Inotiv, Inc.

Q2 2024 Earnings Conference Call


spk00: Good afternoon, ladies and gentlemen, and welcome to the Innotive Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a lesson-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May 15, 2024. I would now like to turn the conference over to Bob Yedid. Please go ahead.
spk04: Thank you, Julie, and good afternoon, everyone. Thank you for joining today's quarterly call with the Initiative's management team. Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties, that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether a result of new information, future events, or otherwise. Please refer to the company's FCC filings for further guidance on this matter. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definition of these non-GAAP measures and reconciliation. The most comparable GAAP measures are included in the company's earnings release, which has been posted to the investor section of the company's website, and is also available in the form 8-K Files with Securities and Exchange Commission today. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of the company's website. Joining us today from the company this afternoon are Bob Leisure, President and Chief Executive Officer, and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the Q&A session. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for the second quarter of fiscal 2024 and the six months added March 31, 2024. And then we'll open the call for your questions. With that, it's now my pleasure to turn the call over to Bob Leisure, CEO. Bob, please go ahead.
spk10: Thank you, Bob, and good afternoon to everyone. Thank you for joining today's call. Let's quickly run through the broad strokes of this quarter's results as we continue to operate in a mixed industry environment. Total revenue came in at $119 million for Q2 of fiscal 2024, which is down 21.5% year-over-year. Segment top line results consisted of DSA revenues of $46.6 million, which was only down 400,000 or less than 1% versus the comparable period a year ago. Revenue from RMS included NHP sales, diets, bedding, small animal models was down 72.4 million in Q2, a decrease of 32 million or 31% from the prior year period. 26.2 million of the 32.1 million decrease was driven by substantially lower NHP revenue. In addition, we have a decrease in revenue of $3.1 million from the sale of our Israel business in August of 2023. Revenues this past quarter were well below our expectations. The lower revenue came as a result of many of the potential risks we discussed in our last quarterly call coming to fruition, primarily weak demand for NHPs and slower DSA discovery-related sales, which were somewhat offset by the growth in our new safety assessment services. 2023 was a challenging funding environment for the biopharma industry, and we saw companies reprioritize their use of capital, resulting in product reprioritizations and some cancellations as companies rationalized their R&D spending. In addition, as we have discussed in the past, the industry faced challenges and volatility resulting from the U.S. Attorney's Office criminally charging a Cambodian government official on alleged charges of conspiracy to illegally import NHPs in the US, and our considered decision to suspend Cambodian imports and the subsequent effective industry ban on the importation of Cambodian NHPs into the US in late 2022. This ultimately resulted in lower NHP availability in the US and heightened concern among customers regarding their ability to access NHPs to develop their pipeline products, which together drove increased NHP pricing in 2023. The uncertainty and available supply to the U.S. also resulted in some discovery in preclinical studies moving outside the U.S., which further impacted drug discovery and development and overall demand for NHPs in the U.S. We indicated in our prior quarterly call that we expected this year could be choppy as it relates to NHP sales. We believe the industry continues to reset and refocus pipeline priorities, and our second quarter results reflects the after effects and volatility caused by the NHP market dynamics at the end of 2022 through 2023 and the first half of fiscal 2024. We're currently witnessing some positive signs in the industry, such as marked improvement in the capital markets funding for biotech and small pharma companies during the first quarter of calendar 2024 as compared to the prior two years. While this is a positive sign for these companies and the CRO industry, we expect biopharma companies in the short term to continue to take a restrained, conservative approach to the pipeline products in order to prioritize the use of capital to the most important projects. Accordingly, the sales cycle has been slow as customers continue to evaluate and rationalize their product pipelines. This has impacted us predominantly through a further reduction in Q2 discovery sales versus the prior year and in the RMS NHP business. In our research models and services RMS business, some of our major CRO NHP customers have seen delays and slowdowns in their ability to acquire new discovery and safety assessment studies requiring NHPs. In other cases, it also became apparent this quarter that certain customers mitigated supply chain risk in 2023 by purchasing NHPs well in advance of their needs and are now able to delay purchasing additional NHPs until they deplete their current inventories. So this year, unlike 2023, we are now seeing customers align their NHP purchases more closely to their immediate project needs. Taking these dynamics collectively, we believe these pressures will normalize later in the year as customer NHP inventories are depleted and they focus on ordering to meet shorter-term needs. Internally, we remain encouraged by the results and benefits of many of the critical actions we took in 2023 are taking in 2024, such as the integration efforts of our acquisitions. We are seeing lower cost and improved service from our RMS site optimization project. We anticipate the RMS site optimization and cost reduction initiatives we started last year are going to be completed by the end of July 2024, and the transportation initiatives, which we announced in December of 2023, are currently being implemented to create further cost and customer service benefits. Additionally, we are pleased to secure new contracts with two research organization customers who wish to occupy space within our UK RMS facilities. In addition to generating recurring income from the use of the space infrastructure and services, we are identifying opportunities to provide these customers with additional products and services to support their scientific research. In DSA, new service offerings are now contributing to increases in safety assessment revenues, which have helped offset some of the decreases we have seen in Discovery Services portion of that segment. In Discovery, We believe the additional salespeople and initiatives we implemented in Q1 of fiscal 2024 will help to increase our market awareness and quoting activity as we go through the remainder of the year. With many of our announced projects now completed or nearing completion, we have also been able to reduce our overall operating expense. Further, due to current market conditions and certain efficiencies we've been able to achieve, we affected a small reduction in force in April, which will help further reduce expenses in future quarters. Overall, net new DSA quarters for this quarter were 35 million versus the 44.6 million last year. For the year-to-date period ending March 31, 2024, we've booked net new orders of 98.9 million versus 84.6 million for the six months ended March 31, 2023. The conversion rate this quarter was 30.1% versus 32% in the prior year. The DSA cancellations in Q2 were consistent with prior year period, and in the first six months of fiscal 2024 were slightly less than they were the same period in 2023. For the six months ended March 31st, 2024, we generated positive cash from operating activities of 10.4 million, and completed many of the investments and initiatives started almost 20 months ago. Capital investments were $7 million in the second quarter and $12.6 million in the year-to-date period. We expect these investments will be reduced further in the next two quarters and until we see further recovery in revenue. In Q2, we completed the sale of the Blackthorn UK and Dublin, Virginia facilities. In April, we completed the sale of our Hazlet, Michigan facility. We expect to complete the sale of our Cumberland, Virginia facility in the third quarter and have listed for sale an additional 85 excess acres of land we have in Pennsylvania. With the investments that we have completed in DSA business, we believe that we have the physical capacity to accommodate increased DSA revenue of 40% over the 185 million recognized in 2023. This capacity still represents a substantial opportunity to improve our DSA sales and margins in the future. For these next two quarters, Initive remains on track to further achieve financial benefits from our investments and growth initiatives, increase sales and marketing, and the organic addition of new services, and our consolidation integration projects with the related efficiency gains. I want to update you now briefly on material legal issues we previously disclosed. With respect to the Cambodian government official indicted by the U.S. government, that official was found not guilty on all counts and has now returned to Cambodia. At this time, we do not have any further updates related to the status of potential future imports of NHPs into the U.S. from Cambodia. With respect to the investigation by the DOJ and other federal and state law enforcement agencies related to the Cumberland, Virginia facility, which we closed in September of 2022, we have been in discussions to resolve the open matters relating to the investigation. Since we believe this resolution is now probable and estimatable, we have recorded an accrual as of March 31st, 2024 of $26.5 million. We would expect to pay 6.5 million of this 26.5 million in fiscal year 2024, and the remaining 20 million would be a non-current liability to be paid over three to five years. This resolution is not finalized and not signed as of today. Until then, we cannot comment further. We have determined that in the last two years, we have incurred expenses of approximately 22 million for the investigation related so far to this Cumberland facility that we closed in 2022. The total expenses include third-party fees to comply with subpoena information request, legal fees, and the cost to close the facility. Some of these fees have been added back as restructuring costs and calculated and adjusted EBITDA, but if possible, we would like to resolve this matter and put it behind us. With that, I'll turn the call over to Beth, who will provide detailed synopsis of Inita's results for the quarter.
spk01: Thank you, Bob, and good afternoon, everyone. Before I start, we have one correction to note. The incurred expenses for the investigation related to the Cumberland facility were $19 million, not $22 million. Now, for the current financial results for the 2024 second quarter, total revenue was $119 million compared to $151.5 million during the prior year period, a decrease of 21.5%, primarily due to a decrease in the number of NHPs sold in the current quarter. For the six months ended March 31st, 2024, consolidated revenue was $254.5 million, down 7.2% compared to $274.2 million for the same period last year due to the decrease in NHP sold, which was primarily offset by a 3.6% increase in DSA revenue. DSA revenues in the 2024 second quarter decreased by less than 1% to $46.6 million when compared to the prior year period of $47 million. The decrease in the DSA revenue was primarily driven by our discovery services as a result of the decline in overall biotech funding and separately a decrease in medical device surgical services due to cancellations we experienced in the fourth quarter of fiscal 23 and Q1 of 2024, and also delayed projects. Partially offsetting this, we continue to see increased revenue from our new service offerings in genetic toxicology and biotherapeutic analysis in connection with new business at our Rockville facility, plus the timing of general toxicology services. DSA revenue for the six months ended March 31st, 2024 were $91.3 million or 3.6% higher compared to the prior year of $88.1 million. The increase in DSA revenue was primarily driven by the mix of general toxicology services and continued increases from value-added services in connection with new business at our Rockville facility partially offset by a decrease of revenue related to our discovery services as a result of the decline in overall biotech funding and a decrease in medical device surgical services due to cancellations we experienced in the fourth quarter of 23 and the first quarter of 24 and delayed projects. RMS revenue for the fiscal second quarter was down 30.7% to $72.4 million compared to $104.5 million the same quarter last year due primarily to the lower NHP-related product and service revenue. In addition, there was a decrease in revenue of $3.1 million as a result of the sale of our Israeli business in fiscal 2023 and a decrease in sales of small research models, which was partially offset by an increase in sales in diets and bedding. RMS revenue for the six months ended March 31, 2024 was down 12.3% to $163.2 million compared to $186.1 million in the same period last year. The decrease was due to the negative impact of lower volume of NHP sales, lower revenue as a result of the sale of our Israeli businesses in fiscal 2023 and lower sales of small research models. partially offsetting these decreases in revenue, there were higher sales in dice and betting. Regarding NHP pricing, we indicated on our last conference call that NHP prices were expected to come down from the highs we saw in Q4 of fiscal 2023. We did see NHP pricing in Q2 of fiscal 2024 on average come down roughly 2% from Q1 2024. This compared to the decrease in pricing in Q1 fiscal 24 of 18% compared to Q4 of fiscal 2023. Operating loss for the second quarter fiscal 2024 was $43.1 million compared to a loss of $2.1 million from last year's second quarter, primarily due to lower margins relating to the decrease in revenue. The twenty six point five million dollar charge related to the agreement in principle with and the impact of lower margins from the sale of our Israeli businesses. These items were partially offset by decreases in third party fees and restructuring costs and favorable cost reductions related to the site closures and optimizations compared to the prior year period. In addition, gross margins for the new DSA services are still creating a headwind for overall margins. However, as we see these service revenues increase, we expect to see an associated margin improvement. Consolidated net loss attributable to common shareholders in the second quarter of fiscal 2024 totaled $48.1 million, or a $1.86 loss per diluted share. This compared to consolidated net loss attributable to common shareholders of $10 million or a $0.39 loss for diluted share in the second quarter of 2023. For the quarter, adjusted EBITDA was $3.1 million or 2.6% of total revenues compared to $17.1 million or 11.3% of total revenue for last year's second quarter. For the six months ended March 31, 2024, adjusted EBITDA improved by $1.1 million compared to the prior year period to $12.7 million or 5% of total revenues from $11.6 million or 4.2% of revenue in the same period last year. Non-GAAP operating income for our DSA segment in the second quarter increased to $8.2 million or 17.6% of segment revenue from $7.9 million or 16.8% of segment revenue in last year's second quarter. As our new DSA services are fully online and we begin to fill newly added capacity, we continue to believe we will be able to boost our DSA operating margins. The bulk to bill ratio for DSA in the second quarter was 0.77 to one, COMING OFF THE STRONG NET AWARDS IN Q1 FISCAL 2024. SO OUR SIX-MONTH YEAR-TO-DATE FISCAL 2024 BOOK-TO-BILL IS 1.11 TO 1, AND OUR TRAILING 12-MONTH NET BOOK-TO-BILL IS .98 TO 1. AS WE STATED LAST QUARTER, WE BELIEVE IT IS MORE MEANINGFUL TO USE BOOK-TO-BILL RATIOS FOR SIX MONTHS OR LONGER AS BETTER INDICATORS OF OUR DSA PERFORMANCE. Thirty one two thousand twenty four we have booked net new orders of ninety eight point nine million dollars versus eighty four point six million for the six months ended March thirty one two thousand twenty three. The cancellations in the second quarter were consistent with prior year period and year to date for the last six months were slightly less than the same period in the prior year. GSA backlog was $142.1 million at March 31, 2024, compared to $145.7 million at March 31, 2023. In our RMS segment, non-GAAP operating income in the second quarter of fiscal 2024 was $8.2 million, or 11.3% of segment revenues, compared to $24.4 million or 23.4% of segment revenues in last year's period. The lower operating income in Q2 fiscal 2024 was primarily the result of a decrease in RMS revenue and the $26.5 million charge related to the agreement and principle discussed above, partially offset by favorable cost reductions related to the site closures and optimizations compared to the prior year period, and decreased third-party fees and restructuring costs. Interest expense in Q2 2024 increased by $11.1 million, up from $10.5 million in last year's second quarter due to higher interest rates. Our balance sheet as of March 31, 2024 included $32.7 million in cash and cash equivalents as compared to $35.5 million at September 30, 2023. Total debt, net of debt issuance cost as of March 31, 2024 was $380.6 million, consistent with the $377.7 million at September 30, 2023. Net cash provided by operations for the six months ended March 31, 2024 was $10.4 million compared to cash provided by operations of $5.4 million in the same period last year. Cash provided by operations for the trailing 12 months was $32.8 million. Capital expenditures in the second quarter were $7 million or 5.9% of total revenue and 12.6 million or 5% of total revenue for the six months ended March 31, 2024 as compared to 16.8 million or 6.1% for the year-to-date period for 2023. The capital expenditures reflect investments in completing our DSA capacity expansions, infrastructure improvements in NHP facilities, and renovations in the UK in order to complete the expansion of Hillcrest for the new customer contract and the consolidation of Blackthorn, and enhancements in laboratory technology and improvements for animal welfare. Now let's turn to our guidance. With the significant impact that NHPs have on our revenue and margins and the current uncertainty in demand for NHPs, we are withdrawing financial guidance for fiscal year 2024. We expect to provide guidance once we have greater clarity on the NHP market and customer demand. We still believe in our long-term plan and our ability to achieve our financial goals. In the DSA segment, we are focusing to optimize our market share and increasing awards to utilize new services and additional capacity to grow DSA segment revenue. We believe that our strategic initiatives to increase our Salesforce and optimize sales territory coverage and focus on sales and discovery services puts us in an advantageous position to gain market share and increase awards as biopharma companies begin to increase their level of investment in preclinical studies. We will continue to stay focused on client satisfaction through innovation and the development of nimble solutions and custom offerings. As the industry continues to face headwinds, we remain focused on executing our plan for long-term growth and sustainable margins. If revenue and margins do not improve in Q3 fiscal 2024, we could be in noncompliance with our covenants at June 30, 2024, and we will have approximately 55 days after the end of the quarter to cure. We have plans to remedy any noncompliance with our lenders through a credit agreement amendment. And with that financial overview, we will turn the call over to our operator for questions.
spk00: Thank you. Ladies and gentlemen, should you have a question, please press star 1. If you'd like to withdraw your question, press star 2. One moment, please, for your first question. Your first question comes from Dave Windley from Jefferies. Please go ahead.
spk05: Hi. Thanks for taking my questions. I wanted to start on NHPs. I heard you say that pricing in 2Q was just 2%. lower than 1Q. Could you maybe help us with some numbers around that? Where was pricing at the peak? I think you referenced peak of 3Q of your last fiscal year. Where was that? Where is the kind of down 2% and 2Q put you? And then given the low volume that you're highlighting, where is that price moving as we sit here today? Thanks.
spk10: I think the peak was Q4 of last year, and Q1 was down 18%. I think we said Q2 is down 2%, so we'd be down 20% from where it was Q4 of last year. More recently, I've not seen it slip since Q2, but it could. One of the things that's keeping up is our costs are still high. So you've got to look on the world market to see where the pricing is. Where's China? Where's Cambodia? Where's Vietnam? They're still selling across the world. And some of those prices are staying a little bit stronger. But I expect we could see those come down in this quarter and next quarter, depending on what happens in Cambodia specifically. And so we'll just have to see how that goes.
spk05: Okay, Bob, so... In terms of the revenue in the quarter, I just want to understand kind of your calculus around supply-demand. Your revenue was down $26 million. I forget the exact percentage, maybe 30% or something like that. Only 2% of that is price, so volume is down a lot. You mentioned costs. I mean, you know, the customer
spk10: Our average costs would be higher than last year's average costs. And the supply is down significantly. And our inventory is also down. But we do have plenty of inventory right now to meet our customers' needs. And I guess so... Sorry. Sorry. Go ahead. Sorry. We did see a very weak second quarter in terms of the units, the number of NHPs sold.
spk05: And so... to ask the provocative question, I guess, why not drop price to sell more volume?
spk08: I'm not sure that would do it.
spk10: The challenge is they don't need the volume right now. Okay. So could price become an issue? It could. It's not been an issue. The issue has been people have inventory. And so... Some that have reoccurring monthly or quarterly shipments did not need any or needed very few just in the last quarter. I believe that, you know, we do have some visibility in some of the inventory and the levels. I think they are coming down, and I think we're starting to see some of that rebound in some customers, not all customers yet. We also see some customers that have lower demand probably because they have lower orders.
spk05: Okay. And on the stocking point, these animals have an age window in which they are applicable. They're usable for research studies. So they can't, they being the client, can't stock them indefinitely. Help us understand a little bit. I know you talked about selling and then contract boarding for some clients, but in those cases, you would know what you have on property. Help us to understand a little bit how this advanced buying and inventory stockpiling of live animals works or worked.
spk10: Well, they could always take first in inventory, be the first out of inventory. So they're quite adept at managing the age limits that they need. And also you remember some studies need mature animals and some need more immature animals. So there are different ages that may be needed at different times. But that is a customer by customer decision. And we've been able to manage our inventory accordingly.
spk05: Got it. One more question on NHPs and I'll yield. In your press release this afternoon, you disclosed the NHP-related revenue decline and then the cost of revenue in the $7.2 million range. So that works out to about a 72% gross margin. Is that the right gross margin to be thinking about on NHP-related revenue? Thank you.
spk07: No, I think that is not. That just shows the... some of that is an indication of the cost didn't go down as much because the average cost for NHP sold went up was higher.
spk05: Okay. So the year-over-year change is not a congruent kind of pro-rata change.
spk10: I noticed that also yesterday when we were looking at this is that That couldn't be misleading. That's not the margin. It's just indicative that the price that you would think it did, the average price was going up.
spk08: Got it. Okay. I'll yield the floor. Thank you.
spk00: Your next question comes from Matt Hewitt from Craig Halem. Please go ahead.
spk03: Good afternoon. Thank you for taking the questions. Maybe just a couple more on the NHPs. Regarding Cambodia, it's still unknown what's going to happen there, but let's assume for sake of argument that that market opens back up to U.S. importation. What does that do to the supply-demand dynamics and ultimately the pricing?
spk07: Well, one, we don't know when and if that will open.
spk10: And two, I'm not going to sit here and try to predict the future of commodities. I think anything is possible. Again, it's a world market. Remember, Cambodians have been used everywhere but the U.S.
spk07: Still are. Could that help decrease the price of the cost? Yes.
spk10: But second of all, will that impact margin dollars? It could. But right now, I don't think we can sit here and predict commodity pricing. What's important to us is that we really need to make this, and we have been making it more of a service business than just selling NHPs. And we continue to do that with boarding and with breeding. And, you know, at some point, yes, we're selling a significantly less amount of NHPs than we did in the past. So it's a matter of margin dollar for NHP. But it's also, you know, obviously you can see it's very dependent on the number of NHPs that we sell.
spk03: Got it. And then kind of transitioning from there. So I guess, and you just touched on it a little bit, but as you transition more customers to the contracts versus, you know, the prior year and a half of buying at the spot market, have you had success with that? When do you start to see that materialize from a margin perspective? And I guess maybe that has something to do with inventory, but when does that start to help on the margin front, having a more consistent or better visibility via the contracts into the costs associated with those.
spk10: Yes, we have had some success. We're working on calendar 2025 contracts. Importantly, right now, we're also working on what is going to be needed to back half the year as the inventories start to deplete. Some people have more inventory than others. So I think we will see some of that change also. But longer term, and I've said this before, is that we want to make sure that... We had a business two years ago that was fairly dependent on these NHPs and NHP margins. And I think what we're building right now is a business that's going to be much less dependent on our NHP margins going forward. So we've probably... We'll continue focusing on growing the margins in our small animal tech lab and DSA business. We're not going to probably see, I don't think, at least we're not going to put in our projections to bet on it, margins ever coming back to what we saw the last two years. If it does, that's great. But I don't think that's not the business model we're going to build. In addition, as I said before, we'd like to see DSA be over 50, closer to 70% of our business versus 30, 70. So we'll continue to work that direction and continue to build our services segment and decrease the dependency on HP margins. And if they happen, that's great. But I don't think that's not going to be the business model that we count on for the next five years. The other margins have to continue to grow. Maybe one last question. If you look at what we've done, that's why it's important. We can grow that DSA business because I think we'll get, with that next $60 million, I think we'll see over $30 million of that go to the bottom line. I think with the RMS costs we're taking out, we'll see over $20 million of costs coming out. We see the SG&A costs coming out. You start looking at that and you add up that $40, $50, $60 million, that's why it's important to get those dollars out. So we're not really as dependent on those NHP margins going forward, and that's what we're setting up.
spk03: Got it. And then maybe last one for me, and I'll hop back into the queue. But regarding the early stage discovery work, the delay that you saw this quarter, you're not alone. Others have kind of talked about how the funding environment improved or has improved, yet these companies are a little bit slower to deploy that capital. You know, we're now into the third quarter for you, you know, month and a half into the quarter, are you starting to see some of those dollars flow at this point or anything that you can, you know, provide from a color perspective for how Q3 is shaping up?
spk10: Yeah, I think, you know, we've seen safety assessment for ourselves stay relatively strong. I think we saw safety assessment actually has increased probably, you know, 8% or 9% year over year. it's the discovery that's down 10 plus percent year over year. That's really hurting us. And, um, you know, that we saw and, and, you know, and we were down from week comparisons from a year ago. So the discovery is the area where I think where we're seeing the greatest impact in our business and, and to our margins and our, and our top lines. And so we started making those sales changes and how we operate six months ago, um, Now, I think what we are seeing now is an increase in the amount of customers who are starting to work with us, and then hopefully we'll start seeing an increase in the amount of awards and the size of the awards. But I'm pleased with the progress that the sales team is making. It's not going to happen overnight, but they've been very focused. They've done a great job. We are seeing incremental new customers. We're starting to see some of the size increase. Will that happen overnight? Will we see that next quarter or two quarters out? You know, that's hard for us. That's why we're not giving that guidance right now. But, you know, we are seeing some momentum.
spk07: Got it. All right. Thank you.
spk00: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Frank Takanan from Lake Street Capital Markets. Please go ahead.
spk06: Great. Thanks for taking the questions. I'll also start with one in the NHP business, maybe just from a higher-level Bob, trying to understand the market. Obviously, supply is constrained, and some heard the comments about some of the business moving overseas. If we're thinking about just the U.S. market, what's kind of the quantity change of NHPs being used in the U.S. last year versus maybe kind of thinking about projections for this year? And I know it's going to be tough to track exactly, but maybe a percentage reduction estimate would be a good way to be thinking about it.
spk10: Frank, the information that I have that we looked at is coming from the USDA. And, you know, I think if you look at it in broad terms, and I believe it was in the 30,000 plus HPs imported in 22, and I think it dipped down to like 19,000 in 23.
spk07: into the U.S.
spk10: And so that's a pretty substantial, I think, reduction. And then we found I think some of the inventories did not really go down, and some of our customers' inventories may have actually increased. So I think it's a function of what moved overseas. It's a function of people getting smarter, redesigning studies to maybe use less NHPs. Less studies overall. So I don't have any exact numbers. I'd say our safety assessment business internally has stayed very full. And we've stayed, you know, it's been one of the positive and very pleased with is our ability to maintain our, you know, the same level in use of NHPs. But we're a very small user compared to some of the, compared to the overall market and some of the other CROs. So that, you know, it's, but I think the reduction, the numbers I gave you are substantial. And so a slight recovery there will be substantial.
spk06: Got it. That makes sense. And I know you pulled the guide and are looking to kind of comment forward, but is it, how are we thinking about where we are in the destocking process? I think I heard some comments that maybe some of your customers are concerned getting ready to reorder, but do we feel like the worst of the destocking is over, or is there still a decent slug of customers that have good inventory and we should expect kind of this level or this run rate from the RMS business for the next couple quarters?
spk07: Well, frankly, if I had that specific answer, we wouldn't have withdrawn.
spk10: We would have put out new guidance, I think. So I'm going to be careful. I don't have a really good feel for that right now. We can see some customers coming back and ordering. But, you know, we're meeting with them and onsite at their facilities. Hopefully we get a better feel for them. And as we do and we have a better feel for it, then, you know, I think we'll come back and be able to do something with guidance again. But right now, you know, that's one of the things that has us, you know, concerned is where are we in that process overall. But I think last quarter was fairly weak.
spk07: I'd hope that we don't have a, I'd hope we don't get any weaker than that.
spk06: Right. Okay. And then last one for me, in relation to the DOJ matters, if the agreement in principle is signed in its current form, just a clarifying question, does this resolve all outstanding DOJ matters or is there still pending investigation ongoing beyond what's in that agreement in principle?
spk07: Well, as far as I know, I think we had, this was the Virginia matter.
spk10: You know, the last time we received a subpoena from the NHP matters, which we've talked about, I think was in June of 2021. So I don't know that, you know, I don't know that we ever find out and have a resolution from that. Could they ask more questions? guess they could but the last time we received a subpoena related to the nhp matter which was in miami florida was june of 21. this was the only active one that we currently had subpoenas i believe we've referred to other cases like sec inquiries which we've been cooperating with but i don't i'm not aware of any other doj matters as we speak of today got it okay and this is this is you know we've had we've had really three substantial overhangs in the past three years. One was the DOJ Virginia matter, which has been expensive for us. Also the DOJ NHP matter, which we've also spent several million dollars on the last two years following and looking into that. And then we have the downturn of the biotech funding market. What I'm looking forward to is seeing the conclusion of all three of these, quantifying what it's going to cost us and move forward. And, you know, overall, yeah, I give themselves a little bit of – it's been difficult. Those are, first of all, very expensive matters. I outlined $19 million, I think, that's added in legal fees. I think the $22 million includes actually the cost of closure of the facility and the $22. $19 is just the third-party fees.
spk08: Is that right, Beth?
spk09: No, I think the total is 19.
spk10: Okay. So, if you look at that, and you look at that money spent, and you look at where we are on our sales margins being less than we expected due to this reduction in our industry later, we're behind where we'd like to be with cash. Right now, liquidity. But I would say, you know, I'll give ourselves an A on managing the balance sheet. As Seth outlined, we've generated $32 million in cash. The team has done a good job of managing the balance sheet, continue to make all the cost cutting and integration site optimization projects come to fruition. We're about done with those now, so that should be significantly reduced. We invested over $22 million in infrastructure and animal welfare improvements in the facilities we purchased, significant. Those are coming to, you know, made most of those that we wanted to do. So we've done a good job, I think, of managing our balance sheet. We've sold some assets, did a little bit better than we thought on the sale of the assets. And we've maintained very good lender support. So, you know, I'm really pleased that, you know, even though last week we found that we may have this event that is probable and estimatable, that, you know, with being able to work with our lenders in a very short period to get the amendment we did yesterday, I think shows fabulous cooperation. Really appreciate it. of them being attentive to our needs and continuing to work with us. So I think we have some positives, but, yeah, we've had a couple tough things go against us. We've managed through it. We continue to stay focused on the long term. And, yeah, I'm pleased that we've also had some pretty good wins throughout. So we'll get through this, and then we'll figure out how to manage forward. Okay.
spk00: Ladies and gentlemen, as a reminder, should you have a question, press star one. Your next question comes from Matt Hewitt from Craig Halem. Please go ahead.
spk03: Quick question regarding the BioSecure Act. It's been front of mind for a lot of investors here over the past couple months. And with it moving through the house today, I'm just curious what, if any, impact you could see on your business if Uji Aptec is ultimately blocked from the U.S. market. I assume that would be a positive, but what are you hearing from customers and how are you thinking about that?
spk07: Well, first of all, I have not followed what came out today.
spk10: So if something just happened today, I'm not familiar with it. I've not had an update. We have followed it. Wuji Aptec is a large player in our market in discovery and safety assessment. I'm not going to sit here and tell you we're going to build a business plan based on our competitor having something negative happen to them, nor are we going to bet on it. The things that they moved to China would probably take some significant capacity out of the U.S. And yes, that ourselves and the other CROs in the U.S. benefit from that. You know, that's not lost upon us, that there could be some wind to our back with that, actually, and that may help us out. But I'm not going to sit here and tell you we're going to bet our business on somebody having a bad day and what the government's going to do, and I don't want to wish anybody bad luck.
spk07: I've dealt with my own DOJ and government issues, and I know it can be challenging. Got it. All right. Thank you.
spk00: Your next question comes from Dave Wendley from Jefferies. Please go ahead.
spk05: Hi, thanks for taking the follow-ups. Just a couple. Bob, you talked about in the kind of geographic mix of studies that some studies moved out of the U.S. I think you mentioned Europe. Canada, I think, was also a net recipient. In terms of your supply of NHPs, kind of emphasizing the point that you don't do a lot of SA study conduct in NHPs, so most of your NHPs you're selling to others that are doing that. Are you not able, is it not part of your business to supply NHPs to users outside the United States?
spk07: We do sell NHPs in Europe, but we do not sell them anywhere else.
spk10: But we quarantine and distribute in Europe and the U.S.
spk05: So for those studies that moved to Europe, you would be able to continue or you would see customers continue to buy from you for that or would have over the last year or so?
spk10: We would, but I don't think the European safety assessment business is big enough to make it that big to make a big dent in it. We don't see that big of a change over there in what we can sell.
spk05: Got it. Okay. And then on the cash flow, several parts that I wanted to kind of understand if the benefits of which may still be in the future for you, so like Proceeds from the sale of Blackthorn, proceeds from the Hazlitt Michigan facility, proceeds from sale of Cumberland. Are those all, have you received those yet or would those all add to your cash balance post March 31st? And how much would that be?
spk10: Those at March 31st, they were not all closed. Well, Cumberland's not closed. That'll close this quarter. And that's what closed after March 31st.
spk07: When did Dublin and UK close? Do you know?
spk09: Dublin closed in Q2. And Hazlitt closed in April.
spk08: Okay.
spk09: So we'll have two. And Blackthorn was in April. No, in Q2.
spk08: In Q2.
spk09: So we'll have two closures in Q3.
spk08: Okay.
spk05: Can you approximate kind of net proceeds from those in Q3?
spk09: You know what? Yeah.
spk01: Hazlet is like $150,000 in material. And what we get for Cumberland will pretty much offset the expenses to prepare the site for closure.
spk05: Okay. So just the last question then. On the cash flow, you had $10 million in positive cash flow, $10.4 million in positive cash flow in the quarter, a couple of fairly significant moving parts there year to date. Are there items that are, say, timing of payments, timing of accruals, that that you would expect to reverse in the next quarter that would you know would cause the the delta between operating losses and positive cash flow to narrow significantly i don't think so i don't yeah i don't see any significant prepays in the next quarter and inventory will probably
spk01: it will go down significantly for whatever NHPs we settle.
spk08: Yeah, okay.
spk01: No significant, yeah.
spk10: The most significant would be if we settle with the DOJ and make a payment, that $6.5 million we talked about.
spk07: Right.
spk10: Other than that, as we look out over the next 12 months and we look at our cash flows and our different models the next 12 months, we do not see that we have a liquidity problem. Okay. Okay. All right. That's what I'm getting at. Thank you. Appreciate it. We have sensitized that, looked at it. I would, you know, I'd like not to, you know, to be that tight. But, no, we will not have a liquidity issue.
spk07: But, you know, we could, what we talk about is, you know, working with our lenders if we have covenant issues.
spk10: But we have time to address that. Sounds great. Thank you for the answers.
spk05: Thank you.
spk00: And there are no further questions at this time. I will turn the call back over to Bob Leisure for closing remarks.
spk10: Well, thank you, everyone, for joining today's call. And I want to close today by reiterating our thinking on the long-term future of our industry, our company, the investments we've made to position ourselves for the future, the new spending on research and development, for new medicines historically ebbed and flowed based on either the industry-specific factors such as timing of patent expirations or macroeconomic or geopolitical factors. But over any long-term analysis, the trend has always been robustly up over time. Our global population is getting older. People are looking for higher quality of life as they age, and there's still a multitude of largely unmet medical needs. The companies that work in this space, our customers, are committed to providing that and have historically reinvested more strongly after every down cycle. Within the broader industry context, we believe we're building ourselves a high-touch, flexible provider that is really attractive to biotech customers who appreciate the personal service and attention and detail they can get from Intitude. We've done a lot of work over the last couple of years in an effort to both drive our top line for the long term with investments and additional capacity, new service lines, and stronger sales and marketing efforts. and drive our bottom line through operating leverage gained from optimizing our site footprint, transportation, and logistics. I feel very positive about our team, what we've accomplished, our ability to navigate through our current challenges, and how the next 12 months look for our industry and our company. Thank you for your time today.
spk00: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

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