Inotiv Inc.

12/05/2025 | Press release | Distributed by Public on 12/05/2025 07:53

Annual Report for Fiscal Year Ending September 30, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements which may be affected by risks and uncertainties, including those discussed in Part I, Item 1A, Risk Factors and elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed in the forward-looking statements, as discussed in the section entitled "Cautionary Note Regarding Forward-Looking Statements" in this Report.
References to fiscal years, years or portions of years in this Item refer to our fiscal year ended September 30, unless otherwise indicated.
The following discussion and analysis focuses on discussion of year-over-year comparisons between fiscal 2025 and fiscal 2024. Discussion of fiscal 2023 results and year-over-year comparisons between fiscal 2024 and fiscal 2023 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, filed with the SEC on December 4, 2024.

All dollar amounts (other than per share amounts) in this Management's Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands, unless otherwise specified.
Business Overview
Inotiv is a leading contract research organization ("CRO") dedicated to providing nonclinical and analytical drug discovery and development services primarily to the pharmaceutical and medical device industries and selling a range of research-quality animals and diets to the same industries as well as academia and government clients. Our products and services focus on bringing new drugs and medical devices through the discovery and preclinical phases of development and, in certain cases, the clinical phases of development, all while focusing on increasing efficiency, improving data, and reducing the cost of discovering and taking new drugs and medical devices to market. Inotiv is committed to supporting discovery and development objectives as well as helping researchers realize the full potential of their critical research and development projects, all while working together to build a healthier and safer world. We are dedicated to practicing high standards of laboratory animal care and welfare.
We operate across 22 sites, encompassing 34 owned or leased facilities, predominantly comprised of vivariums and labs and spread across four countries and one manufacturing site in the U.S. Additionally, we have 14 distribution hubs/warehouse facilities across four countries and one administrative office in the U.S. Our facilities are in the U.K. and Europe (approximately 14% of facilities) and in the U.S. (approximately 86% of facilities). Our corporate headquarters is in West Lafayette, Indiana.
We have two reportable segments: Discovery and Safety Assessment ("DSA") and Research Models and Services ("RMS").
Through our DSA segment, we provide discovery and translational sciences and safety assessment services (including nonclinical development and, in certain cases, clinical development) to support the needs of researchers and clinicians for
primarily small molecule drug candidates, as well as biotherapeutics and biomedical devices utilizing both Good Laboratory Practice ("GLP") and non-GLP. Our scientists have skills in histology, pathology, physiology, surgery, analytical chemistry, drug metabolism, pharmacokinetics, and toxicology. Our principal clients range from small start-up biotechnology companies to some of the largest global pharmaceutical companies, whose scientists are engaged in analytical chemistry, drug safety evaluation, drug metabolism studies, pharmacokinetics, clinical trials, and basic research.
Through our RMS segment, we offer access to a wide range of purpose-bred animal research models for basic research and drug discovery and development, specialized models for specific diseases and therapeutic areas, and diet, bedding and enrichment products, all supported by our deep animal husbandry expertise. We have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and provide access to innovative genetically engineered models and services solutions. Our principal clients include biopharmaceutical companies, CROs, and academic and government organizations.
Our business development efforts focus on both expanding existing client relationships and acquiring new clients. Historically, our RMS segment has maintained stable, long-term relationships with a majority of our clients due to their overarching preference for consistency in the products they use to conduct their studies. However, we are continuing our efforts to cross-sell and expand our client base. We believe our DSA segment, due to its broad menu of services and flexibility in study design, is well positioned to serve the emerging biopharmaceutical segment during the discovery and development phases.
Site Optimization and Transportation
During the twelve months ended September 30, 2025, we moved forward with many of our strategic objectives, which include strengthening the Company's liquidity position, reducing NHP revenue volatility, continuing to focus on client satisfaction and client relationships, and continuing integration efforts. Our December 2024 equity offering provided net proceeds of $27,524. This funding assisted in reducing liquidity risk and allowed us to continue to make strategic long-term decisions, while providing additional operational stability.
In an effort to reduce revenue volatility, we have expanded our NHP client base for calendar year 2025 and have continued to pre-sell our NHP inventory, which helped deliver a more consistent revenue stream in fiscal 2025 as compared to fiscal 2024, and we believe will continue to assist in a more consistent revenue stream for fiscal 2026. In addition, we expect our revenue from our long-term colony management services to continue to increase in calendar year 2026 as compared to calendar year 2025. During the twelve months ended September 30, 2025, we continued to invest in our NHP facilities in order to support our growth initiatives.
Further, in fiscal 2025, we continued to make progress integrating and improving our North American transportation and distribution systems, which we brought in house during fiscal 2024. This has provided an improved client experience and improved our operational efficiency.
Beginning in fiscal year 2022, we have been executing on our restructuring and site optimization plans. These plans included the sale of our Israeli businesses in fiscal year 2023, in addition to the closure and relocation of multiple RMS facilities ("Phase One") by the end of fiscal year 2024. By the end of fiscal year 2025, we believe that, as a result of Phase One and the integration of our North American transportation and distribution systems, we achieved approximately $17,000 to $19,000 in net annual cost savings.
During the first quarter of fiscal 2025, we announced that we would continue our site optimization plan for the RMS business ("Phase Two"). We anticipate that Phase Two will require a capital investment of approximately $6,500, which includes the use of tenant improvement dollars and a portion of a settlement payment we received during March 2025. We also expect that Phase Two will reduce production capacity and create operating efficiencies, while supporting our animal welfare objectives, and provide net annual savings of $6,000 to $7,000. Additionally, we believe Phase Two will allow us to remain agile and to increase capacity in the future, if needed. We are in the process of executing Phase Two, which we plan to complete by March 2026, approximately six months earlier than we originally planned.
In connection with Phase Two, the sale of one U.S. property was completed in June 2025 and the sale of a second U.S. property was completed in September 2025. The net proceeds from the sale in June 2025 were used to repay principal on our term loans, as required by the Credit Agreement (as defined below), during fiscal year 2025, and the net proceeds from the sale in September 2025 were used to repay principal on our term loans, as required by the Credit Agreement, during October 2025.
Refer to Note 10 - Restructuring Costs in our consolidated financial statements contained in Part II, Item 8 for more information related to the site optimizations.
Securities Class Action and Derivative Lawsuits
In order to eliminate the uncertainty, burden, and expense of protracted litigation, on September 25, 2025, we entered into a Stipulation and Agreement of Settlement (the "Proposed Securities Settlement") to settle the Securities Class Action (as defined in Note 15 - Contingencies and Commitments).
The Proposed Securities Settlement does not assign or reflect any admission of wrongdoing or liability by the Company or the individual defendants, all of whom deny any wrongdoing. While the court preliminarily approved the Proposed Securities Settlement on October 3, 2025, it scheduled a final settlement hearing for January 27, 2026, and as a result, as of the date of this report, the Proposed Securities Settlement is still subject in all respects to court approval and there can be no assurance that the court will approve the Proposed Securities Settlement.
If approved by the court, the Proposed Securities Settlement will fully resolve the Securities Class Action claims against the Company and the individual defendants Robert W. Leasure, Beth A. Taylor, John E. Sagartz, and Carmen Wilbourn. As consideration for the Proposed Securities Settlement, the Company will cause to be paid a cash settlement payment of $8,750 ("Cash Payment") to the members of the putative class, which is expected to include all persons and entities who purchased or otherwise acquired shares of the Company's common stock between September 21, 2021 and May 20, 2022
or who held shares of the Company's common stock and were entitled to vote on matters necessary to effectuate the Company's acquisition of Envigo RMS, LLC at a special meeting of the Company's shareholders on November 4, 2021 (subject to certain exclusions). Plaintiff will seek attorneys' fees and costs, the amount of which will be determined by the court and funded from the Cash Payment.
Also on September 25, 2025, the Company reached an agreement in principle to settle (the "Proposed Derivative Settlement") the Derivative Actions (as defined in Note 15 - Contingencies and Commitments). The Company agreed to the Proposed Derivative Settlement to eliminate the uncertainty, burden, and expense of protracted litigation. The Proposed Derivative Settlement does not assign or reflect any admission of wrongdoing or liability by the individual defendants or the Company as the nominal defendant, all of whom deny any wrongdoing. The Proposed Derivative Settlement is subject in all respects to court approval and there can be no assurance that the court will approve the Proposed Derivative Settlement.
If approved by the court, the Proposed Derivative Settlement will fully resolve the Derivative Actions. The Proposed Derivative Settlement credits the plaintiffs in the Derivative Actions for the fact that the Company will receive $2,490 from certain of its insurers to facilitate the resolution of the Securities Class Action, which amount will be utilized by the Company as part of the Cash Payment to the members of the putative class in the Proposed Securities Settlement. The Proposed Derivative Settlement also involves the institution and maintenance of certain corporate governance measures by the Company. These measures are discussed further in Note 15 - Contingencies and Commitments. Plaintiffs in the Derivative Actions will, in addition, seek attorneys' fees, the amount of which will not exceed $2,250 and will be subject to court approval. The Company expects any award of attorneys' fees to be funded by available insurance.
As a result of the amounts included in the Proposed Securities Settlement and the Proposed Derivative Settlement described above, the Company has recorded an $11,000 liability and an insurance recovery receivable of $11,000 as of September 30, 2025.
Refer to Note 15 - Contingencies and Commitments for further discussion of the Securities Class Action and Derivative Lawsuits and the related Proposed Securities Settlement and Proposed Derivative Settlement.
2025 Cybersecurity Incident
On August 8, 2025, we became aware of a cybersecurity incident affecting certain of our systems and data (the "2025 Cybersecurity Incident"). Upon identifying encrypted systems, we took steps to contain, assess, and remediate the cybersecurity incident, including initiating an investigation, engaging external cybersecurity specialists, and restricting access to certain of its systems. We also notified law enforcement. We have restored availability and access to our networks and systems. The forensic investigation of the 2025 Cybersecurity Incident is now complete and determined that between approximately August 5-8, 2025, a threat actor gained unauthorized access to the Company's systems and may have acquired certain data. The Company is in the process of providing notifications regarding the 2025 Cybersecurity Incident in accordance with applicable legal obligations. While we have identified the likely scope of the incident, the full operational and financial impacts are still being evaluated. Accordingly, we have not yet determined whether the 2025 Cybersecurity Incident is reasonably likely to have a material impact on the Company.
External Factors
We remain attentive to external factors, including tariffs, client research and development funding levels, and the recently announced efforts to accelerate implementation of the FDA Modernization Act 2.0, including a roadmap to reduce animal testing in preclinical safety studies with scientifically validated new approach methodologies, any of which may increase our costs and could continue to drive uncertainty and instability in global markets. Any or all of these external factors could impact both of our segments.
Our imported NHPs were subject to tariffs ranging from 10% to 20% during fiscal 2025. These tariffs were required to be paid within 30 days of import, which is a shorter timeframe than the average NHP research model inventory turnover. As a result, payment of tariffs negatively impacted the Company's cash flows during fiscal 2025 and is expected to impact the Company's cash flows in the future. However, we have and expect to continue to work with suppliers and customers to attempt to mitigate the financial impact of these additional costs. The current and future applicable tariff percentages are based on the country of origin of the imported NHPs. If tariff rates continue to increase, we expect to continue working with suppliers and customers to attempt to mitigate these potential additional costs as the NHPs are mission-critical to the safety testing of new medicines; however, there can be no assurance that we will be successful in any mitigation efforts.
Client research and development funding levels, particularly those impacted by government sources like the U.S. National Institutes of Health ("NIH"), can be challenging to forecast. Funding of research and development is impacted by the political process, which is ever-changing. For example, on February 7, 2025, the NIH announced a policy that would reduce research grants by limiting payments for indirect overhead. Subsequently, on April 4, 2025, a federal judge issued a permanent injunction blocking the implementation of this policy.
With respect to the FDA Modernization Act 2.0, which encourages the industry to explore alternatives to animal testing, many of our acquisitions and investments have been implemented, at least in part, if not sometimes wholly, with the intent to help position us for the future. We believe our future objectives are in line with the goals outlined in the FDA Modernization Act 2.0. Examples of some of our current service offerings which we believe are in line with these goals include predictive computer software, computational toxicology, bioinformatics, proteomics, ex vivo and in vitro cell-based assays, and assays we run in human cells and tissues.
Refer to Part I, Item 1A - Risk Factors of this report for further discussion of potential risks associated with tariffs, client research and development funding levels and the implementation of the FDA Modernization Act 2.0.
Consolidated Overview
Revenue for the fiscal year ended September 30, 2025, increased to $513,024 from $490,739 in the fiscal year ended September 30, 2024, due to a $14,458, or 4.7%, increase in RMS revenue primarily driven by higher NHP product and service revenue and a $7,827, or 4.3%, increase in DSA revenue primarily driven by an increase in safety assessment revenue.
Operating loss for the fiscal year ended September 30, 2025 was $30,902, compared to an operating loss of $86,406 in the fiscal year ended September 30, 2024, a decrease of $55,504, which was primarily driven by the change in RMS operating results for the fiscal year ended September 30, 2025 compared to the fiscal year ended September 30, 2024. For the fiscal year ended September 30, 2025, RMS operating income was $20,611, compared to an operating loss of $31,929 for the fiscal year ended September 30, 2024, a change of $52,540. This change was primarily driven by increased RMS revenue discussed above and a decrease in RMS operating expenses (which include selling, general and administrative and other operating expenses) of $38,187. The decrease in operating expenses was primarily driven by the $28,500 charge incurred during the fiscal year ended September 30, 2024 related to the Resolution Agreement and Plea Agreement, which did not repeat during the fiscal year ended September 30, 2025, and a legal settlement of $7,550 that we received during the fiscal year ended September 30, 2025.
Net loss attributable to common shareholders for the fiscal year ended September 30, 2025 decreased to $68,625 from $108,445 in the fiscal year ended September 30, 2024, due primarily to the decrease in operating loss described above.
Net cash used in operations for the fiscal year ended September 30, 2025 was $10,455 compared to $6,805 of net cash used in operations for the fiscal year ended September 30, 2024. Refer to "Liquidity and Capital Resources" below for an analysis of changes.
As of September 30, 2025, the Company had $21,741 in cash and cash equivalents. Total debt, net of debt issuance costs, as of September 30, 2025 was $402,123.
Operational and Capital Resources Highlights during Twelve Months Ended September 30, 2025
•Net book-to-bill ratio for the twelve months ended September 30, 2025 was 1.05x for the DSA services business.
•DSA backlog was $138,197 as of September 30, 2025, up from $129,916 at September 30, 2024.
•We recently engaged Perella Weinberg Partners to provide general financial advisory and investment banking services to assist the Company in exploring potential debt refinancing alternatives.
•In connection with Phase Two of our site optimization plans, we sold two U.S. properties during fiscal year 2025. As required by the Credit Agreement, the net proceeds from the sale in June 2025 were used to repay principal on our term loans, during July 2025 and the net proceeds from the sale in September 2025 were used to repay principal on our term loans during October 2025.
•On August 8, 2025, we became aware of a cybersecurity incident affecting certain of our systems and data (the "2025 Cybersecurity Incident"). We have restored availability and access to the Company's networks and systems. The forensic investigation of the 2025 Cybersecurity Incident is now complete and determined that between approximately August 5-8, 2025, a threat actor gained unauthorized access to the Company's systems and may have acquired certain data. The Company is in the process of providing notifications regarding the 2025 Cybersecurity Incident in accordance with applicable legal obligations. While we have identified the likely scope of the incident, the full operational and financial impacts are still being evaluated. Accordingly, we have not yet determined whether the 2025 Cybersecurity Incident is reasonably likely to have a material impact on the Company.
•In closings on December 19, 2024 and December 30, 2024, the Company raised approximately $27,524 in net proceeds from its underwritten public offering of a total of 6,900,000 common shares at a price to the public of $4.25 per share.
Results of Operations by Segment
Below we have provided discussion and analysis of our financial results by reportable segments:
Twelve Months Ended September 30, 2025 Compared to Twelve Months Ended September 30, 2024
DSA
Twelve Months Ended
September 30,
2025 2024 $ Change % Change
Revenue $ 187,943 $ 180,116 $ 7,827 4.3 %
Cost of revenue 1
138,214 127,216 10,998 8.6 %
Operating expenses2
23,466 26,336 (2,870) (10.9) %
Depreciation and amortization of intangible assets 17,979 17,865 114 0.6 %
Operating income3
$ 8,284 $ 8,699 $ (415) (4.8) %
Operating income % of total revenue 1.6 % 1.8 %
Operating income % of segment revenue 4.4 % 4.8 %
1 Cost of revenue includes cost of services provided and cost of products sold and excludes depreciation and amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses and exclude depreciation and amortization of intangible assets, which is separately stated
3 Table may not foot due to rounding
For the twelve months ended September 30, 2025, DSA revenue was $187,943 compared to $180,116 for the twelve months ended September 30, 2024, representing an increase of $7,827, or 4.3%. The increase in DSA revenue was primarily driven by a $6,376 increase in safety assessment services revenue as a result of an increase in biotherapeutic analysis revenue in connection with new business at our Rockville facility, an increase in surgical services revenue and an increase in general toxicology services revenue. The remaining increase in DSA revenue was primarily due to an increase in our discovery and translational science services revenue.
DSA operating income decreased by $415, or 4.8%, primarily due to an increase of $10,998 in cost of revenue, partially offset by the $7,827 increase in revenue noted above and a decrease of $2,870 in operating expenses. The increase in cost of revenue was primarily due to increases in compensation and benefits expense, partially as a result of additional commercial activity at our Rockville facility, research model expense, professional fees, repairs and maintenance expense and utilities expense, among other changes. The decrease in operating expenses primarily related to decreases in bad debt expense and professional fees, partially offset by an increase in compensation and benefits expense.
RMS
Twelve Months Ended
September 30,
2025 2024 $ Change % Change
Revenue $ 325,081 $ 310,623 $ 14,458 4.7 %
Cost of revenue 1
253,830 252,352 1,478 0.6 %
Operating expenses2
13,399 51,586 (38,187) (74.0) %
Depreciation and amortization of intangible assets 37,241 38,614 (1,373) (3.6) %
Operating income (loss)3
$ 20,611 $ (31,929) $ 52,540 (164.6) %
Operating income (loss) % of total revenue
4.0 % (6.5) %
Operating income (loss) % of segment revenue
6.3 % (10.3) %
1 Cost of revenue excludes depreciation and amortization of intangible assets, which is separately stated
2 Operating expenses include selling, general and administrative and other operating expenses and exclude depreciation and amortization of intangible assets, which is separately stated
3 Table may not foot due to rounding
For the twelve months ended September 30, 2025, RMS revenue was $325,081 compared to $310,623 for the twelve months ended September 30, 2024, representing an increase of $14,458, or 4.7%. The increase in RMS revenue was due primarily to increased NHP product and service revenue of $14,340.
For the fiscal year ended September 30, 2025, RMS operating income was $20,611, compared to an operating loss of $(31,929) for the fiscal year ended September 30, 2024, a change of $52,540. This change was primarily driven by a decrease in RMS operating expenses of $38,187, the increase in RMS revenue of $14,458 discussed above and a decrease in RMS depreciation and amortization of intangible assets of $1,373, partially offset by an increase in RMS cost of revenue of $1,478. The decrease in operating expenses was primarily driven by the $28,500 charge incurred during the fiscal year ended September 30, 2024 related to the Resolution Agreement and Plea Agreement, which did not repeat during the fiscal year ended September 30, 2025 and a legal settlement of $7,550 that we received during the fiscal year ended September 30, 2025, among other immaterial changes.
The increase of $1,478 in cost of revenue was primarily due to increased costs of $7,820 associated with higher NHP-related product and service revenue, partially offset by a decrease in small animal and other non-NHP animal costs, a decrease in transportation costs as a result of the in-house integration of our North American transportation operations and a decrease in facility-related costs, among other immaterial changes.
Resolution Agreement and Plea Agreement
On June 3, 2024, the Company announced that it had reached agreement with the DOJ to resolve a previously-announced criminal investigation into its shuttered canine breeding facility located in Cumberland, Virginia, which was operated originally by Envigo RMS, which the Company acquired in November 2021. In connection with such resolution, the Company and its related entities entered into a Resolution Agreement (the "Resolution Agreement") with the DOJ and the United States Attorney's Office for the Western District of Virginia ("USAO-WDV"), and Envigo RMS and Envigo Global Services, Inc. ("EGSI" and together with Envigo RMS, "Envigo") entered into a Plea Agreement (the "Plea Agreement") with the DOJ and the USAO-WDV. On June 3, 2024, before the United States District Court for the Western District of Virginia, Envigo RMS pleaded guilty to one misdemeanor count of conspiracy to violate the Animal Welfare Act and EGSI pleaded guilty to one felony count of conspiracy to violate the Clean Water Act.
Pursuant to the Resolution Agreement and the Plea Agreement, the Company and Envigo, among other matters, have agreed to: (i) make payments totaling $22,000 in fines, with $5,000 payable on each of June 3, 2025, 2026 and 2027, and $7,000 (plus accrued interest beginning on the sentencing date) payable on June 3, 2028; (ii) on June 3, 2024, pay $3,000, split between the Virginia Animal Fighting Taskforce and the Humane Society of the United States in recognition of assistance provided to the U.S. Government's investigation; (iii) on June 3, 2024, pay $3,500 to the National Fish and Wildlife Foundation to fund environmental projects, studies, and initiatives in Cumberland County, Virginia; (iv) expend at least $7,000 ($2,500 by June 3, 2025, $2,500 by June 3, 2026, and $2,000 by June 3, 2027) for improvements to its facilities and personnel related to the welfare of animals; (v) provide a lien to the United States against sufficient Company
assets to secure the deferred payments in connection with the $22,000 fine, which lien will be junior to only the lien provided by the Company to lenders under its credit facility as of April 1, 2024 and additional liens to secure up to $100,000 of additional debt; (vi) meet specified standards with respect to the health, safety and well-being of animals under the Company's care; (vii) develop, adopt, implement, fund and comply with a comprehensive nationwide compliance plan related to applicable laws; and (viii) on January 20, 2025, appoint the Compliance Monitor to review the Company's care of animals and compliance with certain laws, and to pay all associated costs, which Compliance Monitor shall serve for a term that expires on January 20, 2030, five years from appointment of the Compliance Monitor, unless the Company is released from probation prior to completion of the five-year term, in which case the monitorship term shall expire on January 20, 2028, three years from appointment of the Compliance Monitor, or two months after the completion of probation, whichever is later. In addition, the pleas result in Envigo being subject to probation for up to five years, with the potential to end the term early at a minimum of three years if the Company complies with the elements of the resolution.
For the twelve months ended September 30, 2024, the Company expensed $28,500 related to the Resolution and Plea Agreements, which is presented within other operating expense in the Company's Consolidated Statement of Operations. In line with the Resolution and Plea Agreements, the Company paid $5,000 during the twelve months ended September 30, 2025 and $6,500 during the twelve months ended September 30, 2024, and expects to pay an additional $17,000 over multiple future years. The Company has included $5,000 in accrued expenses and other liabilities on the Consolidated Balance Sheets as of September 30, 2025 and within "Changes in operating assets and liabilities - accrued expenses and other current liabilities" in its Consolidated Statements of Cash Flows for the twelve months ended September 30, 2025 and the Company has included $12,000 in other long-term liabilities on its Consolidated Balance Sheets as of September 30, 2025 and within "Changes in operating assets and liabilities - other assets and liabilities" in its Consolidated Statement of Cash Flows for the twelve months ended September 30, 2025. The total $28,500 charge is reflected in the operating loss of the RMS segment for the twelve months ended September 30, 2024. The charge of $28,500 is non-deductible for U.S. federal income tax purposes. Further, there were multiple amendments to the Company's Credit Agreement which, among other changes, permit charges or expenses attributable to or related to the Resolution Agreement and the Plea Agreement to be added back to the Company's Consolidated EBITDA for purposes of the financial covenants under the Credit Agreement. The Company expects to have additional cash outlays in connection with certain costs related to the Resolution Agreement, which would be paid over the next two to four years. The additional cash outlays could include ongoing monitoring and compliance costs, legal expenses and other payments required to comply with the Resolution Agreement, subject to final approvals, and at this time, the Company expects that such costs would be expensed as incurred.
FNI Settlement
On January 13, 2022, the Company filed a complaint against Freese and Nichols, Inc. ("FNI") titled Envigo RMS Holding Corp. and Envigo Global Services, Inc. v. Freese and Nichols, Inc., Case No. 22-01-61647-CV, in the District Court of Jim Wells County, Texas, 79th Judicial District related to, among other things, FNI's failure to design an adequately sized lagoon to dispose of the current wastewater and future wastewater from expanded operations. The complaint asserted claims against FNI for negligence, negligence per se, and breach of contract seeking damages and attorney fees and costs. On February 14, 2025, the Company (through two of its subsidiaries) entered into a Settlement Agreement (the "FNI Settlement Agreement") with FNI to settle the lawsuit. The FNI Settlement Agreement provides that the parties fully resolve all claims set forth in such lawsuit, without any admission of liability, and that FNI will pay the Company $7,550 within 30 days following the date of the FNI Settlement Agreement. The Court granted the Company's Agreed Motion to Dismiss All Claims on March 27, 2025. The Company received the settlement payment in full prior to March 31, 2025. The $7,550 settlement payment is presented within other operating expense within the Company's Consolidated Statement of Operations for the twelve months ended September 30, 2025.
Unallocated Corporate
Twelve Months Ended
September 30,
2025 2024 $ Change % Change
Operating expenses 1
$ 59,089 $ 62,537 $ (3,448) (5.5) %
Depreciation and amortization of intangible assets 708 639 69 10.8 %
Operating loss $ (59,797) $ (63,176) $ 3,379 (5.3) %
Operating loss % of total revenue (11.7) % (12.9) %
1 Operating expenses include general and administrative and other operating expenses
Unallocated corporate operating loss consists of general and administrative expenses, other operating expenses and depreciation expense that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate operating expenses of $3,448 in the twelve months ended September 30, 2025, compared to the twelve months ended September 30, 2024, was primarily driven by decreases in compensation and benefits expense, legal fees and stock-based compensation expense, among other individually immaterial items, partially offset by an increase in information technology expenses associated with the 2025 Cybersecurity Incident.
Other Expense
Other expense increased by $12,512 for fiscal year 2025 compared to fiscal year 2024. The increase was primarily driven by an increase of $9,709 in interest expense as a result of additional second lien debt incurred in September 2024 and periodic draws on our revolving credit facility, as well as foreign exchange rate losses.
Income Taxes
Our effective income tax rates for fiscal 2025 and fiscal 2024 were 21.8% and 16.7%, respectively. The income tax benefit recorded for fiscal 2025 and fiscal 2024 was $19,143 and $21,875, respectively. For fiscal year 2025, the benefit from income taxes primarily related to deferred tax benefits on the pre-tax loss and a decrease in valuation allowances as a result of changes in U.S. federal tax regulation, partially offset by unfavorable permanent items. The benefit from income taxes for fiscal year 2024 primarily related to deferred tax benefits on the pre-tax loss, partially offset by unfavorable permanent items related to the Resolution and Plea Agreements, an increase in valuation allowances and other permanent items.
Consolidated Net Loss
As a result of the above described factors, we had a consolidated net loss of $68,625 for the twelve months ended September 30, 2025, as compared to a consolidated net loss of $108,885 for the twelve months ended September 30, 2024.
Liquidity and Capital Resources
During the fiscal year ended September 30, 2025, revenue and operating loss were $513,024 and $30,902, respectively, as compared to $490,739 and $86,406, respectively, in the fiscal year ended September 30, 2024. Despite these results, the Company had negative operating cash flows, operating losses and net losses. As of September 30, 2025, the Company has cash and cash equivalents of $21,741 and access to a $15,000 revolver, which had a $3,000 balance outstanding as of September 30, 2025. The Company was in compliance with its financial covenants under its Credit Agreement as of September 30, 2025. If the Company's results of operations in the twelve months following the date of this report do not improve relative to its fiscal 2025 results, the Company will be at risk of non-compliance with its financial covenants under its Credit Agreement. Further, the Company's Term Loan Facility, Delayed Draw Term Loan and Incremental Term Loans mature in the next 12 months.
If at any time in the twelve months following the date of this report, the Company fails to comply with its financial covenants which remains unremedied for the period of time stipulated under the Credit Agreement, this would constitute an event of default under the Credit Agreement and the lenders may, among other remedies set out under the Credit Agreement, declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be immediately due and payable. Furthermore, if the lenders were to accelerate the loans under the Credit Agreement, such acceleration would constitute a default under our indentures governing the Company's Convertible Senior Notes (the "Notes") and the Company's 15.00% Senior Secured Second Lien PIK Notes due 2027 (the "Second Lien
Notes") which, if not cured within 30 days following notice of such default from such trustees or holders of 25 percent of the Notes and from the trustee or holders of 30 percent of the Second Lien Notes, would permit the trustee or such holders to accelerate the Notes and the Second Lien Notes. If the loans under the Credit Agreement, the Notes and the Second Lien Notes are accelerated, the Company does not believe its existing cash and cash equivalents, together with cash generated from operations, would be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and repay the entirety of its outstanding senior term loans, outstanding Notes, outstanding revolving credit facility balance and outstanding Second Lien Notes in the next twelve months. Additionally, access to the revolver would be restricted and such funds would not be available to pay for any operating activities.
Our evaluation of the Company's ability to continue as a going concern in accordance with U.S. generally accepted accounting principles entailed analyzing prospective fully implemented operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balances in order to satisfy our obligations, including cash outflows for planned targeted capital expenditures, and to comply with minimum liquidity and financial covenant requirements under our debt covenants related to borrowings pursuant to its Credit Agreement for at least the next twelve months. This evaluation initially does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented and are outside of its control as of the date the consolidated financial statements are issued. When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the consolidated financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.
Management has developed our fiscal 2026 annual operating plan in which we plan to continue our efforts to optimize our capital allocation and expense base. Additionally, the Company's plan is to continue its efforts to improve its operating results through increases to our NHP-related product and service revenue and increasing our volume of discovery and safety assessment contract awards. In connection with management's fiscal 2026 annual operating plan, the Company believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations and satisfy its obligations, including cash outflows for planned targeted capital expenditures, for at least the next 12 months, excluding the maturity of the Company's Term Loan Facility, Delayed Draw Term Loan and Incremental Term Loans in November 2026. However, management's fiscal 2026 annual operating plan forecasts noncompliance with its financial covenants pursuant to the Seventh Amendment to the Credit Agreement. In the event that the Company fails to comply with the requirements of the financial covenants set forth in the Credit Agreement, the Company has approximately 55 days subsequent to any fiscal quarter, and approximately 100 days subsequent to fiscal year-end, to cure noncompliance (the "grace period").
The Company also continues to discuss its current business conditions with its lenders. Additionally, the Company is exploring potential debt refinancing alternatives. There is no assurance that the Company's lenders will agree to any amendment or extension to the Credit Agreement, nor can there be any assurance that the Company would be able to raise additional capital, whether through selling additional equity or debt securities or obtaining a line of credit or other loan on terms acceptable to the Company or at all. See Note 6 - Debt for further information about the Company's existing credit facilities and requirements under its debt covenants.
The Company's liquidity needs and compliance with covenants depend, among other things, on its ability to source and sell NHPs, its ability to fill its expanded DSA capacity, its ability to generate cash from other operating activities and its ability to manage its forecasted capital expenditures. Although management believes that it will be able to implement its plan, there can be no assurances that its plan will prove successful. As a result, substantial doubt about the Company's ability to continue as a going concern exists.
Comparative Cash Flow Analysis
As of September 30, 2025, we had cash and cash equivalents of $21,741 compared to $21,432 of cash and cash equivalents as of September 30, 2024. As of September 30, 2025, we had a $3,000 outstanding balance on our $15,000 revolving credit facility. Information about other debt outstanding as of each date is set forth below under "Capital Resources."
Net cash used in operating activities was $10,455 for the fiscal year ended September 30, 2025, compared to $6,805 for the fiscal year ended September 30, 2024. Contributing factors to our cash used in operations for fiscal 2025 were a consolidated net loss of $68,625, a $21,612 decrease in deferred taxes and $1,144 for net changes in operating assets and
liabilities, partially offset by noncash charges of $55,928 for depreciation and amortization, $6,028 for stock compensation expense, $12,535 of non-cash interest and accretion expense and $5,206 of amortization of debt issuance costs and original issue discount. Contributing factors to our cash used in operating activities for fiscal 2024 were a consolidated net loss of $108,885, a $23,251 decrease in deferred taxes, and a gain on debt extinguishment of $1,860, partially offset by $57,118 for depreciation and amortization, $52,604 for net changes in operating assets and liabilities, $7,378 of non-cash interest and accretion expense, $6,740 for employee stock compensation expense and $3,745 of amortization of debt issuance costs and original issue discount. Refer to the Statements of Cash Flows within Part II, Item 8 of this Report for further details of net operating cash flows.
Net cash used in investing activities was $12,891 for the fiscal year ended September 30, 2025 compared to net cash used in investing activities of $16,832 for the fiscal year ended September 30, 2024.
Our cash used in investing activities in fiscal 2025 was primarily related to capital expenditures of $16,615, partially offset by proceeds from the sale of property and equipment. Capital expenditures in fiscal 2025 primarily consisted of investments in facility improvements for animal welfare and capacity expansions to support future NHP colony management service revenue growth.
Our cash used in investing activities during fiscal 2024 was primarily related to capital expenditures of $22,310, partially offset by proceeds from sale of property and equipment of $5,478. The capital expenditures reflect investments in completing our DSA capacity expansions, infrastructure improvements in NHP facilities, renovations in the U.K. in order to complete the expansion of Hillcrest for new customer contracts and the consolidation of Blackthorn, enhancements in laboratory technology, and improvements for animal welfare. The proceeds from sales of property and equipment predominantly relate to the sales of our facilities in Blackthorn, U.K., Gannat, France, Spain and Cumberland, Virginia.
Net cash provided by financing activities was $23,701 during the fiscal year ended September 30, 2025 compared to $9,675 during the fiscal year ended September 30, 2024.
Contributing factors to financing activities for fiscal 2025 primarily included net proceeds from the issuance of common shares of $27,524 and borrowings on the revolving credit facility of $26,000, partially offset by payments on the revolving credit facility of $23,000, payments on senior term notes and delayed draw term loans of $4,945 and other financing activities of $1,878.
Contributing factors to financing activities for fiscal 2024 primarily included issuance of Second Lien Notes of $17,000 and borrowings on the revolving loan facility of $12,000, partially offset by payments on the revolving credit facility of $12,000, payments on senior term notes and delayed draw term loans of $3,454 and other financing activities of $3,871.
Inflation
We do not believe that inflation has had a material adverse effect on our business, operations or financial condition.
Capital Resources
Our indebtedness as of September 30, 2025 and September 30, 2024 is detailed in the table below. Refer below for discussion of the Revolving Credit Facility.
September 30, 2025 September 30, 2024
Seller Note - Bolder BioPath (Related party) $ 150 $ 376
Seller Note - Preclinical Research Services - 464
Seller Payable - Orient BioResource Center 3,235 3,700
Seller Note - Histion (Related party) - 84
Second Lien Notes 23,220 17,846
Convertible Senior Notes 116,440 109,979
Term Loan Facility, DDTL and Incremental Term Loans 268,654 272,840
Total debt before unamortized debt issuance costs $ 411,699 $ 405,289
Less: Debt issuance costs not amortized (9,576) (11,950)
Total debt, net of unamortized debt issuance costs $ 402,123 $ 393,339
Less: Current portion (402,123) (3,538)
Total Long-term debt $ - $ 389,801
If the Company's results of operations in the twelve months following the date of this report do not improve relative to its fiscal 2025 results, it is probable that the Company will fail its financial covenants within twelve months of the balance sheet date. As a result, we have classified the Term Loan Facility, DDTL and Incremental Term Loans (each as defined below), the Notes and the Second Lien Notes as current. Refer to Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements contained in Part II, Item 8 for the Company's analysis of its liquidity and going concern, including cross-default considerations.
Refer to Note 6 - Debtto our consolidated financial statements contained in Part II, Item 8 for the combined aggregate amount of maturities over the next five years.
Summary of Activity
Fiscal 2025
We did not enter into any new debt arrangements, or amend any existing debt arrangements during fiscal 2025. During the fourth quarter of fiscal 2025, we borrowed $6,000 under our revolving credit facility and repaid $3,000, leaving an outstanding balance of $3,000 as of September 30, 2025.
Fiscal 2024
On September 13, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into the Seventh Amendment and the Company and the Subsidiary Guarantors entered into the Purchase Agreement (as defined below), with the Purchasers. Pursuant to these agreements, the Purchasers acquired $22,000 in aggregate principal amount of Second Lien Notes from the Company ("Purchaser's Second Lien Notes") and warrants to purchase 3,946,250 shares of the Company's common shares (such warrants, the "Warrants" and such common shares, the "Common Shares") for consideration comprised of (i) $17,000 in cash and (ii) the cancellation of $8,333 of the Notes issued pursuant to the Convertible Bond Indenture (as defined below). Additionally, pursuant to the Fee Letter between the Company and the structuring agent, the Company also issued to the structuring agent $550 aggregate principal amount of Second Lien Notes and additional warrants to purchase 200,000 Common Shares as compensation for its services as structuring agent.
In connection with these transactions, $8,333 of the Notes were cancelled by the Company under the terms of the Purchase Agreement on the same date, such that the aggregate principal amount of Notes that remains outstanding is $131,667, which resulted in a gain on extinguishment of $1,860. The gain on extinguishment of debt is presented in Other (expense) income.
On August 7, 2024 and September 13, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Sixth and Seventh Amendments, respectively, to the Credit Agreement. The Sixth and Seventh Amendments waived the financial covenant tests under the Credit Agreement for the fiscal quarter ended June 30, 2024 through the fiscal quarter ended March 31, 2025. Additionally, the Seventh Amendment permitted the issuance of the Second Lien Notes. Refer below for further information related to these amendments.
On May 14, 2024 and June 2, 2024, the Company, the lenders party thereto, and the Agent, entered into the Fourth and Fifth Amendments, respectively, to the Credit Agreement. Refer below for further information related to those amendments.
Revolving Credit Facility
As of September 30, 2025, the Company had a $3,000 outstanding balance on the revolving credit facility, which remains outstanding as of the date of this report. As of September 30, 2024, the Company had no outstanding balance on the revolving credit facility. Refer to the Consolidated Statements of Cash Flows for information related to borrowings and payments on the revolving credit facility during the twelve months ended September 30, 2025, 2024 and 2023.
Term Loan Facility, DDTL and Incremental Term Loans
Below are the weighted-average effective interest rates for the loans available under the Credit Agreement:
Twelve Months Ended
September 30,
2025 2024 2023
Effective interest rates:
Term Loan 12.58 % 11.39 % 10.41 %
Initial DDTL 12.53 % 11.37 % 10.41 %
Additional DDTL 12.68 % 11.50 % 10.57 %
On November 5, 2026, the Term Loan Facility, DDTL and Incremental Term Loans will mature, any amounts outstanding under the revolving credit facility will be due and payable, and the Credit Agreement will terminate.
Credit Agreement
On November 5, 2021, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Credit Agreement (the "Credit Agreement"). The Credit Agreement provides for a term loan facility (the "Term Loan Facility") in the original principal amount of $165,000, a delayed draw term loan facility in the original principal amount of $35,000 (available to be drawn up to 18 months from the date of the Credit Agreement) (the "Initial DDTL" and together with the Additional DDTL, the "DDTL") and a revolving credit facility in the original principal amount of $15,000. On November 5, 2021, the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the DDTL or the revolving credit facility.
The Company could have elected to borrow on each of the loan facilities at either an adjusted LIBOR rate of interest or an adjusted prime rate of interest. Adjusted LIBOR rate loans accrued interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). The LIBOR rate had to be a minimum of 1.00%. The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%. Adjusted prime rate loans accrued interest at an annual rate equal to the prime rate plus a margin of between 5.00% and 5.50%, depending on the Company's then current Secured Leverage Ratio. The initial adjusted prime rate of interest was the prime rate plus 5.25%.
The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving credit facility and (ii) a fee based on a percentage per annum equal to 1.00% on the average daily undrawn portion of the commitments in respect of the delayed draw loan facility. In each case, such fee shall be paid quarterly in arrears.
Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to 1.00% of their respective original principal amounts. The Company shall also repay the term loan facility on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time. Voluntary prepayments were subject to a 1.00% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
The Company is required to maintain a Secured Leverage Ratio of not more than 4.25 to 1.00 for the Company's fiscal quarters through the fiscal quarter ended June 30, 2023, 3.75 to 1.00 beginning with the Company's fiscal quarter ended September 30, 2023, and 3.00 to 1.00 beginning with the Company's fiscal quarter ended March 31, 2025. The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio was 1.00 to 1.00 during the first year of the Credit Agreement and is 1.10 to 1.00 from and after the Credit Agreement's first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
On January 7, 2022, the Company drew $35,000 on the Initial DDTL. Amounts outstanding under the Initial DDTL accrued interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%.
First Amendment to Credit Agreement
On January 27, 2022, the Company, Subsidiary Guarantors, the lenders party thereto, and the Agent entered into the First Amendment to the existing Credit Agreement. The First Amendment provides for, among other things, an increase to the existing term loan facility in the amount of $40,000 (the "Incremental Term Loans") and the Additional DDTL in the original principal amount of $35,000, which amount is available to be drawn up to 24 months from the date of the First Amendment. The Incremental Term Loans and any amounts borrowed under the Additional DDTL are referred to herein as the "Additional Term Loans". On January 27, 2022, the Company borrowed the full amount of the Incremental Term Loans, and on October 12, 2022, the Company borrowed the full $35,000 under the Additional DDTL.
Amounts outstanding under the Additional Term Loans accrued interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest was the LIBOR rate plus 6.25%.
The Additional Term Loans require annual principal payments in an amount equal to 1.00% of the original principal amount. Voluntary prepayments of the Additional Term Loans were subject to a 1.00% prepayment premium if made on or prior to November 5, 2023 and other breakage penalties, as defined in the Credit Agreement. Voluntary prepayments made after November 5, 2023 are not subject to any prepayment premium.
The Company shall also repay the term loans on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio.
The Additional Term Loans are secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of the Additional Term Loans is guaranteed by each of the Subsidiary Guarantors.
The Additional Term Loans will mature on November 5, 2026.
Second Amendment to Credit Agreement
On December 29, 2022, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Second Amendment (the "Second Amendment") to the Credit Agreement.
The Second Amendment provided for, among other things, an extension of the deadline for the Company to provide to the lenders the audited financial statements for the Company's fiscal year ended September 30, 2022 and an annual budget for
2023; the Company satisfied these requirements by the extended deadline. The Second Amendment added a requirement that the Company provide, within 30 days after the end of each month, an unaudited consolidated balance sheet, statement of income and statement of cash flows as of the end of, and for, such month, as well as a "key performance indicator" report. The Second Amendment also requires that, within 10 business days after the end of each month, the Company will provide a rolling 13-week cash flow forecast prepared on a monthly basis. The Second Amendment further provides that, upon the request of the Required Lenders (as defined in the Credit Agreement), the Company will permit a financial advisor designated by the Required Lenders to meet with management of the Company to discuss the affairs, finances, accounts and condition of the Company during the six-month period following the effective date of the Second Amendment. In addition, the Second Amendment requires the Company to deliver an updated organization chart and certain supplemental information regarding the Company's subsidiaries in connection with each quarterly report required pursuant to the Credit Agreement.
Under the Second Amendment, the Company could have elected to borrow on each of the loan facilities at either an adjusted term secured overnight financing rate ("Term SOFR") rate of interest or an alternate base rate of interest. Term SOFR loans accrued interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448%and 0.42826%, depending on the term of the loan ("Adjusted Term SOFR"); provided that, Adjusted Term SOFR could never be less than 1.00%, and (ii) a margin of between 6.00%and 6.50%, depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). Alternate base rate loans could accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%, (b) the Agent's prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00%(the "Second Amendment Alternate Base Rate"); provided that, the Second Amendment Alternate Base Rate could never be less than 2.00%, plus (ii) a margin of between 5.00%and 5.50%, depending on the Company's then current Secured Leverage Ratio.
The Second Amendment also provides that the Company may not request any credit extensions under the revolving credit facility under the Credit Agreement, if any of the conditions precedent set forth in Section 4.02 of the Credit Agreement cannot be satisfied, including, without limitation, the making of the representation and warranty that as of the date of the most recent audited financial statements delivered to the Agent, no event, change, circumstance, condition, development or occurrence has had, or would reasonably be expected to result in, either individually or in the aggregate, a Material Adverse Effect (as defined in the Credit Agreement).
In addition, the Second Amendment provided that, no later than January 13, 2023 (or such later date as the Required Lenders shall agree in their discretion), the Company shall (i) appoint a financial advisor on terms reasonably acceptable to the Required Lenders and the Company for a term of at least six months, (ii) provide a 13-week budget to the Agent, and (iii) deliver a perfection certificate supplement updating certain information previously provided with respect to each of the Company and the Subsidiary Guarantors, including information regarding certain collateral and other assets owned by such parties. The Company timely satisfied each of these requirements.
Third Amendment to Credit Agreement
On January 9, 2023, the Company, the Subsidiary Guarantors, the lenders party thereto, and the Agent, entered into a Third Amendment ("Third Amendment") to the Credit Agreement. The Third Amendment provides that, among other things, during the period beginning on January 9, 2023 and, subject to the terms of the Credit Agreement, ending on the date on which financial statements for the Company's fiscal quarter ended March 31, 2024 are delivered or are required to be delivered, as long as no event of default has occurred (the "Amendment Relief Period"):
•the Cambodian NHP-related matters, to the extent existing and disclosed to the lenders prior to December 29, 2022, shall not constitute a Material Adverse Effect under the Credit Agreement and will not restrict the Company's ability to request credit extensions under the revolving credit facility;
•the use of borrowings under the revolving credit facility is limited to funding operational expenses of the Company in the ordinary course and cannot be used for the making or funding of investments, permitted acquisitions or restricted payments, payments or purchases with respect to any indebtedness, bonuses or executive compensation, or judgments, fines or settlements; and
•additional limitations are imposed on the Company under the Credit Agreement, including restrictions on permitted asset sales, a prohibition on making permitted acquisitions, and significant limitations on the ability to incur additional debt, make investments and make restricted payments.
The Third Amendment provides that from and after the date thereof, no incremental facilities under the Credit Agreement may be established or incurred. The Third Amendment also provides for additional mandatory prepayments of borrowed amounts following the receipt by the Company of certain cash receipts, including proceeds from certain equity issuances and cash received by the Company not in the ordinary course of business. Under the Third Amendment, after any draw on the revolving credit facility, the Company's cash and cash equivalents held on hand domestically within the U.S. cannot exceed $10,000.
Under the Third Amendment, the Company may elect to borrow on each of the loan facilities accruing interest at either an adjusted Term SOFR or an alternate base rate of interest. Term SOFR loans shall accrue interest at an annual rate equal to the applicable Term SOFR rate plus (i) an adjustment percentage equal to between 0.11448% and 0.42826%, depending on the term of the loan, provided that, the Adjusted Term SOFR shall never be less than 1.00% per annum, plus (ii) an applicable margin of 6.75% per annum for term loans maintained as SOFR loans or 9.50% per annum for revolving loans maintained as SOFR loans. Alternate base rate loans shall accrue interest at an annual rate equal to (i) the highest of (a) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%, (b) the Agent's prime rate and (c) Adjusted Term SOFR for a one-month tenor plus 1.00% (the "Alternate Base Rate"), provided that, the Alternate Base Rate is subject to a floor of 2.00% per annum plus (ii) an applicable margin of 5.75% per annum for term loans maintained as Alternate Base Rate loans or 8.50% per annum for revolving loans maintained as Alternate Base Rate loans.
The fee consideration payable by the Company for each consenting lender party to the Third Amendment is: (i) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender; (ii) 0.50% of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in cash upon the occurrence of certain prepayments of the term loan under the Credit Agreement; and (iii) 7.00% of the aggregate amount of the revolving commitments held by each consenting revolving lender, to be paid in cash upon the occurrence with certain permanent reductions of the revolving loans under the Credit Agreement.
Fourth Amendment to Credit Agreement
On May 14, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fourth Amendment (the "Fourth Amendment") to the Credit Agreement. The Fourth Amendment provided that any charges or expenses attributable to or related to an agreement in principle (subsequently replaced by the Resolution Agreement and Plea Agreement) could be added back to the Company's Consolidated EBITDA (up to $26,500) for purposes of the financial covenants under the Credit Agreement. Refer to Note 15 - Contingencies and Commitments for further discussion of the Resolution Agreement and Plea Agreement.
The fee consideration payable by the Company for each consenting lender party to the Fourth Amendment is 0.50%of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender.
Fifth Amendment to Credit Agreement
On June 2, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Fifth Amendment (the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment, among other changes, permits charges or expenses attributable to or related to the Resolution Agreement and the Plea Agreement to be added back to the Company's Consolidated EBITDA in an amount up to $28,500; excludes any direct effects to the Company resulting from the Resolution Agreement and the Plea Agreement from being deemed a material adverse effect under the Credit Agreement; permits liens on the Company and certain subsidiaries in favor of DOJ in connection with the Resolution Agreement and the Plea Agreement; provides that certain uncured or unwaived breaches of the terms and conditions of the Resolution Agreement and the Plea Agreement shall be considered an event of default under the Credit Agreement; and enables the lenders to cause, at their discretion, material foreign subsidiaries to be joined as guarantors of the Company's obligations under the Credit Agreement. Refer to Note 15 - Contingencies and Commitments for further discussion of the Resolution Agreement and Plea Agreement.
The fee consideration payable by the Company for each consenting lender party to the Fifth Amendment is 0.50%of the aggregate outstanding principal amount of the term loans held by each consenting term loan lender, to be paid in-kind and capitalized to the principal amounts of the term loans held by such lender.
Sixth Amendment to Credit Agreement
On August 7, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into a Sixth Amendment (the "Sixth Amendment") to the Credit Agreement. The Sixth Amendment among other changes, waived the financial covenant tests set out under the Credit Agreement for the fiscal quarter ended June 30, 2024, established a new weekly liquidity reporting requirement to the lenders, and established a new minimum weekly liquidity requirement of $7,000for each of the weeks ended August 16, 2024, August 23, 2024and August 30, 2024, $17,500for each of the weeks ended October 11, 2024, October 18, 2024and October 25, 2024and $10,000for each other week thereafter.
Seventh Amendment to Credit Agreement
On September 13, 2024, the Company, the Subsidiary Guarantors and the lenders party thereto entered into the Seventh Amendment to the Credit Agreement. The Seventh Amendment, among other changes, permitted the incurrence of the issuance of the Second Lien Notes in an aggregate amount of $22,550, made certain changes to the component definitions of the financial covenants, including the definition of Fixed Charge Coverage Ratio, and increased the cash netting capability in the Secured Leverage Ratio covenant. The Seventh Amendment included the addition of a maximum capital expenditure limit and a minimum EBITDA test effective as of the closing date, waived the existing financial covenants from the date of the Seventh Amendment until June 30, 2025, and established new financial covenant tests for the fiscal quarters starting June 30, 2025and thereafter. The Seventh Amendment also capped the reinvestment of funds from extraordinary receipts and asset sales and casualty events at $5,000in the aggregate, and established a non-voting third party observer to the Company's board of directors meetings, as elected by the lenders. Additionally, the Seventh Amendment permits charges or expenses attributable to or related to the Resolution Agreement and the Plea Agreement to be added back to the Company's Consolidated EBITDA in an amount up to $32,000 for purposes of the financial covenants under the Credit Agreement. This is an update to the $28,500 provided in the Fifth Amendment.
Second Lien Notes
Purchase Agreement
The Company and the Subsidiary Guarantors entered into a Purchase Agreement (the "Purchase Agreement"), dated September 13, 2024, with the Purchasers, pursuant to which the Purchasers acquired $22,000in aggregate principal amount of the Second Lien Notes and Warrants to purchase 3,946,250 Common Shares for consideration comprised of (i) $17,000in cash and (ii) the cancellation of approximately $8,333of the Company's Notes held by certain of the Purchasers. In connection with the transactions contemplated by the Purchase Agreement, and pursuant to a Fee Letter between the Company and the structuring agent, the Company also issued to the structuring agent $550aggregate principal amount of theSecond Lien Notes and additional warrants to purchase 200,000Common Shares as compensation for its services as structuring agent for the transactions. In connection therewith, $8,333of the Notes were cancelled by the Company under the terms of the Purchase Agreement, such that the aggregate principal amount of Notes that remains outstanding is $131,667.
Second Lien Indenture
The Second Lien Notes were issued pursuant to an indenture (the "Second Lien Indenture"), dated as of September 13, 2024, by and between the Company, the Subsidiary Guarantors and U.S. Bank Trust Company, National Association, as trustee (the "Second Lien Trustee"). The Second Lien Notes are the Company's senior secured second lien obligations and are secured by substantially all of the Company's and its subsidiaries' assets, and are guaranteed on a senior secured second lien basis by the Subsidiary Guarantors.
Interest on the Second Lien Notes is payable in kind. The Second Lien Notes accrue interest at a rate of 15.00%per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, with the initial payment on December 31, 2024. The Second Lien Notes will mature on February 4, 2027, unless earlier repurchased or redeemed.
The Second Lien Notes will be redeemable, in whole or in part, at the Company's option at any time on or prior to March 13, 2026, at a cash redemption price equal to 100.00%of the principal amount of the Second Lien Notes redeemed, plus accrued and unpaid interest, plus a make-whole premium, as further described in the Second Lien Indenture. The Second Lien Notes may be redeemed on or after March 14, 2026through and including September 13, 2026, at a redemption price of 102.00%of the principal amount of the Second Lien Notes to be redeemed and (ii) on and after September 14, 2026, at a redemption price of 100.00%of the principal amount of the Second Lien Notes to be redeemed, in each case plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
As of September 30, 2025 and September 30, 2024, there were $1,297 and $1,563, respectively, in unamortized debt issuance costs related to the Second Lien Notes. For the twelve months ended September 30, 2025, the total interest expense was $6,290, including coupon interest expense of $3,983, accretion expense of $1,608, and amortization of debt discount and issuance costs of $699.
The Second Lien Indenture contains covenants restricting the Company's and its subsidiaries' ability to incur indebtedness, incur liens, make investments, make restricted payments, make asset sales and engage in transactions with affiliates, subject to certain baskets. The Second Lien Indenture requires the Company to add future assets to the collateral under the Security Agreement (as defined below) and to add future subsidiaries as guarantors under the Security Agreement.
The Second Lien Notes have customary provisions relating to the occurrence of "Events of Default" (as defined in the Second Lien Indenture), which include, among others, the following: (i) certain payment defaults on the Second Lien Notes (which, in the case of a default in the payment of interest on the Second Lien Notes, will be subject to a 30-day cure period); (ii) a default by the Company in its obligations or agreements under the Second Lien Indenture or the Second Lien Notes if such default is not cured or waived within certain grace periods; (iii) certain defaults by the Company or any of its subsidiaries with respect to indebtedness for borrowed money of at least $8,625during the Amendment Relief Period (as defined in the Second Lien Indenture) or of at least $17,250thereafter; (iv) certain defaults by the Company or any of its subsidiaries with respect to the Credit Agreement; (v) subject to certain exceptions, the rendering of certain judgments against the Company or any of its subsidiaries for the payment of at least $8,625during the Amendment Relief Period or of at least $17,250thereafter, where such judgments are not discharged or stayed within 90 daysafter the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vi) the occurrence of certain ERISA events; (vii) the loss of material security interests and liens and guarantees, subject to certain exceptions; (viii) certain payment defaults in excess of $11,500owned by the Company or any of its subsidiaries under the 2024 Settlement (as defined in the Second Lien Indenture) and other failures to perform any term, covenant, condition or agreement contained in the 2024 Settlement that is capable of being cured and that is not cured within 30 daysafter receipt by the Company or any of its subsidiaries of written notice of such failure; (ix) any note Document (as defined in the Second Lien Indenture) or material provision thereof being declared null and void by a court of competent jurisdiction and (x) certain events of bankruptcy, insolvency and reorganization involving the Company or any of the Company's significant subsidiaries.
If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Second Lien Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Second Lien Trustee, by notice to the Company, or noteholders of at least 30.00%of the aggregate principal amount of Second Lien Notes then outstanding, by notice to the Company and the Second Lien Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Second Lien Notes then outstanding to be due and payable immediately.
Security Agreement
On September 13, 2024, the Company and the Subsidiary Guarantors entered into a Security Agreement (the "Security Agreement") with the U.S. Bank Trust Company, National Association, as the collateral agent for the Second Lien Notes (the "Collateral Agent"). Pursuant to the Security Agreement, the Company and Subsidiary Guarantors granted the Collateral Agent a second lien security interest in substantially all of their assets, including but not limited to certain accounts, equipment, fixtures and intellectual property, in order to secure the payment and performance of all of the Obligations, as defined in the Second Lien Indenture.
Convertible Senior Notes
On September 27, 2021, the Company issued $140,000 principal amount of the Notes. The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 27, 2021, among the Company, the Company's wholly-owned subsidiary, BAS Evansville, Inc., as guarantor (the "Guarantor"), and U.S. Bank National Association, as trustee (the "Convertible Bond Indenture"). Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $15,000 principal amount of the Notes. The Notes issued on September 27, 2021 included $15,000 principal amount of the Notes issued pursuant to the full exercise by the initial purchaser of such option. The Company used the net proceeds from the offering of the Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of the Envigo acquisition and related fees and expenses.
In connection with the Purchase Agreement, $8,333of the Notes were cancelled by the Company under the terms of the Purchase Agreement, such that the aggregate principal amount of Notes that remains outstanding is $131,667.
The Notes are the Company's senior, unsecured obligations and are (i) equal in right of payment with the Company's existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company's existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company's non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by the Guarantor.
The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2022. The Notes will mature on October 15, 2027, unless earlier repurchased, redeemed or converted. Before April 15, 2027, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 15, 2027, noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company's election. The initial conversion rate is 21.7162 common shares per $1 principal amount of Notes, which represents an initial conversion price of approximately $46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a "Make-Whole Fundamental Change" (as defined in the Convertible Bond Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
As of September 30, 2025 and 2024, there were $2,093 and $3,031, respectively, in unamortized debt issuance costs related to the Notes. For the twelve months ended September 30, 2025, the total interest expense was $11,681, including coupon interest expense of $4,282, accretion expense of $6,461, and the amortization of debt discount and issuance costs of $938. During the twelve months ended September 30, 2024, the total interest expense was $11,745, including coupon interest expense of $4,529, accretion expense of $6,270, and the amortization of debt discount and issuance costs of $946. During the twelve months ended September 30, 2023, the total interest expense was $11,089, including coupon interest expense of $4,515, accretion expense of $5,686, and the amortization of debt discount and issuance costs of $888.
The Notes are redeemable, in whole and not in part, at the Company's option at any time on or after October 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130.00% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time.
If certain corporate events that constitute a "Fundamental Change" (as defined in the Convertible Bond Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company's common shares.
The Notes have customary provisions relating to the occurrence of "Events of Default" (as defined in the Convertible Bond Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company's failure to send certain notices under the Convertible Bond Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Convertible Bond Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Convertible Bond Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Convertible Bond Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least $20,000; (vi) the rendering of certain judgments against the
Company, the Guarantor or any of their respective subsidiaries for the payment of at least $20,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Convertible Bond Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes.
If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company or the Guarantor (and not solely with respect to a significant subsidiary of the Company or the Guarantor) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then the trustee, by notice to the Company, or noteholders of at least 25.00% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Convertible Bond Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
At issuance, the Company evaluated the convertible feature of the Notes and determined it was required to be bifurcated as an embedded derivative and did not qualify for equity classification. In subsequent periods, the Notes conversion rights met all equity classification criteria and the fair value of the embedded derivative was reclassified to additional paid-in-capital. The discount resulting from the initial fair value of the embedded derivative has and will continue to be amortized to interest expense using the effective interest method. Non-cash interest expense during the period primarily related to this discount.
Acquisition-related Debt (Seller Notes)
In addition to the indebtedness described above, certain of the Company's subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.
As part of the acquisition of Bolder BioPATH, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Bolder BioPATH in an aggregate principal amount of $1,500. As part of the working capital adjustment in March 2022, a reduction of the promissory note of $470 was recorded. The promissory notes bear interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of May 1, 2026.
As part of the acquisition of Histion, the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of $433. The promissory notes bore interest at a rate of 4.50% per annum, with monthly payments of principal and interest and a maturity date of April 1, 2025. The promissory notes were paid in full as of April 1, 2025.
As part of the acquisition of Pre-Clinical Research Services, Inc. ("PCRS"), the Company issued an unsecured subordinated promissory note payable to the PCRS seller in the initial principal amount of $800. The promissory note bore interest at a rate of 4.50% per annum with monthly payments of principal and interest and a maturity date of December 1, 2024. The promissory note was paid in full as of December 1, 2024.
As part of the acquisition of Orient BioResource Center, Inc. ("OBRC"), the Company agreed to leave in place a payable (the "Seller Payable") owed by OBRC to Orient Bio, Inc. (the "Seller") in the amount of $3,700, which the Company determined to have a fair value of $3,325 as of January 27, 2022. The Seller Payable did not bear interest and was originally required to be paid to the Seller 18 months after the closing date of January 27, 2022. The Company has the right to set off against the Seller Payable any amounts that become payable by the Seller on account of indemnification obligations under the purchase agreement. On April 4, 2023, the Company and the Seller entered into a First Amendment to extend the maturity date of the Seller Payable to July 27, 2024. On May 24, 2024, the Company and the Seller entered into a Second Amendment to extend the maturity date of the Seller Payable to July 27, 2025. Further, beginning on July 27, 2024, the note bears interest at a rate of 4.60% per annum. Accrued interest and principal will be paid at the maturity date. On October 24, 2024, the Company and the Seller entered into a Third Amendment to extend the maturity date of the Seller Payable to January 27, 2026. No amendments to the Seller Payable have affected the rights and remedies of any party
under the stock purchase agreement, nor did any alter, modify or amend or in any way affect any of the terms and conditions, obligations, covenants or agreements contained in the stock purchase agreement.
Critical Accounting Policies and Significant Judgments and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S.). The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements contained in Part II, Item 8 - Financial Statements in this Annual Report on Form 10-K.
We believe the following represent our critical accounting policies and estimates used in the preparation of our financial statements:
Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") 606, the Company disaggregates its revenue from clients into two revenue streams, service revenue and product revenue. At contract inception, the Company assesses the services and/or products promised in the contract with the clients to identify performance obligations in the arrangements. In accordance with ASC 606, the Company determines appropriate revenue recognition by completing the following steps: (i) identifying the contract(s) with a client; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when or as the Company satisfies a performance obligation.
Service revenue
DSA
The Company enters into contracts with clients to provide drug discovery and development services. The Company's fixed fee arrangements may involve nonclinical research services (e.g., toxicology, pathology, pharmacology), bioanalytical, and pharmaceutical method development and validation, nonclinical research services and the analysis of bioanalytical and pharmaceutical samples. For bioanalytical and pharmaceutical method validation services and nonclinical research services, revenue is recognized over time using the input method based on the ratio of direct costs incurred to total estimated direct costs. For contracts that involve in-life study conduct, method development or the analysis of bioanalytical and pharmaceutical samples, revenue is recognized over time when samples are analyzed or when services are performed. In determining the appropriate amount of revenue to recognize over time, the Company forecasts remaining costs related to the contracts with clients. In order to forecast the remaining costs, the Company reviews the billings compared to original cost estimates, meets with project managers and updates cost estimates in relation to any scope changes requested by the client.
The Company generally bills for services on a milestone basis. These contracts represent a single performance obligation and due to the Company's right to payment for work performed, revenue is recognized over time. Research services contract fees received upon acceptance are deferred until earned and classified within fees invoiced in advance on the consolidated balance sheets. Unbilled revenues represent revenues earned under contracts in advance of billings and are classified within trade receivables and contract assets on the consolidated balance sheets.
Our service contracts typically establish a fixed fee to be paid for identified services. In most cases, some percentage of the contract costs is paid in advance. While we are performing a contract, clients often adjust the scope of services to be provided based on interim project results. Fees are adjusted accordingly. Generally, our fee-for-service contracts are
terminable by the client upon written notice of 30 days or less for a variety of reasons, including the client's decision to forego a particular study, the failure of product prototypes to satisfy safety requirements, and unexpected or undesired results of product testing. Cancellation or delay of ongoing contracts may result in fluctuations in our annual results. We are generally able to recover, at minimum, our invested costs plus an appropriate margin when contracts are terminated.
RMS
The Company provides GEMS, which include the performance of contract breeding and other services associated with genetically engineered models, client-owned animal colony care, and health monitoring and diagnostics services related to research models. For contracts that involve creation of a specific type of animal, revenue is recognized over time with each milestone as a separate performance obligation. The Company is due payment for work performed even if subsequent milestones are unable to be met. Contract breeding revenue and client-owned animal colony care revenue are recognized over time and are billed as per diems. Health monitoring revenue and diagnostic services revenue are recognized once the service is performed.
Product revenue
DSA
DSA product revenue includes internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company's BASi product line. These products can be sold to multiple clients and have alternative uses. Both the transaction sales price and shipping terms are agreed upon in the client order. For these products, all revenue is recognized at a point in time, generally when title of the product and control is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation. In determining the transaction price, a significant financing component does not exist since the time between when the Company delivers product to when the clients pay for the product is less than one year.
RMS
Product revenue includes research models, diets, bedding, enrichment and bioproducts. Research models revenue represents the commercial production and sale of research models. Diets, bedding and enrichment revenue represents laboratory animal diets, bedding, and enrichment products under the Company's Teklad product line. Bioproducts revenue represents the sale of serum and plasma, whole blood, tissues, organs and glands, embryo culture serum and growth factors. Product revenue is recognized at the point in time when the Company's performance obligations with the applicable clients have been satisfied. Revenue is recorded at the transaction price, which is the amount of consideration the Company expects to receive in exchange for transferring products to a client. The performance obligations, including associated freight to deliver products, are met based on agreed upon terms, which are generally upon delivery (destination point) and transfer of title. The Company determines the transaction price based on fixed consideration in its contractual agreements. In determining the transaction price, a significant financing component does not exist since the time between when the Company delivers product to when the clients pay for the product is less than one year.
Income Taxes
The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense.
The Company adopted an accounting policy regarding the treatment of taxes due on future inclusion of non-U.S. income in U.S. taxable income under the Global Intangible Low-Taxed Income provisions as a current period expense when incurred.
Goodwill and Intangible Assets
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to the fair value. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets. Customer relationship intangible assets are the most significant identifiable definite-lived asset acquired. To determine the fair value of the acquired customer relationships, the Company typically utilizes the multiple period excess earnings model (a commonly accepted valuation technique), which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue growth rates, operating income (loss) margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities' weighted average cost of capital.
Goodwill represents the difference between the purchase price and the fair value of assets acquired and liabilities assumed when accounted for using the acquisition method of accounting. Goodwill is not amortized, but reviewed for impairment on an annual basis, utilizing an assessment date of September 30th, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting units below their carrying amounts.
The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative impairment test. In the quantitative test, the Company compares the fair value of its reporting units to their carrying values. The estimated cash flows used to determine the fair value of the reporting units used in the impairment test requires significant judgment with respect to revenue growth, EBITDA margin, and weighted average cost of capital. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units an impairment loss equal to the difference would be recorded. See Note 5 - Goodwill and Intangible Assets to our consolidated financial statements contained in Part II, Item 8 for further discussion related to goodwill impairment charges during the fiscal year ended September 30, 2023.
Definite-lived intangible assets are amortized over the pattern in which the economic benefits of the intangible assets are utilized and qualitatively reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. If quantitative determination of recoverability is required, recoverability of assets to be held and used is determined by the Company at the level for which there are identifiable cash flows by comparison of the carrying amount of the assets to future undiscounted net cash flows utilizing forecasted revenue growth, EBITDA margin, and capital expenditures before interest expense and income taxes expected to be generated by the assets. If the carrying amount exceeds the outcome of the analysis of undiscounted cash flows, impairment is measured through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the definite-lived intangible assets, the definite-lived intangible assets are written-down to their fair values.
The Company amortizes the cost of its intangible assets utilizing the straight-line method over the estimated useful lives of the definite-lived intangible assets as follows:
Asset
Estimated Useful Lives
(in years)
Customer relationships
5 - 13
Intellectual property
5 - 20
Other
0 - 15
Long-lived Tangible Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. Long-lived assets to be disposed of are carried at fair value less costs to sell.
Fair Value of Financial Instruments
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
•Level 1 - Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
•Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
•Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Valuation methodologies used for assets and liabilities measured or disclosed at fair value are disclosed in Note 6 - Debtand Note 8 - Post Employment Benefits.
Pension Costs
The Company has a defined benefit pension plan for one of its U.K. subsidiaries.
The projected benefit obligation and funded position of the defined benefit plan is estimated by actuaries and the Company recognizes the funded status of its defined benefit plan on its consolidated balance sheets and recognizes gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of accumulated other comprehensive income (loss), net of tax. The Company measures plan assets and obligations as of the date of the Company's year-end consolidated balance sheet, using assumptions to anticipate future events.
Additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations are disclosed in the notes to the consolidated financial statements (see Note 8 - Post Employment Benefits).
Contingencies
In accordance with applicable accounting standards, the Company records a liability in its consolidated financial statements for material loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation, governmental proceedings and other contingencies are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, disgorgement, or punitive damages; or could result in a change in business practice.
Further, in accordance with applicable accounting standards, the Company records an asset in its consolidated financial statements relating to a recovery only when realization of the claim for recovery is deemed probable. An asset should be recognized to the extent that a loss has previously been recognized. Any expected proceeds in excess of a previously recognized loss or a recovery of a loss not yet recognized in the consolidated financial statements should be treated as a gain contingency.
The Company reflects litigation accruals and the related estimated insurance recovery receivable on a gross basis as liabilities and assets, respectively, on our consolidated balance sheet.
Our significant accounting policies, including new accounting pronouncements, are described in more detail in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in response to Part II, Item 8 of this Report.
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