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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number    0-14902
 
MERIDIAN BIOSCIENCE, INC.
Incorporated under the laws of Ohio
31-0888197
(I.R.S. Employer Identification No.)
3471 River Hills Drive
Cincinnati, Ohio 45244
(513)
271-3700
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, no par value
  
VIVO
  
NASDAQ Global Select Market
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer   ☒ 
       
Non-accelerated
filer
     Smaller reporting company  
       
Emerging growth company           
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding January 31, 2021
Common Stock, no par value   43,145,015

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM
10-Q
 
 
  
 
  
Page(s)
 
     
PART I.
  
  
     
     
Item 1.
  
  
     
     
 
  
  
 
1
 
     
 
  
  
 
2
 
     
 
  
  
 
3
 
     
 
  
  
 
4-5
 
     
 
  
  
 
6
 
     
 
  
  
 
7-19
 
     
Item 2.
  
  
 
19-28
 
     
Item 3.
  
  
 
28
 
     
Item 4.
  
  
 
28
 
     
PART II.
  
  
     
     
Item 1.
  
  
 
28
 
     
Item 1A.
  
  
 
28
 
     
Item 6.
  
  
 
28
 
     
  
 
  
 
29
 
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “continues”, “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “signals”, “should”, “can” and similar expressions or the negative versions thereof and which also may be identified by their context. All statements that address operating performance or events or developments that Meridian Bioscience, Inc. (“Meridian” or “the Company”) expects or anticipates will occur in the future, including, but not limited to, statements relating to per share diluted earnings, sales, product demand, revenue, operating margin, other guidance and the impact of
COVID-19
on its business and prospects, are forward-looking statements. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Specifically, Meridian’s forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance. Meridian assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following:
Meridian’s operating results, financial condition and continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition, its ability to effectively sell such products and its ability to successfully expand and effectively manage increased sales and marketing operations. While Meridian has introduced a number of internally developed products and acquired products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis or in protecting its intellectual property, and unexpected or costly manufacturing costs associated with its introduction of new products or acquired products could cause actual results to differ from expectations. Meridian relies on proprietary, patented and licensed technologies. As such, the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would impact its results. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which the Company’s customers operate, as well as adverse trends in buying patterns from customers, can change expected results. Costs and difficulties in complying with laws and regulations, including those administered by the United States Food and Drug Administration, can result in

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unanticipated expenses and delays and interruptions to the sale of new and existing products, as can the uncertainty of regulatory approvals and the regulatory process (including the currently ongoing study and other FDA actions regarding the Company’s LeadCare products). The international scope of Meridian’s operations, including changes in the relative strength or weakness of the U.S. dollar and general economic conditions in foreign countries, can impact results and make them difficult to predict. One of Meridian’s growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses will be successfully integrated into Meridian’s operations. There may be risks that acquisitions may disrupt operations and may pose potential difficulties in employee retention, and there may be additional risks with respect to Meridian’s ability to recognize the benefits of acquisitions, including potential synergies and cost savings or the failure of acquisitions to achieve their plans and objectives. Meridian cannot predict the outcome of future goodwill impairment testing and the impact of possible goodwill impairments on Meridian’s earnings and financial results. Meridian cannot predict the possible impact of U.S. health care legislation enacted in 2010 – the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act – and any modification or repeal of any of the provisions thereof initiated by Congress or the presidential administration, and any similar initiatives in other countries on its results of operations. Efforts to reduce the U.S. federal deficit, breaches of Meridian’s information technology systems, trade wars, increased tariffs, and natural disasters and other events could have a materially adverse effect on Meridian’s results of operations and revenues. The Company can make no assurances that a material weakness in its internal control over financial reporting will not be identified in the future, which if identified and not properly corrected, could materially adversely affect its operations and result in material misstatements in its financial statements. Meridian also is subject to risks and uncertainties related to disruptions to or reductions in business operations or prospects due to pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as
COVID-19.
In addition to the factors described in this paragraph, as well as those factors identified from time to time in the Company’s filings with the Securities and Exchange Commission, Part I, Item 1A Risk Factors of the Company’s most recent Annual Report on Form
10-K
contains a list and description of uncertainties, risks and other matters that may affect the Company. Readers should carefully review these forward-looking statements and risk factors, and not place undue reliance on the Company’s forward-looking statements.
 

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(dollar and share amounts in thousands, except per share data)
 
    
Three Months Ended
 
    
December 31,
 
    
 
2020
   
 
2019
 
NET REVENUES
   $ 92,917     $ 47,421  
COST OF SALES
     31,369       19,770  
    
 
 
   
 
 
 
GROSS PROFIT
     61,548       27,651  
    
 
 
   
 
 
 
OPERATING EXPENSES
                
Research and development
     5,651       4,763  
Selling and marketing
     7,021       6,728  
General and administrative
     11,938       8,984  
Change in fair value of acquisition consideration 
     1,047       1,187  
Restructuring costs
     —         275  
Selected legal costs
     1,227       320  
    
 
 
   
 
 
 
Total operating expenses
     26,884       22,257  
    
 
 
   
 
 
 
OPERATING INCOME
     34,664       5,394  
     
OTHER INCOME (EXPENSE)
                
Interest income
     9       111  
Interest expense
     (534     (767
RADx grant income
 
 
800
 
 
 
 
 
 
Other, net
     (691     (712
    
 
 
   
 
 
 
Total other expense, net
     (416     (1,368
    
 
 
   
 
 
 
EARNINGS BEFORE INCOME TAXES
     34,248       4,026  
     
INCOME TAX PROVISION
     7,469       1,199  
    
 
 
   
 
 
 
NET EARNINGS
   $ 26,779     $ 2,827  
    
 
 
   
 
 
 
BASIC EARNINGS PER COMMON SHARE
   $ 0.62     $ 0.07  
DILUTED EARNINGS PER COMMON SHARE
   $ 0.61     $ 0.07  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—BASIC
     43,098       42,789  
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS
    
681
       
149
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—DILUTED
     43,779       42,938  
    
 
 
   
 
 
 
ANTI-DILUTIVE SECURITIES:
                
Common share options and restricted share units
     258       1,407  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(dollar amounts in thousands)
 
    
Three Months Ended
December 31,
 
    
2020
   
2019
 
NET EARNINGS
   $  26,779     $  2,827  
Other comprehensive income (loss):
                
Foreign currency translation adjustment
     3,301       2,768  
Unrealized gain on cash flow hedge
     21       —    
Reclassification of amortization of gain on cash flow hedge
     (77     (77
Income taxes related to items of other comprehensive income
     14       19  
    
 
 
   
 
 
 
Other comprehensive income, net of tax
     3,259       2,710  
    
 
 
   
 
 
 
COMPREHENSIVE INCOME
   $  30,038     $  5,537  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)
 
Three Months Ended December 31,
  
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES
                
Net earnings
   $  26,779     $ 2,827  
Non-cash
items included in net earnings:
                
Depreciation of property, plant and equipment
     1,508       1,218  
Amortization of intangible assets
     2,221       1,722  
Stock-based compensation
     1,241       788  
Deferred income taxes
     (852     419  
Change in acquisition consideration
     1,047       1,187  
Change in the following:
                
Accounts receivable
     (1,776     550  
Inventories
     (5,941     (3,526
Prepaid expenses and other current assets
     2,682       1,434  
Accounts payable and accrued expenses
     (5,826     (664
Income taxes payable
     4,032       (464
Other, net
     6       (203
    
 
 
   
 
 
 
Net cash provided by operating activities
     25,121       5,288  
    
 
 
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchase of property, plant and equipment
     (2,086     (340
Payment of acquisition consideration holdback
     (5,000     —    
    
 
 
   
 
 
 
Net cash used for investing activities
     (7,086     (340
    
 
 
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Payment on revolving credit facility
     (10,000     —    
    
 
 
   
 
 
 
Net cash used for financing activities
     (10,000     —    
    
 
 
   
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
     1,644       1,212  
    
 
 
   
 
 
 
Net Increase in Cash and Cash Equivalents
     9,679       6,160  
Cash and Cash Equivalents at Beginning of Period
     53,514       62,397  
    
 
 
   
 
 
 
Cash and Cash Equivalents at End of Period
   $  63,193     $  68,557  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
ASSETS
 
  
December 31,
2020
(Unaudited)
 
  
September 30,
2020
 
CURRENT ASSETS
                 
Cash and cash equivalents
   $ 63,193      $ 53,514  
Accounts receivable, less allowances of $579 and $513, respectively
     40,936        38,512  
Inventories, net
     67,243        61,264  
Prepaid expenses and other current assets
     6,244        8,900  
    
 
 
    
 
 
 
Total current assets
     177,616        162,190  
    
 
 
    
 
 
 
PROPERTY, PLANT AND EQUIPMENT, at Cost
                 
Land
     997        991  
Buildings and improvements
     32,320        32,188  
Machinery, equipment and furniture
     71,647        69,854  
Construction in progress
     6,118        1,200  
    
 
 
    
 
 
 
Subtotal
     111,082        104,233  
Less: accumulated depreciation and amortization
     75,094        73,113  
    
 
 
    
 
 
 
Property, plant and equipment, net
     35,988        31,120  
    
 
 
    
 
 
 
OTHER ASSETS
                 
Goodwill
     114,868        114,186  
Other intangible assets, net
     80,976        83,197  
Right-of-use assets, net
     6,213        6,336  
Deferred income taxes
     7,714        7,647  
Other assets
     555        585  
    
 
 
    
 
 
 
Total other assets
     210,326        211,951  
    
 
 
    
 
 
 
TOTAL ASSETS
   $  423,930      $  405,261  
    
 
 
    
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
    
December 31,
2020

(Unaudited)
    
September 30,
2020
 
CURRENT LIABILITIES
                 
Accounts payable
   $ 15,348      $ 11,969  
Accrued employee compensation costs
     10,581        16,661  
Current portion of acquisition consideration
     11,303        12,619  
Current operating lease obligations
     1,835        1,789  
Current government grant obligations
     727        600  
Other accrued expenses
     6,052        5,362  
Income taxes payable
     7,985        3,524  
    
 
 
    
 
 
 
Total current liabilities
     53,831        52,524  
    
 
 
    
 
 
 
NON-CURRENT
LIABILITIES
                 
Acquisition consideration
     10,653        13,290  
Post-employment benefits
     2,494        2,493  
Fair value of interest rate swaps
     693        713  
Long-term operating lease obligations
     4,513        4,678  
Long-term debt
     58,824        68,824  
Government grant obligations
     10,495        10,524  
Long-term income taxes payable
     384        549  
Deferred income taxes
     3,007        3,804  
Other
non-current
liabilities
     169        233  
    
 
 
    
 
 
 
Total
non-current
liabilities
     91,232        105,108  
    
 
 
    
 
 
 
COMMITMENTS AND CONTINGENCIES
             
     
SHAREHOLDERS’ EQUITY
                 
Preferred stock, no par value; 1,000,000 shares authorized; none issued
     —          —    
Common shares, no par value; 71,000,000 shares authorized,
 
43,124,190
and
43,068,842
shares issued, respectively
     —          —    
Additional
paid-in
capital
     141,395        140,195  
Retained earnings
     136,073        109,294  
Accumulated other comprehensive income (loss)
     1,399        (1,860
    
 
 
    
 
 
 
Total shareholders’ equity
     278,867        247,629  
    
 
 
    
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $  423,930      $  405,261  
    
 
 
    
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(dollar and share amounts in thousands)
 
     Common
Shares
Issued
     Additional
Paid-In

Capital
    Retained
Earnings
     Accumulated Other
Comprehensive
Income (Loss)
     Total
Shareholders’
Equity
 
Balance at September 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  43,069      $  140,195   $  109,294      $  (1,860)      $  247,629  
Conversion of restricted share units and exercise of stock options
    
55
    
 
(41
)
 
 
 
 
      
 
 
      
(41
)
 
Stock compensation expense
     —          1,241       —          —          1,241  
Net earnings
     —          —         26,779        —          26,779  
Foreign currency translation adjustment
     —          —         —          3,301        3,301  
Hedging activity, net of tax
     —          —         —          (42)        (42 )
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Balance at December 31, 2020
     43,124      $  141,395     $  136,073      $  1,399      $  278,867  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Balance at September 30, 2019
     42,712      $  132,834     $ 63,108      $  (4,975)      $  190,967  
Conversion of restricted share units and exercise of stock options
     116        —         —          —          —    
Stock compensation expense
     —          788       —          —          788  
Net earnings
     —          —         2,827        —          2,827  
Foreign currency translation adjustment
     —          —         —          2,768        2,768  
Hedging activity, net of tax
     —          —            —          (58)        (58 )
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Balance at December 31, 2019
     42,828      $  133,622     $ 65,935      $  (2,265)      $  197,292  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Dollars in Thousands, Except Per Share Amounts
(Unaudited)
 
1.
Nature of Business
Meridian Bioscience, Inc. (“Meridian” or “the Company”) was formed in 1976 and functions as a fully-integrated life science company with principal businesses in: (i) the development, manufacture, sale and distribution of diagnostic testing systems and kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents used by other diagnostic manufacturers and researchers.
Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of: (i) manufacturing operations for infectious disease products in Cincinnati, Ohio; Quebec City, Canada; and Modi’in, Israel; (ii) manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston); and (iii) the sale and distribution of diagnostics products domestically and abroad. This segment’s products are used by hospitals, reference labs and physician offices to detect infectious diseases and elevated lead levels in blood.
The Life Science segment consists of: (i) manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany; and (ii) the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to pursue revenue opportunities in Asia. This segment’s products are used by manufacturers and researchers in a variety of applications (e.g.,
in-vitro
medical device manufacturing, microRNA detection,
next-gen
sequencing, plant genotyping, and mutation detection, among others).
 
2.
Basis of Presentation
The Condensed Consolidated Financial Statements are unaudited and are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information, and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the
Condensed
Consolidated Financial Statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of December 31, 2020 and the results of its operations, cash flows and shareholders’ equity for the three-month periods ended December 31, 2020 and 2019. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s fiscal 2020 Annual Report on Form
10-K
filed with the SEC on November 23, 2020.
It should be noted that the terms revenue and/or revenues are utilized throughout these notes to the Condensed Consolidated Financial Statements to indicate net revenue and/or net revenues.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the year. In December 2019, the
SARS-CoV-2
virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated
COVID-19
(the disease caused by
SARS-CoV-2)
a global pandemic. In January 2021, the U.S. Department of Health and Human Services extended the public health emergency declaration for
COVID-19
into April 2021. Governments around the world have implemented lockdown and
shelter-in-place
orders, requiring many
non-essential
businesses to shut down operations, many of which remain in effect as of the date of this filing. Our business, however, was deemed “essential” and we have continued to operate, manufacture and distribute products to customers globally.
 
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While revenues within our Life Science segment have been positively impacted by the
COVID-19
pandemic, to date, the negative impacts of
COVID-19
on the Company have been limited to decreased demand for most of our Diagnostics segment’s products and the pausing and/or slowing of clinical trials for new product development programs, as diagnostics testing has focused primarily on
COVID-19
and critical care ailments. Although we do not expect to sustain the level of Life Science segment revenues experienced during the fiscal quarter ended December 31, 2020, over the next twelve months, we do expect current general directional trends in our revenues to continue, particularly during our second fiscal quarter ending March 31, 2021. Specifically, we expect our Life Science segment to continue to experience elevated levels of demand for
COVID-19
reagents. In addition, by the end of fiscal 2021, we expect our Diagnostics segment’s level of revenues to improve as health care facilities return to
pre-pandemic
non-critical
care testing and treatments
,
and we begin to offer COVID-19 tests. However, due to the many uncertainties surrounding the
COVID-19
pandemic, we can provide no assurances with respect to our views of the longevity, severity or impacts to our financial condition of the
COVID-19
pandemic. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein for additional discussion of the effects of the
COVID-19
pandemic on the Company and its results of operations.
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
 
3.
Significant Accounting Policies
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form
10-K
filed with the SEC on November 23, 2020 and should be referred to for a description of the Company’s significant accounting policies.
(a) Recent Accounting Pronouncements –
Pronouncements Adopted
On October 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)
2016-13,
Measurement of Credit Losses
on Financial Instruments
, which changed the impairment model used to measure credit losses for most financial assets. Use of the new forward-looking expected credit loss model for our accounts receivable valuation, rather than the previously utilized incurred credit loss model, resulted in an immaterial impact on the Condensed Consolidated Financial Statements.
Pronouncements Issued but Not Yet Adopted as of December 31, 2020
In March 2020, the FASB issued ASU
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
, to provide temporary optional guidance relating to reference rate reform, particularly as it relates to easing the potential burden resulting from the expected discontinuation of the LIBOR rate. The guidance provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met, which may be applied through December 31, 2022.
The Company continues to evaluate the impacts of this guidance but does not expect its application to have a material impact on the Condensed Consolidated Financial Statements.
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
(“ASU
2019-12”).
ASU
2019-12
clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. ASU
2019-12
will be effective for the Company’s fiscal year beginning on October 1, 2021. The Company is currently evaluating the impact of ASU
2019-12
but does not
expect its application to have a material impact on the Condensed Consolidated Financial Statements.
 
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(b)
Reclassifications –
Certain reclassifications have been made to the prior year Condensed Consolidated Financial Statements to conform to the current year presentation. Such reclassifications had no impact on net earnings or shareholders’ equity.
 
4.
Revenue Recognition
Overview
Revenue from contracts with customers is recognized in an amount that reflects the consideration we expect to receive in exchange for products when obligations under such contracts are satisfied. Revenue is generally recognized at a
point-in-time
when products are shipped, and control has passed to the customer. Such contracts can include various combinations of products that are generally accounted for as distinct performance obligations. Revenue is reduced in the period of sale for fees paid to distributors, which are inseparable from the distributor’s purchase of our product and for which we receive no goods or services in return. Revenue for the Diagnostics segment is reduced at the date of sale for product price adjustments payable to certain distributors under local contracts.
Revenue Disaggregation
The following tables present our revenues disaggregated by major geographic region, major product platform and disease state (Diagnostics segment only):
 
Revenue by Reportable Segment & Geographic Region
 
    
Three Months Ended December 31,
 
    
2020
    
2019
    
Inc (Dec)
 
Diagnostics-
                          
Americas
   $  23,551      $  27,735        (15 )% 
EMEA
     6,020        6,500        (7 )% 
ROW
     750        556        35
    
 
 
    
 
 
    
 
 
 
Total Diagnostics
     30,321        34,791        (13 )% 
    
 
 
    
 
 
    
 
 
 
Life Science-
                          
Americas
     18,755        4,012        367
EMEA
     32,311        4,960        551
ROW
     11,530        3,658        215
    
 
 
    
 
 
    
 
 
 
Total Life Science
     62,596        12,630        396
    
 
 
    
 
 
    
 
 
 
Consolidated
   $  92,917      $  47,421        96
    
 
 
    
 
 
    
 
 
 
Revenue by Product Platform/Type
 
    
Three Months Ended
 
December 31,
 
    
2020
    
2019
    
Inc
 
(Dec)
 
Diagnostics-
                          
Molecular assays
   $ 4,590      $ 6,903        (34 )%
 
Non-molecular
assays
     25,731        27,888        (8 )% 
    
 
 
    
 
 
    
 
 
 
Total Diagnostics
   $  30,321      $  34,791
 
     (13 )% 
    
 
 
    
 
 
    
 
 
 
Life Science-
                          
Molecular reagents
   $  46,029      $ 5,367        758
Immunological reagents
     16,567        7,263        128
    
 
 
    
 
 
    
 
 
 
Total Life Science
   $  62,596      $  12,630        396
    
 
 
    
 
 
    
 
 
 
 
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Revenue by Disease State (Diagnostics segment only)
 
    
Three Months Ended December 31,
 
    
2020
    
2019
    
Inc
 
(Dec)
 
Diagnostics-
                          
Gastrointestinal assays
   $  15,452      $  16,251        (5 )% 
Respiratory illness assays
     4,806        7,778        (38 )% 
Blood chemistry assays
     4,394        4,951        (11 )% 
Other
     5,669        5,811        (2 )% 
    
 
 
    
 
 
    
 
 
 
Total Diagnostics
   $  30,321      $  34,791        (13 )% 
    
 
 
    
 
 
    
 
 
 
Reagent Rental Arrangements
Revenue allocated to the lease elements of Reagent Rental arrangements totaled approximately $880 and $1,150 in the three months ended December 31, 2020 and 2019, respectively, and is included as part of revenues in our Condensed Consolidated Statements of Operations.
 
5.
Fair Value Measurements
Certain assets and liabilities are recorded at fair value in accordance with Accounting Standards Codification (“ASC”) 820,
Fair Value Measurements and Disclosures
(“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each asset and liability is based on the assessment of the transparency and reliability of the inputs used in the valuation of such items at the measurement date based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Level 2
Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable
In order to limit exposure to volatility in the LIBOR interest rate, the Company ha
s
 entered into interest rate swap agreements, which effectively convert the variable interest rate on $50,000
 
of the outstanding revolving credit facility
discussed in
 
Note 11 to a fixed rate. The value of the interest rate swap agreements was determined by reference to a third-party valuation and is considered a Level 2 input within the fair value hierarchy of valuation techniques.
As described in Note 6, we acquired Exalenz Bioscience Ltd. (“Exalenz”) in fiscal 2020. The fair value of the acquired accounts receivable, inventories, property, plant and equipment, and other current assets and the fair value of the assumed accounts payable and accrued expenses were valued using Level 2 inputs, which included data points that were observable, such as appraisals or established values of comparable assets (market approach). Intangible assets
 
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were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flows (income approach). Significant increases (decreases) in any of those unobservable inputs, as of the date of the acquisition, in isolation would result in a significantly lower (higher) fair value measurement. Management engaged a third-party valuation firm to assist in the determination of the preliminary purchase accounting fair values, and specifically those considered Level 3 measurements. Management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.
In connection with the acquisition of the business of GenePOC, Inc. (“GenePOC”) in fiscal 2019 and an updated agreement, dated September 29, 2020, to amend certain terms of the agreement related to contingent consideration achievement levels and milestone dates, the Company is required to make contingent consideration payments of up to
$64,000 (originally $70,000 at the acquisition date), comprised of up to $14,000 for achievement of product development milestones (originally $20,000 at the acquisition date) and up to $50,000
for achievement of certain financial targets. The fair value for the contingent consideration recognized upon the acquisition as part of the purchase price allocation was
$27,202.
The fair value of the product development milestone payments is estimated by discounting the probability-weighted contingent payments to present value. Assumptions used in the calculations include probability of success, duration of the
earn-out
and discount rate, and such calculations were updated for the effect of the previously noted amendment to the contingent consideration achievement levels and milestone dates. The fair value of the financial performance target payments was determined using a Monte Carlo simulation-based model. Assumptions used in these calculations include expected revenues, probability of certain developments, expected expenses and discount rate. The ultimate settlement of contingent consideration could deviate from the current Level 3 measurement estimates based on the actual results of these financial measures.
The following table provides information by level for financial assets and liabilities that are measured at fair value on a recurring basis:
 
           
Fair Value Measurements Using
Inputs Considered as
 
    
Carrying

Value
    
Level 1
    
Level 2
    
Level 3
 
Interest rate swaps -
                                   
As of December 31, 2020
   $ (693 )    $         $ (693 )    $     
As of September 30, 2020
   $ (713 )    $         $  (713 )    $     
Contingent consideration (GeneP
OC
)
                                   
As of December 31, 2020
   $  (21,956 )    $         $         $ (21,956
As of September 30, 2020
   $ (20,909 )    $         $         $  (20,909
 
6.
Business Combinations
On April 30, 2020 (“the acquisition date”), we acquired 100% of the outstanding common shares and voting interest of Exalenz, a Modi’in, Israel based provider of the BreathID Breath Test Systems (“BreathID”), a breath test platform for the detection of
Helicobacter pylori.
Cash consideration totaled 168.6 million New Israeli Shekels (“NIS”), which equated to $48,237 at the date of closing. Including debt assumed and repaid shortly after closing, the total consideration transferred was $56,305. To finance the acquisition, the Company utilized cash and cash equivalents on hand and proceeds drawn from our revolving credit facility (see Note 11). In anticipation of the transaction, we executed forward currency contracts to acquire the NIS required for the acquisition. As a result, the net cash outlay for the transaction prior to the repayment of debt was $47,392.
As a result of total consideration exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $24,503 was recorded in connection with this acquisition, none of which will be deductible for U.S. tax purposes. The goodwill results largely from our ability to market and sell the BreathID platform through our established customer base and distribution channels.
 
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The Company’s consolidated results for the three months ended December 31, 2020 include $3,098 of net revenues and $792 of net loss from Exalenz. These results, which are reported as part of the Diagnostics segment, include $800
of amortization expense related to specific identifiable assets recorded in the preliminary purchase price allocation, including a
non-compete
agreement, trade name, technology and customer relationships.
The recognized preliminary amounts of identifiable assets acquired and liabilities assumed in the acquisition of Exalenz are as follows:
 
    
PRELIMINARY
 
    
April 30,
2020

(as initially
reported)
    
Measurement
Period
Adjustments
    
April 30,
2020

(as adjusted)
 
Fair value of assets acquired -
                          
Cash
   $ 5,006      $ —        $ 5,006  
Accounts receivable
     637        —          637  
Inventories
     4,329        —          4,329  
Other current assets
     851        1,825        2,676  
Property, plant and equipment
     544        39        583  
Goodwill
     29,288        (4,785      24,503  
Other intangible assets (estimated useful life):
                          
Non-compete
agreement (5 years)
     120        (10      110  
Trade name (10 years)
     3,540        320        3,860  
Technology (15 years)
     5,590        530        6,120  
Customer relationships (10 years)
     19,370        1,270        20,640  
Right-of-use
assets
     1,358        (47      1,311  
Deferred tax assets, net
     5,566        1,151        6,717  
    
 
 
    
 
 
    
 
 
 
     76,199        293        76,492  
Fair value of liabilities assumed -
                          
Accounts payable and accrued expenses (including current portion of lease and government grant obligations)
     7,757        251        8,008  
Long-term lease obligations
     1,054        42        1,096  
Long-term government grant obligations
     10,792        —          10,792  
Other
non-current
liabilities
     291        —          291  
    
 
 
    
 
 
    
 
 
 
       19,894        293        20,187  
    
 
 
    
 
 
    
 
 
 
Total consideration paid (including $8,068 to pay off long-term debt)
  $  56,305      $ —        $  56,305  
    
 
 
    
 
 
    
 
 
 
As indicated, the allocation of the purchase price is preliminary, pending final completion of valuations. As a result of further refining its estimates and assumptions since the date of the acquisition, the Company recorded measurement period adjustments to the initial opening balance sheet as shown in the table above. Adjustments were primarily made to other current assets, goodwill, other intangible assets, and deferred tax assets, etc. There were no measurement period adjustments materially impacting net earnings that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. Currently, we are primarily assessing the results of the valuation of intangible assets and the tax implications thereon. Upon completion of these analyses, any required adjustments are expected to result in an amount being reclassified among goodwill, other intangible assets and deferred taxes, as
 
applicable
.
 
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Pro Forma Information
The following table provides the
unaudited
condensed
consolidated pro forma results for the periods presented as if Exalenz had been
acquired
as of the beginning of fiscal 2020. Pro forma results do not include the effect of any synergies anticipated to be achieved from the acquisition, and accordingly, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.
 
Three Months Ended December 31,
  
2020
    
2019
 
Net Revenues
   $ 92,917      $ 51,194  
Net Earnings
   $ 26,779      $ 1,182  
These unaudited pro forma amounts have been calculated by
including
the results of Exalenz and adjusting the results to give effect to the following, as if the acquisition had been consummated on October 1, 2019, together with the consequential tax effects thereon:
 
Three Months Ended December 31,
  
2020
    
2019
 
Adjustments to Net Revenues
                 
Exalenz
pre-acquisition
revenues
  
$
  
 
   $ 3,773  
    
 
 
    
 
 
 
Adjustments to Net Earnings
                 
Exalenz
pre-acquisition
net losses
  
$
  
 
   $ (752
Pro forma adjustments:
                 
Remove net impact of non-continuing personnel, locations or activities
  
 
  
       101  
Incremental depreciation and amortization
  
 
  
       (913
Incremental interest costs, net
  
 
  
       (391
Tax effects of pro forma adjustments and recognizing benefit on resulting Exalenz losses
  
 
  
       310  
    
 
 
    
 
 
 
Total Adjustments to Net Earnings
   $         $ (1,645
    
 
 
    
 
 
 
 
7
.
Cash and
 
C
ash
Equivalents
Cash and
 cash
equivalents include the following:
 
    
December 31,
2020
    
September 30,
2020
 
 
Institutional money market funds
   $ 1,017      $ 1,017  
Cash on hand, unrestricted
     62,176        52,497  
    
 
 
    
 
 
 
Total
   $  63,193      $  53,514  
    
 
 
    
 
 
 
 
8
.
Inventories
, Ne
t
Inventories, net are comprised of the following:
 
    
December 31,
2020
    
September 30,
2020
 
 
Raw materials
   $  13,868      $  11,966  
Work-in-process
     20,874        19,477  
Finished goods - instruments
     1,532        1,594  
Finished goods - kits and reagents
     30,969        28,227  
    
 
 
    
 
 
 
Total
   $  67,243      $  61,264  
    
 
 
    
 
 
 
 
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9
.
Leasing Arrangements
The Company is party to a number of operating leases, the majority of which are related to office, warehouse and manufacturing space. The related operating lease assets and obligations are reflected within right-of-use assets, net, current operating lease obligations and long-term operating lease obligations on the Condensed Consolidated Balance Sheets. Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. Our Condensed Consolidated Statement
s
of Operations for the three months ended December 31, 2020 reflects lease costs for these operating leases
of $158 and $374
within cost of sales and operating expenses, respectively; and
$129 and $267
within cost of sales and operating expenses, respectively, for the three months ended December 31, 2019 . Right-of-use assets, net obtained during the three months ended December 31, 2020 and 2019, in exchange for operating lease liabilities totaled
$80 and $0, respectively.
In addition, the Company has periodically entered into other short-term operating leases, generally with an initial term of twelve months or less. These leases are not recorded on the Condensed Consolidated Balance Sheets and the related lease expense is immaterial for the three months ended December 31, 2020 and 2019.
The Company often has options to renew lease terms, with the exercise of lease renewal options generally at the Company’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion. We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for our operating leases as of December 31, 2020 and September 30, 2020 was
3.9
years and 4.2 years, respectively.
The discount rate implicit within our leases is generally not determinable and, therefore, the Company determines the discount rate using its incremental borrowing rate. The weighted average discount rate used to measure our operating leases as of December 31, 2020 and September 30, 2020 was
3.6
% and 3.7%, respectively.
Maturities of lease liabilities by fiscal year for the Company’s operating lease liabilities were as follows as of December 31, 2020:
 
    
December 31,
2020
 
 
2021 (represents remainder of fiscal year)
   $  1,590  
2022
     1,873  
2023
     1,346  
2024
     1,002  
2025
     707  
Thereafter
     292  
    
 
 
 
Total lease payments
     6,810  
Less amount of lease payments representing interest
     (462
    
 
 
 
Total present value of lease payments
   $  6,348  
    
 
 
 
Supplemental cash flow information related to the Company’s operating leases are as follows:
 
Three Months Ended December 31,
  
2020
    
2019
 
 
Cash paid for amounts included in the measurement of lease liabilities:
                 
Operating cash flows from operating leases
   $  494      $  387  
    
 
 
    
 
 
 
 
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10.
Goodwill and Other Intangible Assets, Net
During the three months ended December 31, 2020, goodwill increased $682, reflecting: (i) 
an additional
$37 acquisition measurement period adjustment upward related to Exalenz (Diagnostics segment; see Note 6); (ii) a $52 increase from the currency translation adjustment on
goodwill in the Diagnostics segment; and (iii) a
$593 increase from the currency translation adjustment
on
 
goodwill
in
the Life Science segment.
A summary of other intangible assets, net subject to amortization is as follows:
 
    
December 31, 2020
    
September 30, 2020
 
    
Gross
Carrying
Value
    
Accumulated
Amortization
    
Gross
Carrying
Value
    
Accumulated
Amortization
 
Manufacturing technologies, core products and cell lines
   $ 62,436      $  19,791      $ 62,363      $  18,750  
Trade names, licenses and patents
     18,510        8,351        18,425        7,801  
Customer lists, customer relationships and supply agreements
     45,263        17,186        45,071        16,210  
Government grants
     847        847        810        810  
Non-compete
agreements
     110        15        110        11  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $  127,166      $  46,190      $  126,779      $  43,582  
    
 
 
    
 
 
    
 
 
    
 
 
 
The aggregate amortization expense for these other intangible assets was
$2,221 and $1,722 for the three months ended December 31, 2020 and 2019, respectively.
The estimated aggregate amortization expense for these other intangible assets for each of the fiscal years through fiscal 2026 is as follows:
 remainder of fiscal 2021 – $6,289, fiscal 2022 – $7,993, fiscal 2023 – $7,980, fiscal 2024 – $7,976, fiscal 2025 – $7,967, and fiscal 2026 – $7,296.
 
11
.
Bank Credit Arrangements
In anticipation of the acquisition of the business of GenePOC, on May 24, 2019 the Company entered into a credit facility agreement with a commercial bank. The Company amended the credit facility agreement on February 19, 2020 in anticipation of the Company’s acquisition of Exalenz (see Note
6
). The credit facility expires in May 2024, and as amended makes available to the Company a revolving credit facility in an aggregate principal amount not to exceed $160,000 (originally $125,000), with outstanding principal amounts bearing interest at a fluctuating rate tied to, at the Company’s option, either the federal funds rate or LIBOR, resulting in an effective interest rate of 2.54% and 3.96%
on the revolving credit
 facility during the three months ended December 31, 2020 and 2019, respectively. Since entering into
the revolving credit
facility, three draws totaling $125,824 have been made on the credit facility, with principal repayments in January 2020, September 2020 and December 2020 of $27,000, $30,000 and $10,000, respectively, resulting in an outstanding principal balance of $58,824
and $68,824 at December 31, 2020 and September 30, 2020, respectively. The
proceeds from these draws were used to: (i) repay and settle the outstanding principal and interest due on our previously existing $60,000
five-year
term loan; and (ii) along with cash
on-hand,
fund the Exalenz and GenePOC acquisitions.
In light of the interest being determined on a variable rate basis, the fair value of the borrowings under the revolving credit facility at both December 31, 2020 and September 30, 2020 approximates the current carrying value reflected in the Condensed Consolidated Balance Sheets.
The revolving credit facility is collateralized by the business assets of the Company’s U.S. subsidiaries and requires compliance with financial covenants that limit the amount of debt obligations and require a minimum level of coverage of fixed charges, as defined in the revolving credit facility agreement. As of December 31, 2020, the Company was in compliance with all covenants.
 
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12.
Contingent Obligations and
Non-Current
Liabilities
In connection with the acquisition of Exalenz (see Note 6), the Company assumed several Israeli government grant obligations. The repayment of the grants, along with interest incurred at varying stated fixed rates based on LIBOR at the time each grant was received (ranging from 0.58% to 6.60%), is not dictated by an established repayment schedule. Rather, the grants and related interest are required to be repaid using 3% of the revenues generated from the sales of BreathID products, with the timing of repayment contingent upon the level and timing of such revenues. In addition, the grants have no collateral or financial covenant provisions generally associated with traditional borrowing instruments. These obligation amounts total $11,222 and $11,124 as of December 31, 2020 and September 30, 2020,
respectively, and are reflected in the Condensed Consolidated Balance Sheets as follows:
Current liabilities
As of December 31, 2020 – $727
As of September 30, 2020 – $600
Non-current
liabilities
As of December 31, 2020 – $10,495
As of September 30, 2020 – $10,524
Additionally, the Company has provided certain post-employment benefits to its former Chief Executive Officer, and these obligations total $1,799 and $1,840 at December 31, 2020 and September 30, 2020, respectively. In addition, the Company is required by the governments of certain foreign countries in which we operate to maintain a level of accruals for potential future severance indemnity. These accruals total $867 and $814 at December 31, 2020 and September 30, 2020,
respectively
.
 
13.
National Institutes of Health Contract
In December 2020, the Company entered into a sub-award grant contract with the University
of Massachusetts Medical School as part of the National Institutes of Health Rapid Acceleration of Diagnostics (“RADx”) initiative to support the Company’s research and development of its diagnostic test for the SARS-CoV-2 antigen. The Company anticipates receipt of approximately $1,000
under the grant contract
for reimbursement of eligible research and development expenditures, $800 of which has been recognized during the three months ended December 31, 2020 and is included within other income (expense) in the Condensed Consolidated Statement of Operations. The remaining amount of reimbursement funds due under the contact are currently expected to be received during the three months ending March 31, 2021.
 
1
4
.
Reportable Segment and Major Customers Information
During the three months ended December 31, 2020, products
related
to
COVID-19
accounted for approximately 45% of consolidated net revenue. In addition, during the three months ended December 31, 2020, no individual Diagnostics or Life Science segment customer accounted for 10% or more of consolidated net revenues, with one Diagnostics segment customer rising to such a level of concentration (11%) during the three months ended December 31, 2019.
 
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Reportable segment revenues were concentrated as follows during the three months ended December 31, 2020 and 2019:
 
Three Months Ended December 31, 2020
            
    
Segment Revenue %
   
Consolidated Revenue %
 
Diagnostics
                
Customer A
     10     4
Customer B
     11     3
Customer C
     12     4
    
 
 
   
 
 
 
       33     11
    
 
 
   
 
 
 
Life Science
                
Customer D
     3     2
Customer E
     5     4
Customer F
     14     9
    
 
 
   
 
 
 
       22     15
    
 
 
   
 
 
 
 
Three Months Ended December 31, 2019
            
    
Segment Revenue %
   
Consolidated Revenue %
 
Diagnostics
                
Customer A
     15     11
Customer B
     6     4
Customer C
     12     9
    
 
 
   
 
 
 
       33     24
    
 
 
   
 
 
 
Life Science
                
Customer D
     8     2
Customer E
     7     2
    
 
 
   
 
 
 
       15     4
    
 
 
   
 
 
 
Accounts receivable from one of the Life Science segment customers accounted for 6% and 15% of consolidated accounts receivable at December 31, 2020 and September 30, 2020, respectively.
 
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Segment information for the interim periods is as follows:
 
    
Diagnostics
   
Life Science
    
Corporate
(1)
   
Eliminations
(2)
   
Total
 
Three Months Ended December 31, 2020
 
Net revenues -
                                         
Third-party
   $ 30,321     $ 62,596      $ —       $ —       $ 92,917  
Inter-segment
     69       18        —         (87     —    
Operating income (loss)
     (1,182     39,797        (3,963     12       34,664  
Goodwill (December 31, 2020)
     94,944       19,924        —         —         114,868  
Other intangible assets, net (December 31, 2020)
     80,966       10        —         —         80,976  
Total assets (December 31, 2020)
     308,990       114,946        —         (6     423,930  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Three Months Ended December 31, 2019
                                         
Net revenues -
                                         
Third-party
   $ 34,791     $ 12,630      $ —       $ —       $ 47,421  
Inter-segment
     97       65        —         (162     —    
Operating income (loss)
     5,141       2,328        (2,087     12       5,394  
Goodwill (September 30, 2020)
     94,855       19,331        —         —         114,186  
Other intangible assets, net (September 30, 2020)
     83,179       18        —         —         83,197  
Total assets (September 30, 2020)
     306,812       98,483        —         (34     405,261  
 
(1)
 
Includes Selected Legal Costs of $1,227
in the three months ended December
 31, 2020 and Restructuring Costs and Selected Legal Costs of $370
in the three months ended December 31, 2019.
(2)
 
Eliminations consist of inter-segment transactions.
A reconciliation of segment operating income (loss) to consolidated earnings before income taxes for the three months ended December 31, 2020 and 2019 is as follows:
 
Three Months Ended December 31,
 
2020
   
2019
 
Operating income
 (loss)
:
 
 
 
 
 
 
 
 
Diagnostics segment
 
$
(1,182
)
 
 
$
5,141
 
Life Science segment
 
 
39,797
 
 
 
2,328
 
Eliminations
 
 
12
 
 
 
12
 
Total operating income
     38,627        7,481  
Corporate expenses
    (3,963     (2,087
Interest income
    9       111  
Interest expense
    (534     (767
RADx initiative grant income
 
 
 
800
 
 
 
 
Other, net
    (691     (712
           
 
 
 
Consolidated earnings before income taxes
 
$
 34,248     $  4,026  
           
 
 
 
Transactions between segments are accounted for at established intercompany prices for internal and management purposes, with all intercompany amounts eliminated in consolidation.
 
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1
5
.
Income Taxes
The effective rate for income taxes was 22% for the three months ended December 31, 2020, compared to 30% for the three months ended December 31, 2019. This lower fiscal 2021 first quarter effective tax rate results primarily from a significantly higher percentage of earnings before income taxes being generated in foreign jurisdictions with tax rates lower than the U.S., particularly the
United Kingdom (“U.K.”).
 
16.
Litigation Matters
On
 
April 17, 2018
,
Magellan received a subpoena from the U.S. Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and the Company is cooperating with the DOJ in this matter. The Company maintains rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements and is working with the DOJ to promptly respond to the subpoena, including responding to additional information requests. The Company has executed tolling agreements to extend the statute of limitations. The Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately 
$
1,227
and $
280
 
of expense for attorneys’ fees related to this matter is included within the Condensed Consolidated Statements of Operations for the three months ended December 31, 2020 and 2019, respectively.
 
17.
Subsequent Event
E
ffective February 1
, 2021, the Company
 
e
ntered into
a second grant contract under the RADx initiative, the purpose of which is to support the Company’s manufacturing production
scale-up
and expansion to meet the demand for
COVID-19
testing. The contract is a twelve-month term service contract, with payment of up to $5,500 being made based on the Company achieving key milestones related to increasing its capacity to produce
COVID-19
tests. No amounts related to this contract are reflected within the Condensed Consolidated Financial Statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Refer to “Forward-Looking Statements” following the Table of Contents in front of this Form
10-Q.
In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data.
The purpose of Management’s Discussion and Analysis is to provide an understanding of the financial condition, changes in financial condition and results of operations of Meridian Bioscience, Inc. (“Meridian”, the “Company”, “We”). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes. It should be noted that the terms revenue and/or revenues are utilized throughout the Management’s Discussion and Analysis of Financial Condition and Results of Operations to indicate net revenue and/or net revenues.
Reportable Segments
Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio; Quebec City, Canada; and Modi’in, Israel; and manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston). These diagnostic test products are sold and distributed in the countries comprising North and Latin America (the “Americas”); Europe, Middle East and Africa (“EMEA”); and other countries outside of the Americas and EMEA (rest of the world, or “ROW”). The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to further pursue growing revenue opportunities in Asia.
 
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Impact of
COVID-19
Pandemic
In December 2019, the
SARS-CoV-2
virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated
COVID-19
(the disease caused by
SARS-CoV-2)
a global pandemic. In January 2021, the United States (“U.S.”) Department of Health and Human Services extended the public health emergency declaration for
COVID-19
into April 2021. Governments around the world have implemented lockdown and
shelter-in-place
orders, requiring many
non-essential
businesses to shut down operations, many of which remain in effect as of the date of this filing. Our business, however, was deemed “essential” and we have continued to operate, manufacture and distribute products to customers globally. We have developed a comprehensive plan that enables us to maintain operational continuity with an emphasis on manufacturing, product distribution and new product development during this crisis. We continually assess
COVID-19
related developments and adjust risk mitigation planning and business continuity activities in real-time as needed.
The
COVID-19
pandemic has had both positive and negative effects on our businesses. Our Life Science segment’s products were well positioned to respond to
in-vitro
device (“IVD”) manufacturers’ needs for reagents for molecular, rapid antigen and serology tests. Consequently, our Life Science segment grew its revenues over 100% in fiscal 2020 and delivered record operating income and margin, demonstrating what this segment could achieve at a much larger scale. This level of growth has continued to increase into fiscal 2021 for the Life Science segment, with first quarter fiscal 2021 revenue exceeding the fiscal 2020 first quarter level by nearly 400%. Our Diagnostics segment, on the other hand, reported decreased year-over-year revenues in the first quarter of fiscal 2021, a continuation of the trends experienced in the third and fourth quarters of fiscal 2020, as health systems focus on
SARS-CoV-2
testing over traditional infectious disease and blood-chemistry testing. Following signs of a recovery in our Diagnostics segment late in fiscal 2020, as evidenced by a 38% sequential quarter increase in the fourth quarter of fiscal 2020, and which continued throughout the early part of the first quarter of fiscal 2021, the recent resurgence of the pandemic resulted in first quarter fiscal 2021 Diagnostic segment revenues growing only 2% from the fourth quarter of fiscal 2020, and down 13% from the first quarter of fiscal 2020.
Employee Safety
We have implemented a work-from-home process for employees whose
on-site
presence is designated as
non-essential
to the ongoing functions of our manufacturing sites, distribution centers, and new product development facilities. We continue to utilize this work-from-home process as needed on a
site-by-site
basis. We also implemented enhanced cleaning and sanitizing procedures and provided additional personal hygiene supplies at all of our sites. We implemented policies for employees to adhere to the Centers for Disease Control and Prevention (“CDC”) guidelines on social distancing, and similar guidelines by authorities outside the U.S., and any employees experiencing any symptoms of
COVID-19
are required to stay home and seek medical attention. Any employee who tests positive for
COVID-19
is required to quarantine and is not allowed to return to our facilities without a physician’s release, including a negative active infection test result. Access to our facilities by outside persons not critical to continuing our operations continues to be limited. To date, we have been able to manufacture and distribute products globally, and all our sites continue to operate, with little, if any, impact on shipments to customers to date. As the pandemic continues to spread, along with continuing governmental restrictions which vary by locale and jurisdiction, there is an increased risk of employee absenteeism, which could materially impact our operations at one or more sites. To date, the steps we have taken, including our work-from-home processes, have not materially impacted the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls.
Supply Chains
Supply chains supporting our products remain intact, providing access to sufficient inventory of the key materials needed for manufacturing. To date, delays and allocations for certain raw materials of higher demand have been limited and have not had a material impact on our results of operations. We regularly communicate with suppliers, third-party partners, customers, health care providers and government officials in order to respond rapidly to issues as they arise. The longer the current situation continues, it is more likely that we may experience some sort of interruption to our supply chains, and such an interruption could materially affect our ability to timely manufacture and distribute our products and unfavorably impact our results of operations.
 
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Clinical Trial Delays
As a result of the pandemic, certain of our clinical trials which were underway or scheduled to begin were temporarily placed on hold. While we are seeing
“re-starts”
for certain clinical trials, the trials are being conducted at a slower pace than normal, as the prevalence of certain infectious diseases (e.g., bacterial gastrointestinal) has been much lower than historical norms during the pandemic. Such delays continue to impact our timing for filing applications for product clearances with the FDA, as well as related timing of FDA clearances of such filings. Additionally, the ongoing
COVID-19
pandemic has and could continue to slow down our efforts to expand our product portfolio through acquisitions and distribution opportunities, impacting the speed with which we are able to bring additional products to market.
Product Demand
Our Life Science segment manufactures, markets and sells a number of molecular and immunological reagents to IVD customers, including those who are making both molecular and immunoassay
COVID-19
tests. Since late in the second quarter of fiscal 2020, we have experienced unprecedented demand for certain of our molecular reagents (e.g., ribonucleic acid (“RNA”) master mixes and nucleotides). Although we are unable to predict when this demand may subside, we expect revenue levels for these products to be materially higher than historical levels during at least the next six to nine months. Our products are used in over 100 approved
COVID-19
related assays around the world. COVID-related reagent revenues totaled approximately $43,000 in the fiscal 2021 first quarter, following approximately $71,500 during full year fiscal 2020.
Our Diagnostics segment manufactures, markets and sells a number of molecular, immunoassay, blood chemistry and urea breath tests
for various infectious diseases and blood-lead levels. We expect near-term sales volumes for a number of these assays to continue to be adversely affected by the
COVID-19
pandemic as such assays are often used in
non-critical
care settings. The
COVID-19
pandemic also has continued to affect our instrument placements. The launch of our Curian platform has been slower than expected as diagnostic testing sites have turned their attention to critical care testing. However, beginning in our fiscal 2020 fourth quarter and continuing through the fiscal 2021 first quarter, we have experienced an acceleration in Revogene instrument placements due to the January 2021 launch of a
SARS-CoV-2
assay (the “Revogene
COVID-19
assay”) under the FDA’s emergency use authorization (“EUA”) program, which permits sales to commence upon notification of intent to submit an EUA application. We submitted our application for EUA to the FDA on December 7, 2020 and expect to receive approval of the submission during our fiscal 2021 second quarter. In response to the high level of demand we are experiencing for the test, we are in the process of increasing our capacity to produce these tests, as well as other tests on the Revogene system. Specifically, we are: (i) adding a second production line at our Quebec City, Canada manufacturing facility; and (ii) installing two additional production lines in a leased facility near our corporate headquarters in Cincinnati, Ohio. It is expected that these expansion efforts will be completed during fiscal 2021 at a total cost of approximately $18,000, which is expected to be partially offset by the $5,500 RADx grant entered into on February 1, 2021 (see Note 17 of the accompanying Condensed Consolidated Financial Statements).
As previously described, signs of a recovery in our Diagnostics segment were experienced late in fiscal 2020 and early in the first quarter of fiscal 2021. However, as a result of the recent resurgence of
COVID-19
infection rates, during the first quarter of fiscal 2021 Diagnostic segment revenues increased only 2% from the level achieved in the fourth quarter of fiscal 2020, and were down 13% from the first quarter of fiscal 2020. While we are expecting a modest rebound in Diagnostic segment revenues in the upcoming months, including revenue from the Revogene
COVID-19
assay, no assurances can be made in this regard.
Asset Impairment Review
Considering the economic impacts of
COVID-19,
we performed an analysis of our business to determine if there were triggering events that would require us to further test our long-lived assets for impairment. Based on our review, we do not believe that a triggering event exists at this time and, therefore, we believe that we will be able to realize the full value of our long-lived assets. As such, no impairments or other write-downs related to
COVID-19
have been recorded during the fiscal 2021 first quarter or prior year period.
Access to Capital
The impacts of
COVID-19
have adversely affected the ability of many companies to access capital and liquidity on favorable terms or at all. As of December 31, 2020, the outstanding debt balance on the Company’s revolving credit facility was $58,824, leaving $101,176 of available borrowing capacity. In addition, positive cash flows from operating activities are expected to be generated over the next twelve months, which will add to cash on hand. We
 
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also maintain a shelf registration statement on file with the SEC. The Company believes these resources will provide sufficient liquidity and cash flows to meet its operating and debt service requirements for at least the next twelve months and expects to be in compliance with its financial covenants during this same period. However, given the unusual nature of the
COVID-19
pandemic and the rapidly changing environment, we can provide no assurances in this regard and future impacts may materialize that are not currently known.
Critical Accounting Estimates
For the three months ended December 31, 2020, there were no significant changes to our critical accounting estimates, as outlined in our Annual Report on Form
10-K
as of and for the
year-end
September 30, 2020.
Impact of Brexit
The United Kingdom (“U.K.”) left the European Union (“EU”) on January 31, 2020. While all EU rules and laws continued to apply to the U.K. through the transition period, which ended December 31, 2020, the U.K. and the EU reached a free trade agreement on December 24, 2020, which included regulatory and customs cooperation mechanisms, as well as provisions supporting open and fair competition. Under the trade agreement, the U.K. is free to set its own trade policy and can negotiate with other countries that do not currently have free trade deals with the EU. Although the full impact of the trade agreement is uncertain, it is possible that the recent changes to the trading relationship between the U.K. and the EU due to the trade agreement could result in increased cost of goods imported into and exported from the U.K., which may decrease the profitability of our operations. Additional currency volatility could drive a weaker British pound, which could increase the cost of goods imported into the U.K. and may decrease the profitability of our operations. A weaker British pound versus the U.S. dollar may also cause local currency results of our operations to be translated into fewer U.S. dollars during a reporting period. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the trade agreement will have on our business; however, Brexit and its related effects could potentially have an adverse impact on our financial position and results of operations.
The U.K.’s withdrawal from the EU could also adversely impact the operations of our vendors and of our other partners. Our management team has evaluated a range of possible outcomes, identified areas of concerns, and implemented strategies to help mitigate these concerns. It is possible that these strategies may not be adequate to mitigate any adverse impacts of Brexit, and that these impacts could further adversely affect our business and results of operations.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2020
Net earnings for the first quarter of fiscal 2021 increased 847% to $26,779, or $0.61 per diluted share, from net earnings for the first quarter of fiscal 2020 of $2,827, or $0.07 per diluted share. The level of net earnings in the fiscal 2021 first quarter was affected by several factors, including most notably the combined net effects of the following (amounts presented on a
pre-tax
basis) and a lower effective tax rate resulting from a greater percentage of pre-tax earnings being generated in lower tax jurisdictions:
 
  (i)
significantly higher revenues in the Life Science segment, due to supplying key molecular components and antibodies to diagnostic test manufacturers for use in
COVID-19
related PCR and antibody tests (up $49,966);
 
  (ii)
higher research and development spending in the Diagnostics segment (up $895) under new product development programs;
 
  (iii)
increased cash-based incentive compensation (up $600) tied to higher revenues and profit levels;
 
  (iv)
increased intangible asset amortization, primarily resulting from purchase accounting amortization related to the acquisition of Exalenz in April 2020 (up $499);
 
  (v)
increased legal expenses related to the DOJ matter at the Billerica, Massachusetts facility (up $947) (see “Lead Testing Matters” below); and
 
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  (vi)
the fiscal 2021 first quarter including $800 in grant income related to the National Institutes of Health RADx initiative (see Note 13 of the accompanying Condensed Consolidated Financial Statements).
Consolidated revenues for the first quarter of fiscal 2021 totaled $92,917, an increase of 96% compared to the first quarter of fiscal 2020 (93% increase on a constant-currency basis).
Revenues for the Diagnostics segment for the first quarter of fiscal 2021 decreased 13% compared to the first quarter of fiscal 2020 (14% on a constant-currency basis), comprised of a 34% decrease in molecular assay products and an 8% decrease in non-molecular assay products. As previously noted, despite the
COVID-19
pandemic continuing to dramatically slow sales of our molecular assay products during the first quarter of fiscal 2021, the acceleration of Revogene instrument placements in anticipation of the Revogene
COVID-19
assay under the FDA’s EUA program resulted in 57 net placements of our Revogene system during the first quarter of fiscal 2021 and a total Revogene system install base of 288 systems as of December 31, 2020. With a 758% increase in revenues from molecular reagents products and a 128% increase in revenues from immunological reagents products, revenues for our Life Science segment increased 396% during the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. On a constant-currency basis, revenues for the Life Science segment increased 387%. Life Science segment revenues reflect a significant increase in the sales of key molecular components such as RNA master mixes and deoxyribonucleotide triphosphates (“dNTPs”) to diagnostic test manufacturers for use in
COVID-19
related PCR tests. Also contributing to the record revenue levels during the first quarter of fiscal 2021 were sales of monoclonal antibody pairs used in COVID-19 antigen tests and, to a lesser degree, recombinant antigens used in
COVID-19
antibody tests. In addition, our core Life Science segment business (other than
COVID-19
contributions) experienced growth of approximately $7,000, or approximately 55%, compared to the first quarter of fiscal 2020. This growth, including an approximate 88% increase in revenues from sales into China, resulted in large part from obtaining business from
COVID-19
customers who are now using our products for other
non-COVID
related purposes, as well as a rebound in volumes in core immunological products.
Lead Testing Matters
On April 17, 2018, Magellan received a subpoena from the U.S. Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we continue to cooperate with the DOJ in this matter, including responding to additional information requests. We have executed tolling agreements to extend the statute of limitations.
Magellan submitted 510(k) applications in December 2018, seeking to reinstate venous blood sample-types for its LeadCare
®
II, LeadCare
®
Plus
and LeadCare Ultra
®
testing systems. In the second fiscal quarter of 2019 the FDA informed Magellan that each of these 510(k) applications had been put on Additional Information hold. On July 15, 2019, we provided responses to the FDA’s requests for Additional Information. These 510(k) applications have since expired and are no longer under FDA review. Further, while Magellan’s LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of Magellan’s LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by the FDA or the CDC is necessary to protect the public health. Meridian intends to fully cooperate with the FDA as the third-party study is completed.
During October 2019, the FDA performed a
follow-up
inspection of Magellan’s manufacturing facility. The FDA issued five Form FDA 483 observations. On March 18, 2020, we participated in a regulatory meeting with the FDA at the FDA’s request to further discuss the Form FDA 483 observations and our remediation efforts. Over the last year, we have submitted a number of written responses to the FDA regarding the five Form FDA 483 observations issued in the October 2019 inspection, and have worked diligently to execute a remediation plan. During October 2020, the FDA issued Establishment Inspection Reports which closed out the inspections from June 2017 and October 2019 under 21 C.F.R.20.64 (d) (3). The Warning Letter issued in October 2017 remains outstanding, pending a future FDA inspection. While we remain committed to strengthening Magellan’s quality system and ensuring that all aspects of the system are in full compliance, we can provide no assurance that our remediation efforts will be successful to a degree acceptable by the FDA.
 
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In the course of remediation, we may encounter additional matters that warrant notifications to the FDA and/or customers regarding the use of our products. At this time, we do not believe that any such notifications would impact the ability to use the LeadCare systems with capillary blood samples. While we remain confident in the performance of the Magellan LeadCare testing systems using capillary samples, we do not expect that the FDA will reinstate our venous blood claims. We can provide no assurance that the ongoing investigation and study of the DOJ and FDA, respectively, or future exercise of their respective enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation, and/or the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, injunctions, settlements or changes to our business practices, product offerings or operations that could have a material adverse effect on our business, financial condition or results of operations; or eliminate altogether our ability to operate our lead testing business on terms su