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BUSINESS COMBINATIONS

12 Months Ended

Sep. 30, 2021

12. BUSINESS COMBINATIONS

The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired, and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will initially be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.

PCRS acquisition

Overview

On November 8, 2019, the Company and Bronco Research Services LLC, a wholly owned subsidiary of the Company (the “PCRS Purchaser”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Pre-Clinical Research Services, Inc., a Colorado corporation (the “PCRS Seller”), and its shareholder. Pursuant to the Purchase Agreement, on December 1, 2019, the Company indirectly acquired (the “PCRS Acquisition”) substantially all of the assets of PCRS Seller used or useful by PCRS Seller in connection with PCRS Seller's provision of GLP and non-GLP preclinical testing for the pharmaceutical and medical device industries. The total consideration for the PCRS Acquisition was $5,857, which consisted of $1,500 in cash, subject to certain adjustments, 240,000 of the Company’s common shares valued at $1,133 using the closing price of the Company’s common shares on November 29, 2019 and an unsecured promissory note in the initial principal amount of $800 made by PCRS Purchaser. The promissory note bears interest at 4.5%. The Company also purchased certain real property located in Fort Collins, Colorado, comprising the main facility for the PCRS Seller’s business and additional property located next to the facility available for future expansion, for $2,500. The Company funded the cash portion of the purchase price for the PCRS Acquisition with cash on hand and the net proceeds from the refinancing of its credit arrangements with FIB, as described in Note 7. As contemplated by the Purchase Agreement, the Company also entered into a lease arrangement for an ancillary property used by PCRS Seller’s business, located in Livermore, Colorado.

Accounting for the Transaction

Results are included in the Company’s results from the acquisition date of December 1, 2019.

The Company’s allocation of the $5,857 purchase price to PCRS Purchaser’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of December 1, 2019, is included in the table below. Goodwill, which is derived from the enhanced scientific expertise, expanded client base and the Company’s ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which

the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. The purchase price allocation as of September 30, 2021 was as follows:


	Allocation as of
	September 30, 2021
Assets acquired and liabilities assumed:
Accounts receivable	$	578
Property and equipment		2,836
Unbilled revenues		162
Prepaid expenses		27
Intangible assets		2,081
Goodwill		751
Accounts payable		(109)
Accrued expenses		(118)
Customer advances		(351)
	$	5,857

The allocation of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. Goodwill from this transaction is allocated to the Company’s Services segment. The Company incurred transaction costs of $248 for the twelve months ended September 30, 2020 related to the PCRS Acquisition. These costs were expensed as incurred and were primarily recorded as selling, general, and administrative expenses on the Company’s consolidated statements of operations. PCRS Purchaser recorded revenues of $7,770 and $4,780 and net income of $177 and $176 for the twelve-month periods ending September 30, 2021 and 2020, respectively.

HistoTox Labs acquisition

Overview

On April 30, 2021, the Company completed the acquisition of substantially all of the assets of HistoTox Labs, Inc. (“HistoTox Labs”). HistoTox Labs is a provider of services in connection with non-clinical consulting, laboratory and strategic support services and products related to routine and specialized histology, immunohistology, histopathology and image analysis/digital pathology. Consideration for the HistoTox Labs Acquisition consisted of $22,389 in cash, including $68 payable in net working capital adjustments.

The Company recognized transaction costs related to the acquisition of HistoTox Labs of $576 for the twelve months ended September 30, 2021. These costs were associated with legal and professional services related to the acquisition and are reflected within general and administrative expenses in the Company’s consolidated statements of operations.

HistoTox Labs and Bolder BioPATH (discussed below) were combined into one business unit and recorded combined revenues of $11,343 and combined net income of $2,017 from their respective dates of acquisition that are included in the Company’s consolidated statements of operations for the twelve months ending September 30, 2021.

The valuation of assets acquired and liabilities assumed has not yet been finalized as of September 30, 2021. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment, intangible assets, income taxes, goodwill, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value.

The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:


	Preliminary
	Allocation as of
	September 30, 2021
Assets acquired and liabilities assumed:
Accounts receivable	$	982
Unbilled revenues		337
Operating lease ROU asset (i)		2,239
Property and equipment		4,021
Intangible assets		8,500
Other assets		25
Goodwill (ii)		9,129
Accounts payable		(132)
Accrued expenses		(266)
Customer advances		(207)
Operating lease liability (i)		(2,239)
	$	22,389

(i) Reflects the estimated right of use asset and associated liability to align with Inotiv accounting policy.

(ii) The preliminary estimates are based on the data available to Inotiv and may change upon completion of the final purchase price allocation. Any change in the estimated fair value of the assets and liabilities acquired will have a corresponding impact on the amount of the goodwill. In addition, a change in the amount of property, plant, and equipment and other identifiable intangible assets will have a direct impact on the amount of amortization and depreciation recorded against income in future periods. The impact of any changes in the purchase price allocation may have a material impact on the amounts presented in this pro forma condensed combined financial information.

The allocation of the preliminary purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date.

Intangible assets primarily relate to customer relationships and a non-compete agreement. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 8 years for customer relationships and 5 years for the non-compete agreement on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of intangible assets as of September 30, 2021 is based on preliminary assumptions which are subject to change as we complete the valuation procedures.

the purchase price exceeds the fair value of the net assets acquired and $10,804 is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s Services segment.

Bolder BioPATH acquisition

Overview

On May 3, 2021, the Company completed the acquisition of Bolder BioPATH in a merger of Bolder BioPATH with a wholly owned subsidiary of the Company. Bolder BioPATH is a provider of services specializing in in vivo models of rheumatoid arthritis, osteoarthritis, and inflammatory bowel disease as well as other autoimmune and inflammation models. Consideration for the Bolder BioPATH acquisition consisted of (i) $17,530 in cash, including net working capital adjustment receivable of approximately $970, and inclusive of $1,250 being held in escrow for purposes of securing any amounts payable by the selling parties on account of indemnification obligations, purchase price adjustments, and other amounts payable under the merger agreement, (ii) 1,588,235 of the Company’s common shares valued at $34,452 using the closing price of the Company’s common shares on May 3, 2021 and (iii) unsecured subordinated promissory notes payable to the former shareholders of Bolder BioPATH in an aggregate principal amount of $1,500. The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date of May 1, 2026.

The Company recognized transaction costs related to the acquisition of Bolder BioPATH of $584 for the twelve months ended September 30, 2021. These costs were associated with legal and professional services related to the acquisition and are reflected within general and administrative expenses in the Company’s consolidated statements of operations.

In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Bolder BioPATH acquisition as a result of book-to-tax differences primarily related to the customer relationship intangible and property and equipment. Subsequent to the establishment of the deferred tax liability as of the opening balance sheet, the Company reversed a portion of its pre-existing valuation allowance and recognized an income tax benefit of approximately $4,867 in the statement of operations for the year ended September 30, 2021.

The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:


	Preliminary
	Allocation as of
	September 30, 2021
Assets acquired and liabilities assumed:
Accounts receivable	$	2,258
Unbilled revenues		1,798
Prepaid expenses		6
Operating lease ROU asset (i)		2,750
Property and equipment		6,609
Intangible asset		12,500
Other assets		70
Goodwill (ii)		36,223
Accounts payable		(159)
Accrued expenses		(294)
Deferred revenue		(662)
Deferred tax liability		(4,867)
Operating lease liability (i)		(2,750)
	$	53,482

(i) Reflects the estimated right of use asset and associated liability to align with Inotiv accounting policy.

The allocation of the preliminary purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date.

Property and equipment is mostly composed of equipment (including lab equipment, furniture and fixtures, and computer equipment). The fair value of property and equipment was determined using a combination of cost and market-based methodologies. The fair value of intangible assets as of September 30, 2021 is based on preliminary assumptions which are subject to change as we complete the valuation procedures.

The intangible asset acquired relates to customer relationships. The acquired definite-lived intangible asset is being amortized over a weighted-average estimated useful life of approximately 8 years on a straight-line basis. The estimated fair value of the identifiable intangible asset was determined using the "income approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of services, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors. The fair value of the intangible asset as of September 30, 2021 is based on preliminary assumptions which are subject to change as the Company completes its valuation procedures.

Goodwill, which is derived from the enhanced scientific expertise, expanded client base and the Company’s ability to provide broader service solutions through a comprehensive portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and none is deductible for tax purposes. Goodwill from this transaction is allocated to the Company’s Services segment.

Gateway acquisition

Overview

On August 2, 2021, the Company completed the acquisition of Gateway Pharmacology Laboratories LLC (“Gateway Laboratories”) to further expand its drug metabolism and pharmacokinetics technology and capability as well as expand service offerings to include in vitro solutions in pharmacology and toxicology early in drug discovery. Consideration for the Gateway Laboratories acquisition consisted of (i) $1,671 in cash, including working capital and subject to customary purchase price adjustments, and (ii) 45,323 of the Company’s common shares valued at $1,182 using the closing price of the Company’s common shares on August 2, 2021.

The Company recognized transaction costs related to the acquisition of Gateway of $93 for the twelve months ended September 30, 2021. These costs were associated with legal and professional services related to the acquisition and are reflected within general and administrative expenses in the Company’s consolidated statement of operations.

In accordance with ASC 805-740, the Company established a deferred tax liability with an offset to goodwill in connection with the accounting for the opening balance sheet of the Gateway Laboratories acquisition as a result of book-to-tax differences primarily related to the customer relationship intangible and property and equipment. Subsequent to the establishment of the deferred tax liability as of the opening balance sheet, the Company reversed a portion of its pre-existing valuation allowance and recognized an income tax benefit of approximately $118 in the statement of operations for the year ended September 30, 2021.

The valuation of assets acquired and liabilities assumed has not yet been finalized as of September 30, 2021. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment, intangible assets, income taxes, goodwill, and net working capital, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value.

The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the acquisition date:


	Preliminary
	Allocation as of
	September 30, 2021
Assets acquired and liabilities assumed:
Accounts receivable	$	422
Operating lease ROU asset (i)		120
Property and equipment		359
Intangible asset		100
Other assets		9
Goodwill (ii)		2,207
Accounts payable		(54)
Accrued expenses		(72)
Deferred tax liability		(118)
Operating lease liability (i)		(120)
	$	2,853

(i) Reflects the estimated right of use asset and associated liability to align with Inotiv accounting policy.

The allocation of the preliminary purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date.

BioReliance acquisition

Overview

On July 9, 2021, the Company completed the acquisition of certain assets of BioReliance Corporation (“BioReliance”) to further expand its service offerings to include in genetic toxicology services. The assets acquired consisted of fixed assets and an intangible asset related to customer relationships. The Company accounted for the transaction as a business combination as it was determined that the transaction included inputs and substantive processes capable of producing outputs which constitute a business. Consideration for the BioReliance acquisition consisted of (i) $175 in cash and (ii) 10% of net sales through December 2023 derived from the provision by the Company of services comprising the business to existing customers related to the intangible asset acquired. The Company estimated the fair value of 10% of net sales and recorded a contingent consideration liability of $640 in the consolidated balance sheets for the year ended September 30, 2021. The $175 consideration payable was included in accrued expenses in the consolidated balance sheets for the year ended September 30, 2021.

The Company did not incur any transaction costs related to the acquisition of BioReliance for the twelve months ended September 30, 2021.

The valuation of assets acquired and liabilities assumed has not yet been finalized as of September 30, 2021. The purchase price allocation is preliminary and subject to change, including the valuation of property and equipment, intangible assets, income taxes, goodwill, and contingent consideration, among other items. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value.


	Preliminary
	Allocation as of
	September 30, 2021
Assets acquired and liabilities assumed:
Property and equipment	$	175
Intangible asset		640
	$	815

Pro Forma Results

The Company’s unaudited supplemental pro forma results of operations for the twelve months ended September 30, 2021 and 2020 assuming the PCRS, HistoTox Labs and Bolder BioPATH acquisitions had occurred as of October 1, 2019 are presented for comparative purposes below. These amounts are based on available information of the results of operations of the Sellers’ operations prior to the acquisition dates and are not necessarily indicative of what the results of operations would have been had the acquisitions been completed on October 1, 2019. The acquisitions related to

BioReliance and Gateway were deemed to not be material to the Company’s results of operations for the twelve months ended September 20, 2021 and 2020 and therefore are not included in the information below.

The unaudited supplemental pro forma information is as follows:


	Twelve Months		Twelve Months
	Ended		Ended
	September 30, 2021		September 30, 2020
Total revenues	$	104,084	$	81,739

Net income		8,741		335

The following pro-forma adjustments have been made to reflect the impact of the acquisition of HistoTox Labs and Bolder BioPATH and the associated financing transactions:

●

Elimination of sales and costs of sales related to transactions between HistoTox Labs and Bolder BioPATH

●

Recognition of incremental depreciations expense, reflected in cost of sales, related to the increase in fair value of the property and equipment based on the estimated fair value of the property and equipment and amortization expense, reflected in selling general and administrative expenses, related to the estimated fair value of the acquired intangible assets. Depreciation expense for the step up in fair value of the property, plant and equipment and amortization of intangible assets are recognized on a straight-line basis over weighted average useful lives of approximately 6 years and 8 years, respectively.

●

Record transaction expense of $1,128 during the year ended September 30, 2020, which is reflected in selling general and administrative expenses

●

Recognition of $302 incremental interest expense and amortization of deferred financing costs associated with the financing of the acquisitions partially offset by the removal of previously recorded interest expense for debt that was not acquired.

●

Subsequent to the establishment of the deferred tax liability as of the opening balance sheet, the Company reversed a portion of its pre-existing valuation allowance and recognized an income tax benefit of approximately $4,867 related to Bolder BioPATH in the statement of operations for the year ended September 30, 2020, assuming the acquisition had been completed on October 1, 2019.