Good afternoon, ladies and gentlemen. And welcome to Inotiv’s Third Quarter 2023 Earnings Results Conference Call. At this time, all lines are in listen-only mode. This call is being recorded on Thursday, August 10, 2023. I will now turn the conference over to Mr. Bob Yedid. Thank you. Please go ahead.

Thank you, operator. And thank you everyone for joining us today with Inotiv’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 as a result of new information, future events or otherwise. Please refer to the company’s SEC filings for further guidance on this matter. Management also will discuss certain non-GAAP financial measures in an effort to provide additional information for investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures are included in the company’s earnings release, which has been posted to the Investors section of the company’s website www.inotivco.com and is also available in the Form 8-K filed with the Securities and Exchange Commission. If you haven’t obtained a copy of today’s press release, you may do so by going to the investor section of Inotiv’s website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz, the company’s Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company’s financial results, and then we’ll open the call for questions from our analysts. It’s my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Bob. Good afternoon, everyone. Before we dive into the quarter’s results, I'm going to start the call by framing some of our efforts today, noting how far we've come in the last few years and how we've positioned ourselves to continue to execute on our plans and goals. Our investments and growth have been guided by seven strategically planned key objectives. First, right structure after several acquisitions, we are currently in the final stages of modernizing our infrastructure, right-sizing the company's global footprint in order to improve client service and program management. This will competitively position our company as a mid-sized full-service CRO and research model provider. We feel that completing this objective will allow us to operate even more effectively with smaller as well as larger CROs and research model providers. Second, we are reducing our dependency on third-party providers and focusing on becoming a full-service provider. To meet our client's needs, we have developed internal capabilities both organically and through acquisitions. In doing so, we have been able to reduce our reliance on third parties for external services. This, in turn, reduces costs but also enhances speed, quality, and overall value for our customers. We expect this will support continued gross margin improvements. Third, our strategic capital investments have included updating our global technology, which was appropriate and necessary now that Inotiv is a significantly larger organization. We've also updated our enterprise resource planning and customer relationship management systems, as well as our enterprise solution and laboratory systems for managing preclinical studies. Additionally, we are committed to addressing deferred maintenance and acquired sites and expanding acquired facilities to allow for growth and leveraging our fixed cost structure. Four, we have rebranded our services business as Inotiv, driven by our belief that customers should expect more from their CRO, and we are raising awareness that we now provide a more complete spectrum of services. Fifth, we are passionate regarding our commitment to and standards for animal welfare. This has included focusing increased resources and attention to retain experienced and caring staff, recruiting and retaining talented and passionate leadership, providing appropriate training, implementing our site optimization plan, and making investments in facilities when required. Six, we have worked diligently to foster a positive and entrepreneurial work environment around our shared purpose of helping clients bring lifesaving therapies to people around the world. This shared purpose, combined with fair compensation, has greatly assisted our efforts to recruit and retain top talent. To this end, we are very proud to have received Energage’s Top Workplaces USA Award earlier this year and have seen significant improvement in our ability to attract and retain talent. Seventh, we have been working with our supply chain and vendors to generate synergies from the increased volumes resulting from acquisitions and a broader range of services. This has led to additional vendor and alternative supply opportunities, enabling cost reductions from greater purchasing power that we continue to realize. It's also important to reiterate how the company has evolved over the past six years, and how our focus on these key objectives outlined today has prepared us for the next chapter of our story. In early 2018, with two locations and 120 people, the company was firmly focused on the preclinical safety assessment segment of the drug development market. In 2018 and 2019, we completed several acquisitions and began to develop new services organically. That organization became Inotiv in 2019, targeting small to mid-sized biopharma companies that our clients believed were being underserved by larger CROs. Over the next four years, some of these organically grown service offerings included safety pharmacology, juvenile toxicology, sand reporting, Clinical Pathology, Biotherapeutics, and genetic toxicology. Expanding our range of services has now enabled us to reduce our reliance on third-party suppliers to meet our clients’ needs, enhance margins, and improve overall value provided to our customers. In 2021, we began to further expand our offerings through acquisitions, which not only enhanced these preclinical services but also provided a strong foundation to build our discovery-based platform. In the fiscal year 2022, we secured access to key research models to support and complement our DSA services and became a major supplier of both small and large research models and diets through the acquisition of Envigo and two other critical research model providers. These acquisitions enhanced our ability to access critical research models and address the major risks we identified in the supply chain. Additionally, we prioritized improvements in animal care and welfare by enlarging our veterinary team and consolidating facilities, allowing us to make significant infrastructure improvements in the remaining facilities. Ultimately, we believe these efforts will allow us to increase our margins, remain competitive regarding new business development, while continuing our key strategic objective of enhancing animal welfare. Today, through these acquisitions and the eight organically developed service offerings, we now currently operate 24 sites across the US and Europe serving over 3,000 customers, employing over 2,200 professionals worldwide, including industry-recognized experts across a wide range of scientific disciplines. We have evolved into a CRO with the ability to serve clients who require a full breadth of products and services under one roof while delivering those services with a personal touch and being highly responsive with scientific credibility. We still have room for improvement, but we get better every month, and we believe we will be much better in the future. I encourage you to review the solutions page of our industry website. There you'll find comprehensive discovery, preclinical, and clinical safety assessment services, along with an extensive offering of standard and custom research models, support services, diet, and bedding for research and development. Currently, Inotiv has become an organization that enables clients to advance programs from concept to clinic by strategically filling the gaps with our spectrum of services and products. Now, our story is shifting to Inotiv’s next chapter, and our strategy will continue to evolve in 2023 and further take shape in 2024 as we plan to improve our service levels, profitability, and continue our growth. With this in mind, let's move to the financial results. Year-to-date 2023 revenues were $431.7 million, up 9% versus the same period last year. Our revenue for the last nine months for discovery and safety assessment and research model services grew 11% and 8% respectively, as compared to the same period a year ago. The third quarter of 2023 was the strongest performing quarter of the fiscal year, with revenues of $157.5 million for Q3 2023 vs Q3 2022. Revenues were down 9% year-over-year; however, it was our first quarter of profitability. DSA revenue decreased 5% year-over-year in Q3, primarily driven by our discovery services, which we believe is a result of the decline in overall biotech funding in the market, plus the timing of some general toxicology services, somewhat offset by increased revenues from genetic toxicology services in connection with new business at our Rockville facility. RMS revenue for the quarter was down 10% mainly due to significantly reduced volume of NHP and small animal sales, somewhat offset by increased pricing. Integration plans remained on target for this quarter. This has been important to increase effectiveness and reduce our costs. We have previously announced nine site closures and completed eight as planned by the end of this June. The ninth previously announced planned closure is Blackthorn facility in the UK. Its consolidation into Hillcrest is expected to be finalized by the end of Q3 of next year. Additionally, we are closing a small facility in Spain, which is now substantially complete, and we will relocate our facility in Everett, Washington to our expanding operations in Fort Collins, Colorado, which we expect to complete in fiscal Q1 of 2024. Over the last 12 months, we have largely completed nine of the eleven closures, mainly by consolidating the operations of these closed facilities into existing operations. Moreover, most of the planned expansions are also completed. Final expansion balance remains on track to be completed by the end of the fourth quarter of this fiscal year. We have work scheduled to fill this increased capacity, expecting revenue to begin in Q1 for fiscal 2024. We are now focused on the sale of assets from sites that were closed, including Boyertown and Cumberland, along with our Israeli businesses, which are under contract, and negotiations are ongoing regarding the sale of other locations in Haslett, Michigan, Spain, France, and Blackthorn in the UK. We believe these asset sales may potentially be completed over the next two to three quarters. Our integration efforts and site closures also give us the opportunity to restructure our transportation system for the research models business, which is currently in process. In addition to improving margins related to consolidating our operations, we believe that sales of the sites planned for closure will generate additional cash for the company. From the perspective of future growth, we will focus on optimizing operations with our new facility footprint, realizing the benefits from the recently made investments at many of our sites, which will also allow us to bring more service capabilities online. Overall, we expect to grow our DSA business from $160 million in 2022 to an estimated $180 million in 2023, to in excess of $200 million in 2024. We believe these DSA expansion projects we've just recently completed will allow us to grow our DSA sales by 40% to 50% above the 2022 DSA sales levels and will enable us to leverage our DSA fixed cost structure and infrastructure. We also anticipate the capacity to grow the RMS business and expect to reduce our RMS expenses by approximately $20 million after all these restructuring changes are implemented. We believe the lack of NHP imports from Cambodia continues to affect the entire industry's supply of research models being imported into the US. According to the USDA’s Global Agricultural Trade System, 2023 imports of NHPs to the US year-to-date through June are now 47.9% lower than the same period in 2022. We have begun to identify additional suppliers and increase our imports of NHPs from countries outside of Cambodia. Pricing of NHPs and related costs continue to increase. We continue to generate positive margins; we are meeting our customers’ requirements. Our safety and assessment service offerings have not been impacted by the industry shortage. However, the suppliers identified in countries other than Cambodia and China, and the NHP volume available from them are not sufficient to make up for the volume of NHP exports from Cambodia in prior years. We sold fewer NHPs in Q3 than we did in Q2; Q2 was less than Q1. We expect to have fewer NHPs available for sale in Q4 than we sold in Q3. We will sell fewer NHPs in fiscal 2023 versus fiscal 2022. If the situation in Cambodia and China remains the same, we expect fewer NHPs available for sale in fiscal 2024 versus fiscal 2023. Due to increases in pricing, our sales dollars have remained fairly consistent this year, despite the reduced volumes. If we are able to implement continued price increases, we could see similar sales dollars in 2024 compared to ‘23 on lower volumes. Based on current trends, and taking into account the unknowns that exist for the NHP situation, we believe in future quarters, our company will be able to achieve a normalized average EBITDA run rate of about $20 million per quarter, and that should be achievable through all of fiscal 2024. As we begin to utilize the recently added DSA capacity and sell new services, and if there is an increase in the supply of NHPs available for sale, these estimates may increase. We continue to expect improvements in our business as we optimize and integrate our DSA and RMS segments and see results from our focus on key initiatives. We will continue to monitor the NHP situation and adjust our plans accordingly with or without imports from Cambodia. We understand this is a significant industry issue in the US and needs to be resolved to maximize the industry's ability to bring important lifesaving therapies to the market. Looking to the future, as we continue to explore how we can better support our customers in their development of novel medicines going forward, we have embarked on a program to standardize the capture of our data generated in discovery, safety, and clinical studies. The goal is to structure our data in a way that should enable an AI approach to integrate them to find correlations between discovery and safety data, and clinical outcomes that can innovate and accelerate our translational medicine offering. Longer term, we are confident in the product service portfolio we've assembled and will continue to optimize, along with our customer service value proposition that is particularly attractive to the biopharma sector, and in the skill and experience of the team executing our vision globally. With this, I would like to turn the call over to Beth for the financial overview.

Thanks, Bob. For the nine months ended June 30, 2023, revenues totaled $431.7 million, a 9% increase from the $397.2 million recorded during the first nine months of 2022. RMS revenue for the nine months increased 8% to $296.8 million from $276.1 million in the same period in 2022. In our math, we continue to operate in an extremely dynamic pricing environment for larger research models, particularly NHP. DSA revenue for the nine months increased 11% as compared to the same fiscal period last year. The increase in DSA revenue was primarily driven by additional year-to-date fiscal 2023 revenue generated from Integrated Laboratory Systems that we acquired in January 2022, plus new services related to genetic toxicology and inorganic growth in general toxicology services. These increases in DSA service revenues were partially offset by decreases in our discovery services, primarily related to the decline in overall biotech funding in the market. For the 2023 third quarter, total revenue decreased 9% to $157.5 million from the $172.7 million recorded during the prior year period. DSA revenues for the fiscal third quarter decreased by 5% to $46.8 million when compared to the prior year period. As previously mentioned, the lower revenues experienced in our DSA segment were primarily driven by declines in overall biotech funding in the market, plus the timing of general toxicology services, somewhat offset by increased revenue from genetic toxicology services connected with our new business at our Rockville facility. RMS revenue for the fiscal third quarter was down 10% to $110.7 million year-over-year, mainly due to reduced volume of NHP sales, somewhat offset by favorable pricing for several products, particularly the NHP. For the quarter, total gross profit improved to $55.2 million, or 35% of total revenues, from $50.9 million, or 29.5% of total revenues in last year's third quarter. Gross profit for our DSA segment in the fiscal third quarter decreased to $17.3 million or 37% of segment revenue from $21.8 million or 44.3% of segment revenue in last year's third quarter. Overall, we were pleased with the DSA gross profit as it showed improvements over the last 12 months. The decrease in gross profit versus last year’s Q3 was primarily due to an unusually high gross profit in Q3 of 2022 due to the timing of studies in our safety assessment services. DSA gross profit in 2023 was also impacted by the lower revenue in our discovery services. As our new services start to come online, we expect to generate further demand from both new and current customers alike. Ultimately, based on this broader range of services and growth, we believe we will be able to boost our DSA margins from 30% to the mid-30% range in 2024, with long-term targets going into the upper 30% range. The net book-to-bill ratio for DSA in the third quarter was 1.08x, with a slightly positive book-to-bill for the trailing 9 and 12 months. DSA backlog was $149.1 million at June 30, 2023, compared to $143.2 million at June 30, 2022. Additionally, our conversion rate, which is our ability to convert our backlog to sales, has continued to improve over the last three quarters. RMS segment gross profit in the third quarter of fiscal 2023 was $37.9 million, or 34.2% of total revenues, compared to $29.1 million, or 23.6% of revenues in last year's period. The increase in margin in the current quarter was driven by several factors including improved pricing for several product lines, partially offset by the absorption of duplicate costs as we implemented our site optimization plan. General and Administrative expenses rose to $26.6 million in the third quarter of fiscal 2023 from $21.7 million in last year’s second quarter. However, these expenses were down by $2.5 million from Q2 of 2023. G&A expenses for the third quarter reflected $4.1 million in legal and third-party fees primarily related to ongoing NHP matters, the Cumberland Virginia ongoing investigation, defense on pending securities litigation, and the recognition of a charge to fully accrue for a settlement of a purported class action and a related action in California. This compares to the previously reported legal and third-party fees in Q2 of 2023 of $6.7 million. Operating income for the quarter was $8.8 million, an increase from $4.8 million of operating income during last year's third quarter, reflecting both the $4.9 million in higher G&A expenses and a $4.6 million decrease in other operating expenses driven primarily by decreased acquisition, integration, and restructuring expenses. Interest expense increased to $10.8 million, up from $8.4 million in last year's third quarter, reflecting our higher debt balance from borrowings obtained for acquisitions, capital investments, and higher interest rates. Consolidated net income attributable to common shareholders in the third quarter of fiscal 2023 totaled $1.8 million or $0.07 per diluted share, compared to a consolidated net loss attributable to common shareholders of $3.7 million or a $0.15 loss per diluted share in the third quarter of 2022. Adjusted EBITDA was $30.5 million or 19.4% of total revenue, as compared to adjusted EBITDA of $37 million or 21.4% of total revenue in last year's third quarter. We are pleased with the $30.5 million of adjusted EBITDA this quarter as it sequentially increased each quarter this year, up from adjusted EBITDA of $17.1 million or 11.3% of total revenue in the second quarter of fiscal 2023, and a negative $5.5 million of adjusted EBITDA in Q1 of fiscal year 2023. Net cash provided by operations for the third quarter was $3.7 million, compared to cash used by operations of $9.4 million in the same period last year. The increase in cash provided by operations was primarily driven by improved net working capital compared to the same period last year. Capital expenditures in the third quarter totaled $4.5 million or 2.9% of total revenue and reflected investments in completing our DSA capacity expansions in Rockville, Maryland, and Fort Collins, Colorado, enhancements in laboratory technology, and improvements for animal welfare. For the first nine months of fiscal year 2023, capital expenditures totaled $21.3 million. Our balance sheet as of June 30, 2023, included $22.2 million cash and cash equivalents compared to $24.6 million at March 31, 2023. Total debt, net of debt issuance costs, as of June 30, 2023, was $375.6 million, compared to $374.1 million at March 31, 2023. The balance sheet also includes assets held for sale of $8.7 million and liabilities held for sale of $2.3 million. Due to the decreasing availability of NHPs in the US, we are revising our full-year revenue guidance to at least $570 million in revenue, down from a previous guidance of $580 million. We are also updating fiscal 2023 adjusted EBITDA guidance to be at least $60 million, down for the year from the previous guidance of $70 million. We expect to continue to remain in compliance with our financial covenants for the fiscal year. We still expect capital expenditures to be approximately 5% of revenue in fiscal 2023. We anticipate a modest level of capital investment in 2024 of less than 5%. The capital expenditures are down from our five-year average of 14% as we build capacity, new service offerings, and implement our site optimization plan. We are pleased with our sequential financial performance this fiscal year and the progress that we are seeing from our investments, our site optimization implementation, and additional capacity investments in our DSA segment. We remain optimistic as we continue to grow and capture a significant portion of the opportunities in our market. With this financial overview, we will turn the call over to our operator for questions.

Your first question comes from the line of Tim Daley from Wells Fargo.

Great. Thanks for the question here. So Bob, very impressive book-to-bill here in DSA at 1.08, implying roughly $5 million sequential increase in net orders in the quarter. Were there any pull up here, any pull forward? Just how are bookings going in the fourth quarter so far? Just trying to figure out a bookings rate on a sequential basis moving forward.

I'm sorry. I think I was on mute. Sorry, Bob. Tim, thank you. To answer your question, our bookings for the third quarter were actually very strong, one of our strongest ever. The net bookings came just over one due to cancellations. We are still seeing a high level of cancellations as we have in previous quarters, and I think that will continue. It's one of the reasons why we increased the salesforce over the last year. As we've done that, we've seen our ability to increase quotes; our quoting level for the quarter was probably a record for us, as was our closing. I hope to continue to see those trends. One of the areas where we've been off in the last six to nine months is in the discovery service. As we discussed, revenues in discovery are expected to be one of the reasons we decreased guidance. However, I also said in the last call in March that we added a specific discovery sales team to the market back in the first half of this calendar year. We are starting to see significant improvement there and a good trend in discovery, which may indicate that some of the biotech funding is back, and they're coming back to put some of the projects in place because that's been one of the strengths so far in the first part of this quarter. I do not have the ability to predict bookings going forward, but I do expect cancellations will continue as people are very cautious with their money. I feel that quoting activity remains fairly strong. I'm hopeful that we'll continue to close at a good level. So far, I'm pleased with what we’re seeing this quarter.

All right. Great. And then I guess just for Beth, I think you guys called out that assuming that Cambodia and China conditions remain, a $20 million quarterly run rate of EBITDA is a good number for 2024. So is that a way to think about at least the baseline for 2024 being $80 million of EBITDA for the full year? Thank you for your time, appreciate it.

Yes, I would think of it in terms of $80 million for the year with an average of $20 million per quarter.

We averaged, if you look at the last two quarters, were probably 48, which is an average of 24. I would say that we look at the 48% reduction of what's coming into the country; there'll be a significant reduction. We're looking at pricing and ensuring we set a conservative estimate we can depend on, if nothing changes. If biotech funding goes up, if we recover some of these discovery sales, if we see additional opportunities for those fees, that would be great. But at this point, let's recognize the environment we're in.

And your next question comes from the line of Matt Hewitt from Craig-Hallum Capital Group.

Good afternoon. Thanks for taking the questions. And congratulations on navigating what is a challenging environment. Maybe first up regarding the NHPS. I heard what you said as far as Cambodia still being pretty locked down. It sounds like you're finding some supply in some other geographies or countries. As we think about opportunity there, I guess, two questions. First, were you able to unlock some of your existing inventory? Or sell some of the existing inventory? Secondly, is there an opportunity for you to take in animals in one or more of your international sites? Or is that not an option?

What was the last question, Matt?

Would it be possible to take custody of animals in one of your European locations?

First, we do distribute NHPs in Europe. We have done that, and that market—Cambodian NHPs have never been part of our European plan. We're not going to do anything with Cambodians for the moment. Regarding your first question, yes, we have been able to bring in from other countries, but it depends on what our customers want. About our inventory, I don't want to get too into the details. But yes, we have sold from our inventory in the past. But no, we have not sold all of our inventory, nor have we installed our complete inventory.

Got it. All right. And then maybe second question, as you rolled out some of these new services and clearly, you're having some success there, have you looked at or is there any kind of a metric you can provide that shows how across your over 3,000 customers worldwide, how many are using two services or three services? How has that metric changed over the past year? Thank you.

I don't have a good metric on that, Matt. I know we are bringing our DSA groups together, discovery and our safety assessment group. We are now discussing and figuring out how to better bring our research models customer base to our discovery base, which will evolve into our safety assessment base. We will be making some changes, adding scientific strength to our bench in the coming year. I'm looking forward to evolving that part of the business so we can bring the RMS business closer to the discovery business and cross-sell more than we have in the past. However, we need to improve the scientific team, and those plans will be announced in the future. I'm excited about that. We have a lot of opportunities we've not explored yet.

And your next question comes from the line of Dave Windley from Jefferies.

Hi. Good afternoon. Thanks for taking my questions, Bob. I'm wondering if you wouldn't mind breaking out your bookings from some of your newer services. I think you've pulled out in the past biopharmaceutical gene tox, wondering how much traction those are gaining and how much they're contributing so far.

Yes, I'd say, thank you, Dave. I have some awareness of this, but I don't have the exact figures in front of me. We started those services up at the end of the calendar year last year. We've started to see that backlog grow for those services. It's still not exceeding a million a month in those services for the new facilities, but it's grown fairly rapidly over the last six months. The backlog is growing, but it may be $3 million to $4 million, $5 million in backlog. It's difficult to separate it from many of the larger programs since some of those services are things we were outsourcing before. So it is hard to determine what we didn't have in the backlog before.

That's good. As for your adjusted guidance, you're attributing most of the revenue decline in the full-year guide to availability of NHPs. You also mentioned earlier about discovery. Your overall revenue; you expect it to be sequentially down by about $30 million-ish. Should we think of that all coming from RMS? Or is some of that DSA?

Yes, we're going to see most of that come out of the RMS. The adjustment is more related to the RMS side, primarily NHP-related. For the year, our NHP revenue will likely be lower than I initially thought, while I anticipate our DSA sales will be lower than expected for the year.

Okay. But then, on the RMS side, can you, Beth, give us a sense of how much of the revenue for the quarter or year-to-date is still tied to NHPs? How much of your RMS revenue is driven by NHPs now?

It's always been an important part of our revenue, but I can put it in perspective. The volume of NHPs we sold in the third quarter this year was probably at least 40% lower than we sold last year. The imports from the US are down 40%. We are seeing that, and we have much less going out the door on a quarterly basis. However, we don't break out NHP revenues from RMS revenues.

Got it. But the commentary suggests that your NHP revenue is down significantly.

The interesting thing is that while the volume of NHPs in the third quarter was down over last year, I think on average, we could expect a decline of 40% to 45% next year. I don't know that we could see greater declines next year in sales from any space than we saw in the third quarter. So that significant decline is likely baked in, though some quarters may vary while adjusting for when imports come in.

Last question from me, both at the entity level and the industry level, there has been much conversation about working with the US Fish and Wildlife Service to both get approved and create a pathway to get approved a parentage test to satisfy and kind of reopen the supply chain for animals coming from Cambodia. Your competitor didn't mention that yesterday. I'm wondering if you could provide an update on where that stands, what progress has been made, and what upcoming court cases or meetings might mean for that dialogue.

David, I've come to the conclusion that we're not big enough and important enough to make a difference in the US Fish and Wildlife or the DOJ's actions. We follow it closely but they will do what they think is best. I don't predict what they'll do. This is why we're trying to be realistic given our current landscape. We are positioning our business model under today's status quo. Therefore, our management team needs to wake up feeling successful rather than find constraints in things we can't control.

Your next question comes from the line of Frank Takkinen from Lake Street Capital Markets.

Great. Thanks for taking the questions. I wanted to clarify the renewed EBITDA guidance. I understand the revenue guidance change but was hoping to get more color on the EBITDA guidance change. I figured it would be a little less than the same proportion of revenue coming down. Maybe talk to margin expectations and whether there is an expected uptick in operating expenses as well to reach that $60 million.

As I outlined, I’m pleased with the sequential growth despite the reduction in volume. The pricing for NHPs has held fairly well, and RMS sales have also held up well. However, our discovery sales may be down about $10 million from our targeted projection, and we probably had legal fees exceeding $9 million or $10 million. With the discovery sales, about 80% of that is likely to affect the bottom line. These factors contribute significantly to our current differences from expectations. Given the challenges we faced this year and the changes in the industry, particularly around biotech funding and NHP availability, we are quite pleased with the current state of our organization.

Got it, that's helpful. Now that you have a lot of the site closures and broader site optimization behind you, you've built a solid infrastructure to grow off of now. Can you speak to your confidence behind your longer term 18% to 22% EBITDA margins? And is there any timeline you’re thinking about to reach a profitability profile like that?

I think as biotech funding returns or as we increase our market share, we have great leverage in our DSA model. I’ve outlined how we can reach these targets into the 22% margin through growing DSA sales and reducing costs on the RMS side. While we may not hit these targets in 12 months, we definitely do not need to feel pressured by a short timeline. At this moment, let’s put realistic expectations. We grew 10% last year at revenue levels of $160 million, likely in the low 160s again. If we saw biotech funding high, we could expand growth at rates of 25%-30%. We are adapting proactively and can grow as we gain operational efficiencies. Ultimately, we need to ensure we have a strong foundation for the future, so that it does not take six months to achieve these targets.

Your last question comes from the line of Yuan Zhi from B. Riley.

Thank you for taking our questions. Bob, high level, can you provide some comments on the demand for NHPs? How does that compare to last year based on your observations? You mentioned supply from government tracking data, and then I have a couple of follow-up questions.

Our demand is fairly high and it should continue as it will take a while for the supply chain to work through. With inventory in quarantine, it takes time for the supply to normalize. Now that we're importing about half of what we had before, I believe supply bottlenecks will toughen.

Got it. Additionally, can you clarify the accounting method relative to NHP biologic assets? Did you use first in first out or last in first out to calculate the inventory and cargo?

We use actual cost. Each animal will have its specific cost of purchasing and importing. Our overhead costs must be covered by those margins, such as feeding, labor, utilities, insurance, and transportation, many of which are expensed rather than included in our inventory.

Lastly, have you noticed an increase in the cost of NHPs outside of Cambodia? And do you have some sort of contract or price locking in place for those supplies?

We do have some contracts that lock in prices, and we have seen prices increase. I expect that trend to continue.

Mr. Leasure, there are no further questions at this time. Please proceed.

Thank you, everyone for joining today's call. We appreciate the great questions and the information shared. Our team looks forward to what the future holds for Inotiv. We've positioned the company for strong growth. I’d like to thank our investors for being part of this journey with us. We understand our industry has faced some challenges and some changes. We’ve made adjustments to address these challenges. We believe substantial opportunities lie ahead as our efforts have significantly enhanced our capabilities in the marketplace. Our capital investment program has largely been successfully accomplished, and we expect lower CapEx spending as a percentage of revenue going forward. Having completed necessary infrastructure upgrades, we now have both scale and in-house capabilities. We believe we can continue to effectively increase our sales volume through cross-selling to existing customers while developing relationships with new customers. We are now well positioned to better control project start and delivery timelines while providing high levels of customer service at all times. We look forward to the next call and seeing many of you at upcoming Healthcare Investment Conferences. Thank you, and I’d like to add one more thing: Happy birthday, Robert. Thank you very much.

Thank you, ladies and gentlemen. That concludes our conference for today. Thank you all for participating. You may now disconnect.