tune the facilities that we have, relocating some work without moving brick-and-mortar, but relocating work and how do we do a better job for our client, serving our client, how do we open up additional capacity. So it's one thing that we -- when you're making these macro changes, and now I like to really focus on some of the smaller changes that are very significant. And how do we get more capacity out of existing facilities. And so before we get back into the brick- and-mortar game right now, I don't think we have any more significantly old facilities to close. This is the last big one, but I do think we have a lot of tweaks we can make in order to improve upon the existing facilities that we do have, and that will be the focus.

And we can take our next question from Dave Windley with Jefferies.

I wondered, first, Bob, if you could talk about the mix of bookings that you're seeing relative to your book of business. You've called out new services added a couple of quarters, maybe more quarters about momentum in biotherapeutics and medical device was another call out today. Are the bookings even more overweighted in those new service directions than the current revenue?

Yes. We've seen bookings yet and the revenue is yet to catch up with some of the bookings that we recorded last quarter. But we had seen over the last 2 quarters prior to that, we've seen a beginning a significant increase kind of started last -- in our first fiscal Q1 in Discovery, kind of continued into Q2, and then it really ballooned quite a bit into Q3. So Discovery being up 31%, 32% year-over- year is very big for us. Those -- because Discovery is probably our most fixed cost business. And that has really significant impact on our ability to create margins and create money to the bottom line. It's also an area where we had expanded some of the services. We brought in some scientific talent we're very pleased with. And we developed and put in place -- really started developing a new sales team there, I would say, in December of 23. So it's been about 18 months. So to see them really come together and sell and really win new accounts and then see increasing sales from existing accounts has been very, very rewarding. And I think they're feeling very good about the momentum that they have. But it's not just Safety Assessment. Our Safety Assessment capacity has stayed fairly full. We may see some benefit from Safety Assessment from pricing, but we don't have a lot of room. We've stayed at 85% in terms of a lot of our Safety Assessment capacity. So a lot of this is in niche and scientific areas.

Got it. Shifting to NHPs. Your competitor and you have announced today a conclusion of this DOJ investigation Obviously, that's good news to put that behind you to put a kind of a turnnket on the legal costs that you were incurring. I want to understand better what your freedom of movement is with NHP. So can -- are you now free to import from Cambodia broadly speaking? And then secondary question to that, how do you believe that any changes, depending your answer to my question, but any changes to the market and market pricing that will cause as a result of these changes?

First of all, the DOJ issues for us, I think, were resolved several quarters ago, and U.S. Fish and Wildlife is -- and the DOJ have never told us we cannot import from Cambodia. As a matter of fact, just the opposite. They told us that we are free to import from Cambodia, and we haven't for the last 2 or 3 quarters. We have not imported from Cambodia. But that also is somewhat not only up to the -- to our U.S. government, it's also up to the Cambodian government. So -- and we have other good Asian supplies right now. So we do work with people in Cambodia and along with many other countries. If we see the opportunity that we can safely import at a fair price, that obviously is something we're going to consider. That has not transpired yet. We have not done that. I'm not aware of anybody that's done that. But I'm not aware of anybody prohibiting in the U.S. are prohibiting the use of imports. There may be that's something Cambodia is -- also has a say in though. So right now, I don't believe that we have any plans to change that in the next quarter. But those conversations and those site visits take place frequently throughout the months and throughout the quarters. And that could always change. So -- but right now, I don't -- I think we have plenty of ability to meet the demand, and we'll keep that option open, hopefully.

So on the price point, the -- I mean, COGS is still a little elevated in NHP-related activities. But I mean, yours may not have changed, but Charles River situation definitely changed. they have inventory that is freed up. I think that inventory might have aged out of its usefulness. But seemingly, there's more inventory available than less. And I'm wondering how that impacts price going forward.

Well, I can't comment on Charles River, obviously. As far as pricing, we've not seen pricing really change much in the last year. Fortunately, it's calmed down. We've not seen price cost or pricing change much in the U.S. And I'm not -- we keep track of what is in the U.S. from the USDA and the other government statistics. And I've not seen a large increase and amount of NHPs available in the U.S. So I think for right now, it looks like things are staying pretty stable. And I don't see -- unless Cambodia does open and they change pricing and Cambodia chooses how they export, I'm not sure that we see it changing next year. So there are a lot of factors that go in there. I'm not going to get all of them to -- on this call. But right now, we don't see a change in pricing.

Before our next question, we do have a correction to our cash used in operating activities for the 9 months ended June 30, 2024. I read this as $14.4 million, but it was $4.4 million. So operator, please continue.

[Operator Instructions] And we can move next to Frank Takkinen with Lake Street Capital Markets.

I was hoping to follow up on some of the Discovery commentary. Obviously, you just mentioned that's your largest fixed cost business. I was hoping you could help maybe put some metrics around what incremental growth in that business would translate to from an EBITDA perspective. I realize you're not providing forward EBITDA commentary at this point, but just kind of understanding just how much leverage is in that business as some of the strong orders you've seen start to translate to revenue.

Yes. So let me go back in. We saw a strong increase, but it's not back to the levels it was 2 or 3 years ago. So -- and it's -- this had pretty dramatic impact on our margins and our bottom line when we saw those series deteriorate. So we're now getting back very quickly, I should say, if we can continue this growth to the levels we were 2 or 3 years ago. But in terms of -- if you were to say Safety Assessment, you have incremental bottom line -- it goes to the bottom line of 50% to a variable contribution of 50% to 60%. And in the Discovery, because of the fixed cost nature, we could see incremental bottom line be as high as 70% to 80%.

Got it. That's helpful. And then I think we've talked about kind of some of the metrics you have recently started tracking around kind of customer satisfaction, on-time delivery of services. Can you maybe recap some of those metrics for the most recent quarter and the importance of just that and how it translates to new business awards from those customers?

Well, during the Investor Day, I think we alluded to some of these. And one of the great advantages of having a lot of new and improved systems is we have very much better metrics. And so I think we talked about this a little bit. When we had in Investor Day is that when we first started together, we had 14 sites that were operating as 14 individual sites. And many times, we have now customers who are using multiple sites, 3, 4 sites. I think 60%, 70% of our customer base may use multiple sites. So that's -- you check that you and Brendan there, if you could check that number for me, what -- because I know we talked about that during the Investor Day. One of the things that's important to us is though if we -- how do we act like one company. And if they're going to use multiple sites, how do we make that seamless for them so they're getting the one company experience, feel like they're working with 3 companies. And then when we do that, how do we communicate internally and then how do we make sure we deliver that on time. So first of the systems, we had to develop the systems to be able to track this, to communicate it and then be able to track it. So now when we did -- when we were growing 3 years ago, we could grow, but we didn't have the sophistication in the pricing systems, the management systems and the on-time delivery. Now we have that. And so when we're seeing growth now, I continue to focus on this because I think one of the mistakes we made 3 years ago is we grew very quick, but it didn't mean we…

Got it. That's helpful. And then maybe just one last one related to cash. I heard the comment about some NHP stocking that took some cash out this quarter. I was curious if you could maybe talk to cash flow expectations going forward as some of that -- those NHPs maybe convert to revenue and what that does to your cash balance?

Well, I think what we will do is, if possible, we'll probably maintain a higher level of NHPs than we have in the past. We were running very thin, and I think that, that was -- and I think our customers would like to see that we had a little bit more inventory. So we now are carrying a little bit more inventory. And I think we'll continue to carry more inventory. I think as it comes to evaluating our balance sheet, we will look at this -- if this is the new normal that we want to carry in inventory.

Yes, we could convert some of this to cash if we needed to, Frank.

But I think if we want this to be the new normal and when we evaluate how we want to improve our balance sheet, we may need to plan for this to be the new normal and plan accordingly. So right now, if we need to slow down the imports and slow down what we're doing, we could do that and convert it to cash. But I think what we're looking to do is make sure we have a much more stable environment to take care of our customers' needs.

And this does conclude the question-and-answer session. I'd like to turn the program back over to Bob Leasure for any closing remarks.

All right. Thank you. As you can tell, we're very encouraged by these results and the recent growth we've seen in our DSA business or quoting awards over the last 2 quarters. And as this growth develops, we will need to remain vigilant on delivering an exceptional experience, service and product for our clients, as I just outlined. We made progress towards achieving the financial goals we outlined during our Investor Day, and we are also -- and as I said, we're going to prioritize a strategic review of our capital structure, improving our balance sheet. As I've said in the past, we are a much better company today than we have ever been before, but we still feel like we have a plan for much further improvement in the future. So thank you very much for your time today. We look forward to talking to many of you later.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.