Inotiv (NOTV) Risk Factors

Our Credit Agreement contains various covenants, restrictions, and events of default. Among other things, these provisions require us to maintain certain financial ratios and impose certain limits on our ability to engage in certain activities. The restrictions in the Credit Agreement impose operating and financial restrictions on us and may limit our ability to compete effectively, take advantage of new business opportunities, or take other actions that may be in our, or our shareholders', best interests. Further, various risks and uncertainties may impact our ability to comply with our obligations under the Credit Agreement. Our obligations under the Credit Agreement and the Second Lien Notes are secured by all assets (other than certain excluded assets) of the Company and each of the subsidiary guarantors. Our inability to comply with any of the provisions of the Credit Agreement could result in a default under it. 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 Notes and the Company's 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, repay the entirety of its outstanding Notes and repay the entirety of its outstanding Second Lien Notes in the next twelve months. In addition, if we are unable to repay outstanding borrowings when due, the lenders also have the right to proceed against the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition, results of operations and liquidity. Amendments to our Credit Agreement, including the Seventh Amendment, have added additional, or changed existing, financial covenants, which now include a secured leverage ratio, a fixed charge coverage ratio, a minimum weekly covenant, and any future amendments to our Credit Agreement may include other financial covenants or restrictions that could increase our risk of default.

Successful execution of our growth plans will require that we have access to capital. Our expected financing needs are based upon management's estimates as to future revenue and expense. Our business plan and financing needs are subject to change based upon, among other factors, our ability to increase revenues and manage expenses and the timing and extent of our future capital expenditures and acquisition activity. If our estimates of our financing needs change, we may need additional capital more quickly than we expect or we may need a greater amount of capital. In general, additional capital may be raised through the sale of common shares, including through our at-the-market offering program with Jefferies LLC, preferred equity or convertible debt securities, entry into debt facilities or other third-party funding arrangements, such as our recent sale of Second Lien Notes and accompanying warrants. The sale of equity, convertible debt securities and warrants may result in dilution to our shareholders and those securities may have rights senior to those of our common shares. Agreements entered into in connection with such capital raising activities could contain covenants that would restrict our operations or require us to relinquish certain rights. Additional capital may not be available on reasonable terms, or at all. If we cannot timely raise any needed funds, we may be forced to reduce our operating expenses, which could adversely affect our ability to implement our long-term strategic roadmap and grow our business. The financial covenants under the Company's Credit Agreement include, among others, a requirement to not permit the consolidated debt to consolidated EBITDA of the Company to exceed certain leverage thresholds under the Credit Agreement. The Seventh Amendment provides that any charges or expenses attributable to or related to the Resolution Agreement and Plea Agreement may be added back to the Company's consolidated EBITDA (up to $32,000) for purposes of the financial covenants under the Credit Agreement. For the fiscal year ended September 30, 2024, the Company had negative operating cash flows, operating losses and net losses. As of September 30, 2024, the Company has cash and cash equivalents of $21,432 and access to a $15,000 revolver, which had $0 balance outstanding as of September 30, 2024. These results, in large part, are a result of the difficulties in managing the constrained global supply and the shift in NHP demand in fiscal 2024, as discussed in the Operational Update of Note 1 - Description of the Business. Absent the Fifth, Sixth and Seventh Amendments (as defined in Note 7 - Debt), the Company would not have complied with its financial covenants under the Credit Agreement for the March 31, 2024, June 30, 2024 and September 30, 2024 testing dates, respectively. If results of operations in the coming twelve months do not improve relative to the previous twelve months, the Company is at risk of non-compliance with its financial covenants under its Credit Agreement. If at any time in the next twelve months the Company reports a failure 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 Second Lien Notes (as defined in Note 7 - Debt) which, if not cured within 30 days following notice of such default from the trustee 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 lenders accelerate the loans under the Credit Agreement, 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, repay the entirety of its outstanding Notes and repay the entirety of its 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. On September 13, 2024, the Company entered into a Seventh Amendment to the Company's Credit Agreement. The Seventh Amendment, among other changes, permits the incurrence of the issuance of the Second Lien Notes, 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 for the testing periods of the six months ended December 31, 2024 and the nine months ended March 31, 2025, waived the existing financial covenants from the date of the Seventh Amendment until June 30, 2025, and established new testing ratios for the Fixed Charge Coverage Ratio and the Secured Leverage Ratio covenants for the fiscal quarters beginning June 30, 2025 and thereafter. The Seventh Amendment also caps the reinvestment of funds from extraordinary receipts and asset sales and casualty events at $5,000 in the aggregate, and established a non-voting third party observer to the Company's board of directors meetings, as elected by the lenders. 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 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. After considering the factors outlined above, we concluded that substantial doubt about our ability to continue as a going concern exists. This is discussed further in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies.

We have completed several acquisitions and from time to time may review other acquisition candidates. Acquisitions involve numerous risks, including: - The inability of the Company to obtain financing for the acquisition of targets;- Difficulties and expenses in connection with integrating acquired companies and achieving expected benefits, including as related to the integration of departments, accounting and other systems, technologies, books and records and procedures;- Diversion of management's attention from daily operations to various integration activities;- The potential for disruption of prior operations and plans;- The risk that acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common shares to the shareholders of the acquired company, dilutive to the percentage ownership of our existing shareholders;- The adverse impact of risks facing the acquired companies, including losses resulting from undiscovered liabilities of acquired companies not covered by the indemnification we may obtain from the sellers;- Risks associated with the assimilation and retention of employees, including key employees;- The potential loss of, or adverse effects on, existing business relationships the acquired business has with suppliers and clients;- The potential need to address relevant internal control over financial reporting and disclosure control and procedures matters;- Possible deficiencies in operational processes and procedures;- Risks associated with carrying a relatively significant level of debt; and - The ability of our management team to manage expanded operations to meet operational and financial expectations. Our operating results or financial condition also may be adversely impacted by (i) claims or liabilities related to the acquired companies' businesses including, among others, claims from U.S. regulatory or other governmental agencies, such as those related to OBRC and Envigo, terminated employees, current or former clients or business partners, or other third parties; (ii) pre-existing contractual relationships of the acquired companies that we would not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business; (iii) unfavorable accounting treatment as a result of the acquired companies' practices; and (iv) intellectual property claims or disputes. Certain of the companies we have acquired were not required to maintain an internal control infrastructure that would meet the standards of a public company, including the requirements of the Sarbanes-Oxley Act of 2002, and we may acquire similar companies in the future. The costs to implement such controls and procedures may be substantial and we could encounter unexpected delays and challenges in this implementation. In addition, we may discover significant deficiencies or material weaknesses in the quality of an acquired company's financial and disclosure controls and procedures which could result in additional costs or adversely affect our business or operating results, and, as has occurred with us, the accounting for acquisitions can be complex and may lead to material weaknesses. As part of our merger and acquisition due diligence, we utilize information provided by relevant sellers. As is true with any merger and acquisition transaction, we may not be aware of all liabilities, or the full magnitude of liabilities, of the acquired business at the time of acquisition. Potential incremental liabilities and additional risks and uncertainties related to our recent or future acquisitions not known or fully appreciated by us could negatively and materially impact our future business, financial condition and results of operations. For example, there are a number of investigations, lawsuits, claims and other matters described in Note 16 – Contingencies that relate to the businesses and operations we acquired through the acquisitions of Envigo, OBRC and others.