Greetings and welcome to Inotiv’s Second 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.

I would now like to turn the conference over to your host, Mr. Kalle Ahl of The Equity Group. Please proceed sir. .

Thank you, LaTonya and good afternoon everyone. Inotiv, Inc.’s second 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 statements represent management's expectations as of today's date and you should not place undue reliance on these forward-looking statements.

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 a 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'll open the call for questions.

Now, it's my pleasure to turn the call over to Bob..

Thank you, Kalle and good afternoon everyone. Thank you for joining us this afternoon.

We've made significant progress this fiscal year advancing our goal becoming the preferred research partner to emerging biopharma and other companies by providing best in class customer service and building a comprehensive suite of solutions across the drug discovery and preclinical development continuum.

In this regard, we believe that Inotiv is uniquely positioned in North America to fill the gap between the smaller independent service providers and the large multibillion dollar CROs. We believe that our agility, responsiveness, breadth of preclinical services frequently sets us apart from our competition.

The start of fiscal 2021 has been busy and transformative period for the company as we continue to invest in new talent, enhance capabilities, broaden our services, improve infrastructure systems, and add capacity while successfully raising capital and completing two complimentary acquisitions in the month of April.

Last month we raised approximately 49 million in net proceeds following the close of an underwritten public offering of our common shares and secured an additional 28 million in additional debt financing, enabling us to complete the recent acquisitions of HistoTox Labs and Bolder BioPATH, and which will provide additional capital for internal expansions and development.

HistoTox brings us scientific talent, new capabilities and expertise in cell typing, bio distribution, gene therapy, and novel biomarker assay development. It's a thriving business that has achieved compounded annual revenue growth in excess of 30% over the last three years.

It's a client base having less than 20% overlap with ours and consisting of predominantly emerging biopharma companies with a focus on cell and gene therapy, as well as those discovering traditional small molecule therapeutics.

As an excellent cross out -- provides us excellent cross selling opportunities and has additional capacity to support future growth in its current 15,900 square foot Boulder, Colorado facility. Its neighbor is Bolder BioPATH.

Bolder BioPATH adds for a scientific talent, new capabilities, expertise in non-clinical pharmacology and pathology, particularly in in-vivo models of arthritis, inflammatory bowel disease, and central nervous system diseases as well as other autoimmune inflammation and pain models.

It's a platform that registered compounded annual revenue growth in excess of 20% three years prior to the pandemic. It's another client base having in excess -- having less than 20% overlap with ours and consisting of predominantly emerging biopharma companies.

Again, provides excellent cross selling opportunities and has available capacity for future growth in its 24,500 square foot facility, which was expanded -- it's basically tripled in size it was in 2019. Combined with our planned expansion in St.

Louis, which we also announced in April, these acquisitions position us to offer comprehensive laboratory solutions in DMPK and cell and molecular biology, immunohistochemistry, and pharmacology model support to clients pursuing preclinical drug safety and efficacy programs. We plan to exercise our option to buy the St.

Louis facility for approximately $4.7 million contingent upon business incentives. The 50,000 square foot facility is comprised of 30,000 square feet of finished laboratory space and office space which is included in the 30,000 and an additional 20,000 square feet of unfinished shelf space.

The expansion will finish the ship -- our expansion will finish the shelf space, adding office and laboratory capacity to accommodate additional growth in our growing client base and diversity of service offerings. In March, our shareholders approved our formal corporate name change to Inotive, Inc.

which unifies our organization under the philosophy of expect more and the fundamental goal of delivering exceptional client experiences. HistoTox Labs and Bolder BioPATH spouse similar credos, and we expect to smooth cultural transition during their integration.

Finally, we believe that both transactions are financially accretive to Inotive before revenue synergies. We also are making internal investments in people, systems, capabilities designed to drive future growth. Our success, attracting and recruiting high caliber executives and scientific members to our team continued in the second quarter.

For example, in February we were pleased to appoint Greg Beattie as our Chief Operating Officer. He brings his 30 plus years of contract research experience, including more than two decades in operational leadership roles at Charles River Laboratories where he drove growth and profitability across multiple business units.

Inotive already is benefiting from his extensive industry experience and perspectives. In January, we expanded our scientific talent in veterinary, clinical pathology with the hiring of Adam Albauch, who provides us unique knowledge in the area of experimental biomarkers.

And we bolstered our surgical models team with the appointment of Daniel Smeak, who came to us from Colorado State University veterinary teaching hospital where he was Professor and Chief of Small Animal Surgery and Dental and Oral Surgery.

In the second quarter, we also invested in the design and implementation of an enterprise technology solution for study management, partnering with the technology services company Centric Consulting, LLC.

By integrating study management activities and migrating multiple legacy systems into a new singular platform, we will ultimately improve processes, enable a more seamless automated workflow, and improve client deliverables. We started to reduce our subcontracted and outsourced work.

For example, in the second quarter we invested in software solutions that support bringing in house certain data management and delivery services that were previously outsourced in the area of Send or the Standard for Exchange Non-Clinical Data.

Moreover, this quarter we announced plans to expand our service offerings to add cardiovascular safety pharmacology evaluations, to the existing capabilities for respiratory and central nervous system, safety pharmacology. Previously we relied on subcontractors for these cardiovascular assessments.

All of these internal and external investments should enable us to better serve our customers, drive revenue growth, achieve greater scale, and deliver higher margins given the operating leverage inherent in our businesses.

Moving to our second quarter financial results, we achieved year-over-year growth of 17.1% all of which was organic and 106 basis point improvement in gross margin. Similarly, our first half gross margin increased by 333 basis points to approximately 33.3%, illustrating the inherent operating leverage potential as we expand.

As I discussed to augment future revenue growth, we have increased our strategic investment in G&A including people, capacity, infrastructure, systems, and services.

These growth initiatives, along with higher unallocated corporate expenses for due diligence, legal support, and integration planning and related to our purchase of HistoTox Labs and Bolder BioPATH in April, temporarily dampened operating margin in the quarter.

Given the expected contribution from these acquisitions, the anticipated return on internal investments, our second quarter book-to-bill ratio of 1.5 to 1.25 ending backlog of 53.9 million, we anticipate higher revenue, greater scale, and eventual improved operating margins.

Recapping our growth strategy, we're currently focused on providing flexible, superior customer service to our clients pursuing selective strategic acquisitions that dovetail well with our current assets and services and provide cross selling opportunities, integrating our acquisitions, and then adding services, people, equipment, and capacity to drive subsequent organic growth, investing in internal growth initiatives and capacity, driving ongoing operational efficiencies, scaling our business to realize operating leverage in order to drive improved profitability and cash flow.

We remain optimistic about the long-term growth opportunity in front of us. We help clients reduce time and cost to bring drugs to market through critical outsourced discovery and development services, which otherwise would require a significant client overhead.

We strive to outperform our larger and smaller CRO peers with service, flexibility, innovation, and attention to details, creating a unique opportunity for us to grow in this space. With that, I will turn the call over to Beth Taylor, our Chief Financial Officer to recap our fiscal 2021 second quarter financial results in more detail.

Beth, please go ahead..

Thanks Bob and good afternoon. In the second quarter of fiscal 2021, our revenue increased 17.1% to $18.8 million from $16 million in the comparable period -- prior year period driven by internal growth. Service segment revenue in the second quarter of fiscal 2021 increased 17.8% to 17.9 million from 15.2 million in the comparable prior year period.

Service gross margin increased 33.3% in the second quarter of fiscal 2021 from 32.8% in the comparable prior year period. And our product segment revenue increased 3.4% to $849,000 in the second quarter of fiscal 2021 from $821,000 in the comparable prior year period.

Product gross margin increased to 38.5% in the second quarter of fiscal 2021 from 25.5% in the comparable prior year period, driven by expense reductions implemented in the last half of fiscal 2020 and improved margins on existing sales.

Operating loss in the second quarter of fiscal 2021 totaled $521,000 compared to an operating loss of $195,000 in the prior year period, reflecting increases in operating expenses for strategic investment.

This quarter’s growth oriented investment in operating expenses includes consulting fees to implement our new enterprise study management system, higher compensation which includes non-cash stock compensation expense, recruiting and relocation fees to onboard new talent, cost to bring services in house to improve margins, and increases or excuse me, and expenses to increase capacity and service offerings.

All combined, corporate unallocated G&A much of which was growth oriented totaled approximately 18% of revenue in the second quarter of fiscal 2021 compared to approximately 10% of revenue in the second quarter of fiscal 2020. It was approximately 15% in the first quarter of fiscal 2021.

I also want to point out that this quarter’s selling expenses were higher compared to prior periods due to our increased book-to-bill ratio and we pay upfront commissions when we win new orders prior to the recognition of corresponding revenue.

And this increase was partially offset by a decrease in travel expenses due to continued limitations on client visits due to the COVID pandemic. Net loss in the second quarter of fiscal 2021 totaled $723,000 or negative $0.06 per diluted share, compared to a net loss of $588,000 or negative $0.05 per diluted share in the comparable prior year period.

Adjusted EBITDA equaled approximately 1.1 million in the second quarter of fiscal 2021 as well as in the comparable prior year period.

The book-to-bill ratio for the second quarter of fiscal 2021 was 1.5 to 1, our backlog at the end of the second quarter of fiscal 2021 was $53.9 million, up 19% from $45.3 million on December 31, 2020 and up 50% from $36 million on March 31, 2020.

Briefly reviewing our first half fiscal 2021 results, total revenue increased 26.6% to 36.6 million, driven by 6.2 million of internal growth and 1.5 million of incremental revenue from a full six months of operations at our Fort Collins, Colorado location that was acquired in December 2019.

Compared to the prior year period, first half 2021 gross margin expanded 333 basis points to 33.3%. Net loss narrowed by approximately $900,000 to $1.1 million or a negative $0.10 per diluted share and adjusted EBITDA increased 51.3% to $2.4 million.

Cash flow from operations during the first half of fiscal 2021 totaled 4.5 million which primarily reflects the add back of depreciation and amortization of $2.2 million, an increase of customer advances of $3.8 million partially offset by an increase in accounts receivable of $1.9 million.

CAPEX for the first half of fiscal 2021 totaled $2.4 million. Our balance sheet at March 31, 2021 included cash and cash equivalents of $2.2 million and long-term debt of $17.9 million. Total debt was $26.2 million, which included a $5.1 million balance of our PPP loans.

We believe the benefit of the PPP loan has allowed us to continue to retain our employees and safely maintain business operations through recent periods. We have submitted our application for forgiveness of 4.9 million of the loan to the bank for their review.

Following our recent equity capital raise and the purchase of Bolder BioPATH, we estimate a diluted share count of approximately 16.5 million and an equity market cap of approximately $430 million based on our closing share price of $26.27 on May 4, 2021.

Overall, we are pleased with the direction our business is heading and feel confident in continuing to invest in our future. This concludes our prepared remarks. So with that I will turn it over to LaTonya to open the call for questions..

Thank you. [Operator Instructions]. Our first question comes from Kyle Baiser [ph] with Talos Securities. Please proceed..

Great, thank you. Congratulations on all the updates. You've certainly been very busy here. Maybe I'll start with your acquisition strategy. As you look at potential subsequent acquisitions, just wondering how you're prioritizing new targets, you've been able to be opportunistic with very high quality targets and nice transaction multiples.

Are you prioritizing, converting outsourcing services to in house services such as genetic toxicology or maybe tuck in acquisitions to add client base that could benefit from cross selling opportunities or both, I am just kind of wondering how you're prioritizing targets right now?.

Thank you Kyle. John, do you want to answer Kyle. .

Sure, there is a lot wrapped up Kyle in that question, but I guess I can think about the prioritization process as being multifactorial.

First of all, I think it's really important that we identify opportunities that share a cultural and philosophic fit with respect to our core values, especially the approach to client experience that is a major part of our brand historically, and will remain a major part of our brand going forward.

You asked about tuck-ins, we certainly want to look for opportunities to bring expanded capabilities to extend our reach within our market space. But obviously, it's also of great value when we have opportunities to bring accretive revenue and accretive profit by using other capabilities that we have elsewhere within the company.

You mentioned decreasing a dependence upon external service providers for key programmatic activities and certainly with the recent announcements about major players exiting from genetic toxicology specifically, is causing us to rethink our approach to our dependence on third parties. So we certainly look for those opportunities.

But I think ultimately, any deal that we contemplate has to create value for our shareholders. And, Bob I don't know if you want to take it back and just respond a little bit more on the value side of these opportunities..

Sure, I think that gets into the pricing and the opportunities. But, John outlined very carefully what we're looking for. In addition, we want to make sure all these acquisitions are going to provide real value for the clients, but also real value for our shareholders.

And in third, it's very important that we're creating a place where people want to work. And the more services and the more talent we surround ourselves with, the easier it is to recruit. And the more the clients want to associate with us and I think it all works hand in hand with how the shareholder value works.

I think these last two were very positive and they're very fair deals. They were great for the sellers, but they were also great for our shareholders. So hopefully, we can continue to find opportunities such as these..

Got it, great. That's very helpful. And regarding the expansion in the St. Louis facility, you mentioned 4.7 million will be to buy the facility. And then there's the 20,000 square feet of unfinished shelf space incremental to the existing 30,000 square feet of finished space.

Have you talked about what you anticipate the incremental CAPEX spend to be to finish this?.

I don't know we've talked about it. But I will say that we expect it is going to be between $2.5 million to $3.5 million, probably over $3 million to $3.5 million to complete that space. And to equip it with some of the equipment we'd like to start off with.

And we hope that we can complete that build out over nine months, but we are still waiting to hear back from the State of Missouri and then once we get those answers, we will make further decisions..

Got it. And I know Beth talked about the unallocated G&A bucket.

I think it was 18%, correct me if I'm wrong, any sense to how this could trend over the next call 12-24 months, this is a key source of leverage from what I understand and so just kind of trying to get a sense of how we should model that going forward?.

Yes, Kyle. I mean, it's something that we watch closely and we don't make investments like this lightly. We make sure we are cash flow positive, but these are significant investments we made this quarter and really in the first quarter.

But if you look at the number, the unallocated G&A, I think last quarter was I'm going to give you some figures and that will probably help give a little bit of direction where we're headed. I think the allocated G&A was 3.4 million and 18.8 million in sales. That's what has generated the 18%.

So in a theoretical business model if we did 25 million on that same three, four, we'd be 13%. There were probably some expenses in that quarter that we at least had 230,000 transaction related expenses in that quarter between due diligence, audits, and legal transition cost.

So if you say it was a more normalized, maybe it's 3.1 on that same quarter of $100 million run rate, which would be $25 million, that would be 12.5%. I think, that during the calls on raising money, I may have used the number, I thought that we ought to try to get to 15% when we got to 115 million to 120 million.

So basically, simply if you keep with that same logic and you say your 150 million would be a $28 million to $29 million a quarter, assuming that same 3.1 and you get the unallocated G&A is coming down to 10 points.

And that combined with some of the insourcing of what we're doing that services are out sourced, I thought we could pick up a point and a half, that really gets you to the 15% EBITDA level, closer to 115 to 120 mark. So that's some of the math that goes into it. I think we build an infrastructure up that is cables supporting that level of investment.

Now, hopefully for us also we will continue to invest. And so the core unallocated corporate G&A we had this past quarter, I expect that we'll still see additional transition costs, and integration costs come through this quarter and possibly into the fourth quarter. So the third and fourth quarter could also see those continued costing.

We're going to continue to be aggressive looking for those opportunities to grow in and invest. But if we were to slow -- if we were to slow down, I think that's where we would be at 115 to 120. And that's probably, that's what gets us to the 15% range.

And I think, as I said before, as we move up to 150, then I think you can move closer to the 20% range. .

Got it. That's helpful. .

I hope that’s helpful. That is a lot of numbers that I thought, I know that this come up a couple times before, and I wanted to kind of give a little bit of idea of how we get there..

That's perfect. Appreciate that. And then just lastly, if I may, what -- if we're looking at organic growth rate going forward, and we just had two acquisitions that closed but can you talk about what a reasonable target is, I mean, is it still close to 20%, just trying to understand how we should model that as well? Thank you..

Well, obviously, our six months is pretty strong. And we're really pleased with the organic growth we were able to get last quarter. Some of that Kyle, I guess, is a function of our, I believe our Q3 of 2019 basis plays 15.8 million.

So, in essence if we are able to duplicate the quarter we just had, we would see about 20% growth just duplicating the quarter on the base we're coming up to in the next quarter. And with the backlog, I think we have a good backlog going into this quarter. So I don't want to give guidance but so far we have set a pretty hard bar for ourselves.

And we've now demonstrated that we have the capacity to exceed that -- to meet or exceed that 20% next quarter. But beyond that, I prefer not to get into to some of the future quarters beyond that..

Okay, got it. That's great. I appreciate you taking the questions and congratulations on all the progress here. .

Thank you..

[Operator Instructions]. There are no further questions in queue at this time. I would like to turn the call back over to Mr. Bob Leasure for closing remarks..

Alright, well I would like to thank everybody for participating in our call this afternoon. If you have any questions, 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 talking to you.

We look forward to reporting back to you in August when we can release our third quarter fiscal 2021 financial results. Hope everyone has a good day. Thank you very much..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day..