INOTIV, INC. This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our services and products; (iii) trends in the industries that consume our services and products; (iv) our ability to develop or acquire new services and products; (v) our ability to make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact our markets; (vii) our cash position; (viii) our ability to successfully integrate the operations and personnel related to recent acquisitions; (ix) our ability to effectively manage current expansion efforts or any future expansion or acquisition initiatives undertaken by us; (x) our ability to develop and build infrastructure and teams to manage growth and projects; (xi) our ability to continue to retain and hire key talent; (xii) our ability to market our services and products under our corporate name and relevant brand names; (xiii) our ability to service our outstanding indebtedness, (xiv) our expectations regarding the volume of new bookings, pricing, gross profit margins and liquidity, (xv) our ability to manage recurring and non-recurring costs, (xvi) the impact of COVID-19 on the economy, demand for our services and products and our operations, including the measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties, and additional risks set forth in our filings with theSecurities and Exchange Commission (the "SEC"). Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to the risk factors disclosed in our reports with theSEC , many of which are beyond our control. In addition, we have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the assumptions on which the forward-looking statements contained herein are based on are reasonable, actual events may differ from those assumptions, and as a result, the forward-looking statements based upon those assumptions may not accurately project future events. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included or incorporated by reference elsewhere in this Report. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements that may be affected by risks and uncertainties, including those discussed in Item 1A, Risk Factors contained in our annual report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Our actual results could differ materially from those discussed in the forward-looking statements.
Amounts in this Item 2 are in thousands, unless otherwise indicated.
Recent Developments and Executive Summary
During the recent period, we have continued to focus on our growth initiatives, which are (1) strategic acquisitions, (2) expansion of existing and acquired businesses, and (3) startup of new services. As a result, the Company has gained momentum on its path to being a comprehensive provider of preclinical research services, while adding a highly complementary research model platform through the strategic acquisition ofEnvigo . Our full spectrum solutions now span two segments: Discovery and Safety Assessment, or DSA, and Research Models and Services, or RMS. The acquisition ofEnvigo was transformative to our Company as we have grown from 240 employees in 2018 to over 2,000 employees today.
Significant Accomplishments during three months ended
?
?
Entered into a credit agreement, which includes a senior secured term loan
? facility of
original principal amount of
original principal amount of
? Repaid all indebtedness due to
using borrowings under the senior secured term loan facility of
Pursuant to the Envigo Merger Agreement, we entered into a Shareholders
? Agreement with certain stockholders of
expanded to seven members, including newly appointed members
and
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? Opened modern drug metabolism and pharmacokinetics (DMPK) and cell & molecular
biology laboratories at our
?
Events subsequent to
? Announced a collaboration with Synexa Life Sciences
?
? Borrowed the full amount of the existing
agreement dated
?
Entered into a first amendment to our existing credit agreement. which provides
? for an increase to the existing term loan facility in the original principal
amount of
in the amount of
? Borrowed the full amount of the Incremental Term Loans, but did not borrow any
amounts under the new delayed draw term loan.
Business Overview
As a result of the strategicEnvigo acquisition, which added a complementary research model platform, our full spectrum solutions now span two segments: Discovery and Safety Assessment, or DSA, and Research Models and Services,
or RMS. DSA Our DSA segment specializes in providing nonclinical and analytical drug discovery and development services to the pharmaceutical, chemical, and medical device industries, and sells analytical instruments to the pharmaceutical development and contract research industries. Our mission is to focus on bringing new drugs and medical devices through the discovery and preclinical phases of development, all while increasing efficiency, improving data, and reducing the cost of taking new drugs to market.Inotiv is committed to supporting discovery and development objectives as well as helping researchers realize the full potential of their critical R&D projects, all while working together to build a healthier and safer world. Our strategy is to provide services that will generate high-quality and timely data in support of new drug and product approval or expand their use. Our clients and partners include pharmaceutical, biotechnology, biomedical device, academic and government organizations. We believe that we offer an efficient, variable-cost alternative to our clients' internal drug and product development programs. Outsourcing development work to reduce overhead and speed product approvals through theU.S. Food and Drug Administration ("FDA") and other regulatory authorities is an established alternative to in-house product development efforts. We derive our revenues from sales of our research services and instruments, both of which are focused on evaluating drug and product safety and efficacy. We have been involved in the research of drug and products to treat diseases in numerous therapeutic areas for over 47 years since our formation as a corporation organized inIndiana in 1974, under the nameBioanalytical Systems, Inc. OnMarch 18, 2021 , we changed our name fromBioanalytical Systems, Inc. toInotiv, Inc. We support both the non-clinical and clinical development needs of researchers and clinicians for primarily small molecule drug candidates, but also provide services to biotherapeutics and device companies. We believe that our scientists have the skills in analytical instrumentation development, chemistry, computer software development, pharmacology, histology, pathology, physiology, medicine, surgery, analytical chemistry, drug metabolism, pharmacokinetics, and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are scientists engaged in analytical chemistry, pharmacology, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research from small startup biotechnology companies to some of the largest global pharmaceutical companies. We are committed to bringing scientific expertise, quality and speed to every drug discovery and development program to help our clients develop safe and effective life-changing therapies.
Developments within the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies have major "blockbuster" drugs that are nearing the end of their patent protections. This puts significant pressure on these companies to discover, acquire or develop new drugs with large market opportunity, and to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations have benefited from these developments, as the
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pharmaceutical industry has turned to outsourcing to both reduce fixed costs and
to increase the speed of research and data development necessary for new product
applications. The number of significant drugs that have reached or are nearing
the end of their patent protection has also benefited the generic drug industry.
Generic drug companies provide a significant source of new business for CROs as
they develop, test and manufacture their generic compounds.
A significant portion of innovation in the pharmaceutical industry is now driven
by smaller, venture capital funded drug discovery companies. Many of these
companies are "single-molecule" entities, whose success depends on one or a few
innovative compounds. While several biotech companies have reached the status of
major pharmaceutical companies, the industry is still characterized by numerous
smaller entities. These developmental companies generally do not have the
resources to perform much of their research within their organizations and are
therefore increasingly dependent on the CRO industry for both their research and
for guidance in preparing their regulatory submissions. These companies have
provided significant new opportunities for the CRO industry, including Inotiv .
We believe that we are ideally positioned to serve these clients as they look
for alternatives to the large CROs that cater primarily to the large
pharmaceutical company segment of the marketplace.
RMS
Our RMS segment breeds, imports and sells research-quality animal models for use in laboratory tests, manufactures and sells standard and custom diets, distributes bedding and enrichment products, and provides other services associated with these products. We are the second largest commercial provider of research models and services globally, and our predecessors have been supplying research models since 1931. With over 130 different species and strains, we are a global leader in the production and sale of the most widely used rodent research model strains, among other species. We maintain production facilities, including barrier and isolator facilities, in theU.S. ,U.K. , mainlandEurope , andIsrael .
Financial Performance Highlights
We review various metrics to evaluate our financial performance, including revenue, margins and earnings. In the three months endedDecember 31, 2021 , total revenues increased to$84,211 from$17,885 , a 370.8% increase from the three months endedDecember 31, 2020 . Operating expenses increased by 803.3%, or$47,103 , due to acquisitions and cost increases as we continued to build the infrastructure for growth, which included additional headcount, recruiting, relocation expense, post combination non-cash stock compensation expense relating to the assumption of certain outstanding stock options of theEnvigo Equity Plan recognized in connection with theEnvigo acquisition of$23,014 and investments in building out new service offerings. Additionally, there was an increase in selling expenses due to an increase in travel cost as our sales and marketing teams have traveled more as the COVID-19 pandemic eases and an increase in commissions due to higher sales awards.
As of
During the first quarter of fiscal 2022, we obtained a credit agreement in relation to theEnvigo acquisition and repaid our previous borrowings withFirst Internet Bank of Indiana . Refer to the Liquidity and Capital Resources section herein for a description of our cash flows from operating, investing and financing activities and details related to our credit arrangement, our convertible notes and the related fair value remeasurement of the embedded derivative component of our convertible notes. 30 Table of Contents Results of Operations
The following table summarizes our condensed consolidated statement of operations as a percentage of total revenues for the periods shown:
Three Months Ended
December 31,
2021 2020
Services revenue 45.3 % 95.2 %
Products revenue 54.7 4.8
Total revenue 100.0 100.0
Cost of services revenue (a) 63.4 68.1
Cost of products revenue (a) 88.4 48.2
Total cost of revenue 77.1 67.1
Operating expenses 62.9 32.8
Operating income (loss) (40.0) (32.8)
Other income (expense) (74.3) (1.9)Income (loss) before income taxes (114.3) (34.7) Income tax expense (benefit)
15.2 (0.2)
Consolidated net income (loss) (99.1) % (2.0) %
a)Percentage of service and product revenues, respectively
Three Months Ended
DSA and RMS Revenue Total revenue increased 370.8% to$84,211 from$17,885 in Q1 FY 2021, driven by a$14,940 increase in DSA revenue and$51,386 of incremental RMS revenue. The acquisitions ofHistoTox Labs , Bolder BioPATH, Gateway Pharmacology and PlatoBioPharma added approximately$10,000 of service revenue and internal growth generated approximately$4,940 of service revenue in our DSA segment during Q1 FY 2022. Our acquisition ofEnvigo contributed$45,085 of product revenue and$6,301 of service revenue to our RMS segment during Q1 FY 2022. RMS revenue in Q1 FY 2022 reflected a partial quarter contribution fromEnvigo , which was acquired onNovember 5, 2021 . We did not have any RMS revenue in the comparable prior year period. Cost of Revenues Cost of revenues for the three months endedDecember 31, 2021 was$64,886 or 77.1% of revenue, compared to$11,842 , or 66.2% of revenue for the three months endedDecember 31, 2020 . Cost of service revenue as a percentage of Service revenue decreased to 63.4% during the three months endedDecember 31, 2021 from 68.1% in the three months endedDecember 31, 2020 , reflecting greater utilization of recently expanded capacity. Cost of products revenue as a percentage of Products revenue in the three months endedDecember 31, 2021 increased to 88.4% from 48.2% in the three months endedDecember 31, 2020 due to acquisition ofEnvigo whose products have a lower gross profit as a percent of revenue compared to the historic DSA product-based revenue.
Operating Expenses
Selling expenses for the three months endedDecember 31, 2021 increased 338.1% to$2,738 from$625 compared to the three months endedDecember 31, 2020 . This increase is mainly due to an increase in travel expenses as our sales and marketing teams have begun traveling more as the COVID-19 pandemic eases and an increase in commissions due to higher sales awards. General and administrative expenses for the three months endedDecember 31, 2021 increased 171.4% to$13,252 from$4,882 compared to the three months endedDecember 31, 2020 , as the Company continued to build the infrastructure for growth, which included additional headcount, recruiting and relocation expense and higher compensation. 31 Table of Contents Amortization of intangible assets for the three months endedDecember 31, 2021 increased to$3,396 from$160 compared to the three months endedDecember 31, 2020 , as the Company obtained various intangible assets related to theGateway , HistoTox, Bolder BioPATH, Plato andEnvigo acquisitions that were amortized during the three months endedDecember 31, 2021 . Other operating expenses for the three months endedDecember 31, 2021 increased to$33,580 from$196 compared to the three months endedDecember 31, 2020 . The increase in other operating expenses reflects post combination non-cash stock compensation expense relating to the assumption of certain outstanding stock options the Envigo Equity Plan recognized in connection with theEnvigo acquisition of$23,014 . The Company has also incurred transaction costs related to the acquisitions of Plato,Envigo and RSI and an increase in startup costs for internal investments in new service offerings. The acquisition ofEnvigo was transformational to the Company's underlying business. As a result, certain reclassifications have been made to prior periods in the unaudited condensed consolidated financial statements and accompanying notes to conform with current presentation, which more closely reflects management's perspective of the business as it currently exists.
Other Income (Expense)
Interest expense for the three months endedDecember 31, 2021 increased to$4,828 from$347 compared to the three months endedDecember 31, 2020 . The increase in interest expense is due primarily to the convertible senior notes and the senior term loan, as well as various promissory notes, entered into subsequent toDecember 31, 2020 . Interest expense for the three months endedDecember 31, 2021 includes approximately$1,659 of non-cash interest expense. Other expense for the three months endedDecember 31, 2021 increased to$57,727 from$0 compared to the three months endedDecember 31, 2020 as the Company recognized a$56,714 fair value remeasurement of the embedded derivative component of the convertible notes issued inSeptember 2021 and$877 loss on debt extinguishment. Income Taxes
Our effective income tax rates for the three months endedDecember 31, 2021 and 2020 were 13.33% and (9.89)% respectively. The benefit (expense) recorded for each period was$12,785 and ($33 ), respectively. The benefit from income taxes in the first quarter of fiscal 2022 was primarily related to deferred tax liabilities established as part of the acquisition ofEnvigo , which resulted in a release of valuation allowance, as well as, the impact on tax expense of certain book to tax differences on the deductibility of certain transaction costs and non-deductibility of the loss on fair value remeasurement of the embedded derivative component of the convertible notes. The expense from income taxes in the first quarter of 2021 relates primarily to certain credits that arise when deferred tax liabilities that are created by indefinite-lived assets cannot be used as a source of taxable income to support the realization of deferred tax assets for valuation allowance purposes.
Net Income/Loss
As a result of the above described factors, we had a consolidated net loss of
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At
Net cash used in operating activities was$1,143 for the three months endedDecember 31, 2021 compared to net cash provided by operating activities of$1,652 for the three months endedDecember 31, 2020 . Contributing factors to our cash used in operations in the first three months of fiscal 2022 were noncash charges of$6,035 for depreciation and amortization,$19,159 for non-cash stock compensation expense,$56,714 for loss on fair value measurement of convertible senior notes, changes in deferred taxes of$14,281 and a net increase due to changes in operating assets and liabilities of$8,594 . Included in operating activities for the three months endedDecember 31, 2020 are non-cash charges of$1,065 for depreciation and amortization,$181 of stock compensation expense and a decrease of$435 in accounts payable. These items were partially offset by an increase of$634 in accounts receivable and a net decrease in accrued expenses of$1,089 . 32
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Investing activities used$232,393 in the three months endedDecember 31, 2021 due mainly to cash paid in the acquisition of Plato,Envigo and RSI and capital expenditures of$5,655 as compared to$1,474 used in the first three months of fiscal 2021. The capital additions during the three months endedDecember 30, 2021 consisted of the renovation and expansion of theDenver, Pennsylvania facility and continued construction of ourSt. Louis facility, as well as purchases of certain lab equipment. Financing activities provided$119,466 in the three months endedDecember 31, 2021 , compared to$428 used in the three months endedDecember 31, 2020 . The cash provided in the first three months of fiscal 2022 included borrowings on a senior term loan of$165,000 and borrowings on construction loans of$1,184 , partially offset by payments of long-term borrowings of$37,747 , debt issuance costs of$7,102 and repayment of our previous capex line of credit of$1,749 . The main sources of cash in the first three months of fiscal 2021 were from borrowings on the capex lines of credit of$387 .Total long-term loan payments were$712 and finance lease payments of$108 contributed to the use of cash. Capital Resources Credit Facility OnNovember 5, 2021 , the Company, certain of subsidiaries of the Company (the "Subsidiary Guarantors"), the lenders party thereto, andJefferies Finance LLC , as administrative agent, entered into a Credit Agreement (the "Credit Agreement"). The Credit Agreement provides for a term loan facility in the original principal amount of$165,000 , a delayed draw term loan facility in the original principalirs amount of$25,000 (available to be drawn up to 18 months from the date of the Credit Agreement), and a revolving loan facility in the original principal amount of$15,000 . In addition, the Credit Agreement provides for an aggregate combined increase of the revolving loan facility and the term loan facility of up to$35,000 , which amount will be available to be drawn once the delayed draw term loan facility is no longer available. OnNovember 5, 2021 , the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the delayed draw term loan facility or the revolving loan facility. The Company may elect to borrow on each of the loan facilities at either an adjusted LIBOR rate of interest or an adjusted prime rate of interest. Adjusted LIBOR rate loans shall accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). The LIBOR rate must be a minimum of 1.00%. The initial adjusted LIBOR rate of interest is the LIBOR rate plus 6.25%. Adjusted prime rate loans shall accrue interest at an annual rate equal to the prime rate plus a margin of between 5.00% and 5.50%, depending on the Company's then current Secured Leverage Ratio. The initial adjusted prime rate of interest is the prime rate plus 5.25%. Actual interest accrued at 7.25% throughDecember 31, 2021 . The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving loan facility and (ii) a fee based on a percentage per annum equal to 1.00% on the average daily undrawn portion of the commitments in respect of the delayed drawn loan facility. In each case, such fee shall be paid quarterly in arrears. Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to 1.0% of their respective original principal amounts. The Company shall also repay the term loans on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time with premium or penalty. The Company is required to maintain an initial Secured Leverage Ratio (as defined in the Credit Agreement) of not more than 4.25 to 1.00. The maximum permitted Secured Leverage Ratio shall reduce to 3.00 to 1.00 beginning with the Company's fiscal quarter endingMarch 31, 2025 . The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio shall be 1.00 to 1.00 during the first year of the Credit Agreement and shall be 1.10 to 1.00 from and after the Credit Agreement's first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
Utilizing proceeds from the Credit Agreement onNovember 5, 2021 , the Company repaid all indebtedness and terminated the credit agreement related to theFirst Internet Bank of Indiana ("FIB") credit facility as described in Note 10 and recognized$877 loss on debt extinguishment. 33
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Long term debt as ofDecember 31, 2021 andSeptember 30, 2021 is detailed in the table below. As of: December 31, 2021 September 30, 2021 FIB Term Loans $ - $ 36,185 Seller Note - Bolder BioPath 1,455 1,500 Seller Note - Smithers Avanza 175 280 Seller Note - Preclinical Research Services 667 685 Seller Note - Plato BioPharma 3,000 - EIDL Loan 141 - Convertible Senior Notes
101,062 131,673
Senior Term Loan 165,000 -
271,500 170,323
Less: Current portion (5,223) (9,656)
Less: Debt issue costs not amortized (10,882) (6,458)
Total Long-term debt $ 255,395 $ 154,209
Acquisition-related Debt
In addition to the indebtedness under the Credit Agreement, certain of the Company's subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement.
As part of the acquisition of Plato BioPharma, which is a part of the Company's Inotiv Boulder subsidiary,Inotiv Boulder, LLC , issued unsecured subordinated promissory notes payable to the former shareholders of Plato BioPharma in an aggregate principal amount of$3,000 . The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date ofJune 1, 2023 .
Convertible Senior Notes
OnSeptember 27, 2021 , the Company issued$140,000 principal amount of its 3.25% Convertible Senior Notes due 2027. The Notes were issued pursuant to, and are governed by, an indenture, dated as ofSeptember 27, 2021 , among the Company, the BAS Evansville, as guarantor, andU.S. Bank National Association , as trustee. Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional$15,000 principal amount of Notes. The Notes issued onSeptember 27, 2021 include$15,000 principal amount of Notes issued pursuant to the full exercise by the initial purchaser of such option. The Company used the net proceeds from the offering of Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of the Envigo Acquisition and related fees and expenses, as described in Note 16. The Notes are the Company's senior, unsecured obligations and are (i) equal in right of payment with the Company's existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company's existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company's non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by BAS Evansville (the "Guarantor"). The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears onApril 15 andOctober 15 of each year, beginning onApril 15, 2022 . The Notes will mature onOctober 15, 2027 , unless earlier repurchased, redeemed or converted. BeforeApril 15, 2027 , noteholders have the right to convert their Notes only upon the occurrence of certain events. From and afterApril 15, 2027 , noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company's election. The initial conversion rate is 1.7162 common shares per$1,000 principal amount of Notes, which represents an initial conversion price of approximately$46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. 34 Table of Contents
In addition, if certain corporate events that constitute a "Make-Whole Fundamental Change" (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole and not in part, at the Company's option at any time on or afterOctober 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time. If certain corporate events that constitute a "Fundamental Change" (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company's common shares. The Notes have customary provisions relating to the occurrence of "Events of Default" (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company's failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least$20,000 ; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least$20,000 , where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes. If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company or the Guarantor (and not solely with respect to a significant subsidiary of the Company or the Guarantor) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes. In accordance with ASC 815, at issuance, the Company evaluated the convertible feature of the Notes and determined it was required to be bifurcated as an embedded derivative and did not qualify for equity classification. The convertible feature of the Notes is subject to fair value remeasurement as of each balance sheet date and is valued utilizing level three inputs as described below. In the first quarter of 2022, the Company early adopted Accounting Standards Update ("ASU")ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06)". The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. As a result of the approval for the increase in authorized shares onNovember 4, 2021 (See Note 2 - Equity), the convertible note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as ofNovember 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital. 35 Table of Contents
Based upon the above, the Company remeasured the fair value of the embedded
derivative as of
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