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Table of Contents
 
 
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 March 31, 2021
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  ☐

Table of Contents
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 April 30, 2021
Common Stock, no par value
 
43,330,038

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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  
       
7-20
 
Item 2.
       
21-30
 
Item 3.
        30  
Item 4.
        30  
PART II.
     
Item 1.
        31  
Item 1A.
        31  
Item 6.
        31  
        32  
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 net earnings, sales, product demand, net revenues, 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

Table of Contents
in 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 net 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 consolidated 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.

Table of Contents
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
   
Six Months Ended
 
    
March 31,
   
March 31,
 
    
2021
   
2020
   
2021
   
2020
 
NET REVENUES
   $ 85,264     $ 57,296     $ 178,181     $ 104,717  
COST OF SALES
     27,492       22,750       58,861       42,520  
    
 
 
   
 
 
   
 
 
   
 
 
 
GROSS PROFIT
     57,772       34,546       119,320       62,197  
    
 
 
   
 
 
   
 
 
   
 
 
 
OPERATING EXPENSES
                                
Research and development
     6,065       5,315       11,716       10,078  
Selling and marketing
     6,540       6,529       13,561       13,257  
General and administrative
     12,925       10,628       24,863       19,612  
Acquisition-related costs
           1,787             1,787  
Change in fair value of acquisition consideration
     (2,989     (2,491     (1,942     (1,304
Restructuring costs
     —         252         
      527  
Selected legal costs
     1,030       735       2,257       1,055  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     23,571       22,755       50,455       45,012  
    
 
 
   
 
 
   
 
 
   
 
 
 
OPERATING INCOME
     34,201       11,791       68,865       17,185  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
                                
Interest income
     6       23       15       134  
Interest expense
     (472     (532     (1,006     (1,299
RADx grant income
     200       —         1,000       —    
Other, net
     (883     1,365       (1,574     653  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other income (expense)
     (1,149     856       (1,565     (512
    
 
 
   
 
 
   
 
 
   
 
 
 
EARNINGS BEFORE INCOME TAXES
     33,052       12,647       67,300       16,673  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME TAX PROVISION
     6,750       3,288       14,219       4,487  
    
 
 
   
 
 
   
 
 
   
 
 
 
NET EARNINGS
   $ 26,302     $ 9,359     $ 53,081     $ 12,186  
    
 
 
   
 
 
   
 
 
   
 
 
 
BASIC EARNINGS PER COMMON SHARE
   $ 0.61     $ 0.22     $ 1.23     $ 0.28  
DILUTED EARNINGS PER COMMON SHARE
   $ 0.60     $ 0.22     $ 1.21     $ 0.28  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC
     43,244       42,830       43,171       42,810  
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS
     878       138       789       143  
    
 
 
   
 
 
   
 
 
   
 
 
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
DILUTED
     44,122       42,968       43,960       42,953  
    
 
 
   
 
 
   
 
 
   
 
 
 
ANTI-DILUTIVE SECURITIES:
                                
Common share options and restricted share units
     166       1,635       169       1,520  
    
 
 
   
 
 
   
 
 
   
 
 
 
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
   
Six Months Ended
 
    
March 31,
   
March 31,
 
    
2021
   
2020
   
2021
   
2020
 
NET EARNINGS
   $ 26,302     $ 9,359     $ 53,081     $ 12,186  
Other comprehensive income (loss):
                                
Foreign currency translation adjustment
     79       (2,786     3,380       (18
Unrealized gain (loss) on cash flow hedge
     439       (313     460       (313
Reclassification of amortization of gain on cash flow hedge
     (77     (77     (154     (154
Income taxes related to items of other comprehensive income (loss)
     (80     96       (66     115  
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), net of tax
     361       (3,080     3,620       (370
    
 
 
   
 
 
   
 
 
   
 
 
 
COMPREHENSIVE INCOM
E
   $ 26,663     $ 6,279     $ 56,701     $ 11,816  
    
 
 
   
 
 
   
 
 
   
 
 
 
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)
     
Six Months Ended March 31,
  
2021
   
2020
 
CASH FLOWS FROM OPERATING ACTIVITIES
                
Net earnings
   $ 53,081     $ 12,186  
Non-cash
items included in net earnings:
                
Depreciation of property, plant and equipment
     3,072       2,439  
Amortization of intangible assets
     4,363       3,449  
Stock compensation expense
     2,291       1,759  
Deferred income taxes
     (777     656  
Change in fair value of acquisition consideration
     (1,942     (1,304
Change in the following:
                
Accounts receivable
     (5,267     (4,950
Inventories
     (12,185     (2,511
Prepaid expenses and other current assets
     1,440       1,278  
Accounts payable and accrued expenses
     77       1,621  
Income taxes payable
     (2,698     400  
Other, net
     36       692  
    
 
 
   
 
 
 
Net cash provided by operating activities
     41,491       15,715  
    
 
 
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchase of property, plant and equipment
     (11,955     (1,543
Payment of acquisition consideration holdback
     (5,000     —    
    
 
 
   
 
 
 
Net cash used in investing activities
     (16,955     (1,543
    
 
 
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Payment on revolving credit facility
     (18,824     (27,000
Payment of debt issuance costs
     —         (116
Proceeds from exercise of stock options
     2,852       —    
    
 
 
   
 
 
 
Net cash used in financing activities
     (15,972     (27,116
    
 
 
   
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
     1,296       97  
    
 
 
   
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
     9,860       (12,847
Cash and Cash Equivalents at Beginning of Period
     53,514       62,397  
    
 
 
   
 
 
 
Cash and Cash Equivalents at End of Period
   $ 63,374     $ 49,550  
    
 
 
   
 
 
 
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
 
    
March 31,
        
  
2021
    
September 30,
 
  
(Unaudited)
    
    
2020
    
 
CURRENT ASSETS
                 
Cash and cash equivalents
   $ 63,374      $ 53,514  
Accounts receivable, less allowances of $505 and $513, respectively
     44,895        38,512  
Inventories, net
     72,534        61,264  
Prepaid expenses and other current assets
     7,491        8,900  
    
 
 
    
 
 
 
Total current assets
     188,294        162,190  
    
 
 
    
 
 
 
PROPERTY, PLANT AND EQUIPMENT, at Cost
                 
Land
     991        991  
Buildings and improvements
     32,326        32,188  
Machinery, equipment and furniture
     74,173        69,854  
Construction in progress
     10,779        1,200  
    
 
 
    
 
 
 
Subtotal
     118,269        104,233  
Less: accumulated depreciation and amortization
     76,303        73,113  
    
 
 
    
 
 
 
Property, plant and equipment, net
     41,966        31,120  
    
 
 
    
 
 
 
OTHER ASSETS
                 
Goodwill
     115,296        114,186  
Other intangible assets, net
     78,834        83,197  
Right-of-use
assets, net
     6,297        6,336  
Deferred income taxes
     8,017        7,647  
Other assets
     465        585  
    
 
 
    
 
 
 
Total other assets
     208,909        211,951  
    
 
 
    
 
 
 
TOTAL ASSETS
   $ 439,169      $ 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
 
     
    
March 31,
    
September 30,
 
    
2021
    
2020
 
    
(Unaudited)
    
        
 
CURRENT LIABILITIES
                 
Accounts payable
   $ 16,714      $ 11,969  
Accrued employee compensation costs
     12,634        16,661  
Current portion of acquisition consideration
     11,296        12,619  
Current operating lease obligations
     1,892        1,789  
Current government grant obligations
     608        600  
Other accrued expenses
     5,664        5,362  
Income taxes payable
     1,502        3,524  
    
 
 
    
 
 
 
Total current liabilities
     50,310        52,524  
    
 
 
    
 
 
 
NON-CURRENT
LIABILITIES
                 
Acquisition consideration
     7,671        13,290  
Post-employment benefits
     2,429        2,493  
Fair value of interest rate swaps
     254        713  
Long-term operating lease obligations
     4,555        4,678  
Long-term debt
     50,000        68,824  
Government grant obligations
     10,537        10,524  
Long-term income taxes payable
     374        549  
Deferred income taxes
     3,389        3,804  
Other
non-current
liabilities
     177        233  
    
 
 
    
 
 
 
Total
non-current
liabilities
     79,386        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, 43,329,294 and 43,068,842
shares issued, respectively
     —          —    
Additional
paid-in
capital
     145,338        140,195  
Retained earnings
     162,375        109,294  
Accumulated other comprehensive income (loss)
     1,760        (1,860
    
 
 
    
 
 
 
Total shareholders’ equity
     309,473        247,629  
    
 
 
    
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 439,169      $ 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 Changes in 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
 
THREE MONTHS ENDED MARCH 31, 2021
                                          
Balance at December 31, 2020
     43,124      $ 141,395     $ 136,073      $ 1,399     $ 278,867  
Conversion of restricted share units and exercise of stock options
     205        2,893       —          —         2,893  
Stock compensation expense
     —          1,050       —          —         1,050  
Net earnings
     —          —         26,302        —         26,302  
Foreign currency translation adjustment
     —          —         —          79       79  
Hedging activity, net of tax
     —          —         —          282       282  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Balance at March 31, 2021
     43,329      $ 145,338     $ 162,375      $ 1,760     $ 309,473  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
THREE MONTHS ENDED MARCH 31, 2020
                                          
Balance at December 31, 2019
     42,828      $ 133,622     $ 65,935      $ (2,265   $ 197,292  
Conversion of restricted share units and exercise of stock options
     3        (9     —          —         (9
Stock compensation expense
     —          971       —          —         971  
Net earnings
     —          —         9,359        —         9,359  
Foreign currency translation adjustment
     —          —         —          (2,786     (2,786
Hedging activity, net of tax
     —          —         —          (294     (294
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Balance at March 31, 2020
     42,831      $ 134,584     $ 75,294      $ (5,345   $ 204,533  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
     Common
Shares
Issued
     Additional
Paid-In

Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 
SIX MONTHS ENDED MARCH 31, 2021
                                          
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
     260        2,852       —          —         2,852  
Stock compensation expense
     —          2,291       —          —         2,291  
Net earnings
     —          —         53,081        —         53,081  
Foreign currency translation adjustment
     —          —         —          3,380       3,380  
Hedging activity, net of tax
     —          —         —          240       240  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Balance at March 31, 2021
     43,329      $ 145,338     $ 162,375      $ 1,760     $ 309,473  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
SIX MONTHS ENDED MARCH 31, 2020
                                          
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
     119        (9     —          —         (9
Stock compensation expense
     —          1,759       —          —         1,759  
Net earnings
     —          —         12,186        —         12,186  
Foreign currency translation adjustment
     —          —         —          (18     (18
Hedging activity, net of tax
     —          —         —          (352     (352
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Balance at March 31, 2020
     42,831      $ 134,584     $ 75,294      $ (5,345   $ 204,533  
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
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, immunoassay blocking reagents, various Polymerase Chain Reaction (“PCR”) master mixes, 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-generation 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 March 31, 2021 and the results of its operations, cash flows and shareholders’ equity for the three- and
six-month
periods ended March 31, 2021 and 2020. 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 April 2021, the U.S. Department of Health and Human Services extended the public health emergency declaration for
COVID-19.
During the past year, 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 over the last year has focused primarily on
COVID-19
and critical care ailments. For the second half of our fiscal 2021, we expect demand for our Life Science segment’s reagent products used in
COVID-19
tests will be lower than that experienced during the six months ended March 31, 2021, as health care systems transition to more asymptomatic testing versus the predominant symptomatic testing we have seen over the last year. However, this varies by country based on their individual
COVID-19
case statistics. 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 these 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 Statement
s
 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 March 31, 2021
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.
 
(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.
 
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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 March 31,
   
Six Months Ended March 31,
 
    
2021
    
2020
    
Inc (Dec)
   
2021
    
2020
    
Inc (Dec)
 
Diagnostics-
                                                    
Americas
   $ 25,290      $ 27,670        (9 )%    $ 48,824      $ 55,405        (12 )% 
EMEA
     6,071        6,777        (10 )%      12,101        13,277        (9 )% 
ROW
     588        495        19     1,345        1,051        28
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Diagnostics
     31,949        34,942        (9 )%      62,270        69,733        (11 )% 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Life Science-
                                                    
Americas
     13,550        4,612        194     32,296        8,623        275
EMEA
     21,773        9,946        119     54,066        14,907        263
ROW
     17,992        7,796        131     29,549        11,454        158
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Life Science
     53,315        22,354        139     115,911        34,984        231
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Consolidated
   $ 85,264      $ 57,296        49   $ 178,181      $ 104,717        70
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Revenue by Product Platform/Type
 
    
Three Months Ended March 31,
   
Six Months Ended March 31,
 
    
2021
    
2020
    
Inc (Dec)
   
2021
    
2020
    
Inc (Dec)
 
Diagnostics-
                                                    
Molecular assays
   $ 4,395      $ 7,238        (39 )%    $ 8,985      $ 14,077        (36 )% 
Non-molecular
assays
     27,554        27,704        (1 )%      53,285        55,656        (4 )% 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Diagnostics
   $ 31,949      $ 34,942        (9 )%    $ 62,270      $ 69,733        (11 )% 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Life Science-
                                                    
Molecular reagents
   $ 37,752      $ 11,534        227   $ 83,776      $ 16,902        396
Immunological reagents
     15,563        10,820        44     32,135        18,082        78
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Life Science
   $ 53,315      $ 22,354        139   $ 115,911      $ 34,984        231
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
 
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Revenue by Disease State (Diagnostics segment only)
 
    
Three Months Ended March 31,
   
Six Months Ended March 31,
 
    
2021
    
2020
    
Inc (Dec)
   
2021
    
2020
    
Inc (Dec)
 
Diagnostics-
                                                    
Gastrointestinal assays
   $  15,666      $  14,014        12   $  31,118      $  30,060        4
Respiratory illness assays
     3,686        10,863        (66 )%      8,492        18,612        (54 )% 
Blood chemistry assays
     4,358        4,194        4     8,753        9,142        (4 )% 
Other
     8,239        5,871        40     13,907        11,919        17
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Diagnostics
   $ 31,949      $ 34,942        (9 )%    $ 62,270      $ 69,733        (11 )% 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Royalty Income
Royalty income received from DiaSorin, which primarily related to sales of
H. pylori
products, totaled approximately $2,845 and $1,280 in the three months ended March 31, 2021 and 2020, respectively, and $3,705 and $2,205 in the six months ended March 31, 2021 and 2020, respectively. Such revenue is included as part of
Non-molecular
assays and Other within the Revenue by Product Platform/Type and Revenue by Disease State tables, respectively, above.
Reagent Rental Arrangements
Revenue allocated to the lease elements of Reagent Rental arrangements totaled approximately $900 and $1,125 in the three months ended March 31, 2021 and 2020, respectively, and $1,780 and 2,250 in the six months ended March 31, 2021 and 2020, respectively.
Such revenue is included as part of net revenues in our Condensed Consolidated Statements of Operations.
 
5.
Fair Value Measurements
Certain asset
s
 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
T
o limit exposure to volatility in the LIBOR interest rate, the Company has 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 fair values of the interest rate swap agreements were determined by reference to a third-party valuation and is considered a Level 2 input within the fair value hierarchy of valuation techniques.
 
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As described in Note 6, we acquired Exalenz Bioscience Ltd. (“Exalenz”) in fiscal 2020. The fair values of the acquired accounts receivable, inventories, property, plant and equipment, and other current assets and the fair values 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 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 subsequent amendments to modify 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
s
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
significantly 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 March 31, 2021
   $ (254 )    $         $ (254 )    $     
As of September 30, 2020
   $ (713 )    $         $ (713 )    $     
Contingent consideration -
                          
As of March 31, 2021
   $ (18,967 )    $         $         $ (18,967
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 $24,827
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 and six months ended March 31, 2021 include the following from Exalenz:
 
    
Three
Months Ended

March 31,
2021
    
Six
Months Ended

March 31,
2021
 
Net revenues
   $ 2,784      $ 5,882  
Net loss
   $ (947    $ (1,739
    
 
 
    
 
 
 
These results for the three and six months ended March 31, 2021, which are reported as part of the Diagnostics segment, include $720 and
 $1,520
, respectively, 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        (296      4,033  
Other current assets
     851        1,825        2,676  
Property, plant and equipment
     544        (16      528  
Goodwill
     29,288        (4,461      24,827  
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        1,178        6,744  
    
 
 
    
 
 
    
 
 
 
       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  
    
 
 
    
 
 
    
 
 
 
 
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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. 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.
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 (October 1, 2019). Pro forma results do not include the effect of any synergies achieved or 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 March 31,
    
Six Months
Ended March 31,
 
    
2021
    
2020
    
2021
    
2020
 
Net revenues
   $ 85,264      $ 60,701      $ 178,181      $ 111,895  
Net earnings
   $ 26,302      $ 8,064      $ 53,081      $ 9,246  
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 March 31,
    
Six Months Ended
March 31,
 
    
2021
    
2020
    
2021
    
2020
 
Adjustments to net revenues
                                   
Exalenz pre-acquisition net revenues
   $         $ 3,405      $         $ 7,178  
    
 
 
    
 
 
    
 
 
    
 
 
 
Adjustments to net earnings
                                   
Exalenz pre-acquisition net loss
   $         $ (752    $         $ (1,504
Pro forma adjustments:
                                   
Remove net impact of
non-continuing
personnel, locations or
activities
               490                  591  
Incremental depreciation and amortization
               (911                (1,824
Incremental interest costs, net
               (381                (772
Tax effects of pro forma adjustments and recognizing benefit on
resulting Exalenz losses
               259                  569  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total adjustments to net earnings
   $         $ (1,295    $         $ (2,940
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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7.
Cash and Cash Equivalents
Cash and cash equivalents include the following:
 
    
March 31,
2021
    
September 30,
2020
 
Institutional money market funds
   $ 1,017      $ 1,017  
Cash on hand, unrestricted
     62,357        52,497  
    
 
 
    
 
 
 
Total
   $ 63,374      $ 53,514  
    
 
 
    
 
 
 
 
 
8.
Inventories, Net
Inventories, net are comprised of the following:
 
    
March 31,
2021
    
September 30,
2020
 
Raw materials
   $ 18,706      $ 11,966  
Work-in-process
     22,987        19,477  
Finished goods - instruments
     1,933        1,594  
Finished goods - kits and reagents
     28,908        28,227  
    
 
 
    
 
 
 
Total
   $ 72,534      $ 61,264  
    
 
 
    
 
 
 
 
 
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.
The lease costs for these operating leases reflected in 
 
our Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2021 and 2020, as well as the right-of-use assets, net obtained during these periods in exchange for operating lease liabilities, are as follows: 
 
 
  
Three Months
Ended March 31,
 
  
Six Months
Ended March 31,
 
 
  
2021
 
  
2020
 
  
2021
 
  
2020
 
Lease costs within cost of sales
  
$
198
 
  
$
130
 
  
$
356
 
  
$
259
 
Lease costs within operating expenses
  
 
387
 
  
 
292
 
  
 
761
 
  
 
559
 
Right-of-use
assets, net obtained in exchange for operating lease liabilities
  
 
612
 
  
 
222
 
  
 
692
 
  
 
222
 
In addition, the Company periodically enters 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 and six months ended March 31, 2021 and 2020.
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 discount rate implicit within our leases is generally not
 
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determin
a
ble and, therefore, the Company uses its incremental borrowing rate as the basis for its discount rate. The weighted average remaining lease term for our operating leases and the weighted average discount rate used to measure our operating leases as of March 31, 2021 and September 30, 2020 were as follows:
 
 
  
March 31,
2021
 
 
September 30,
2020
 
 
Weighted average remaining lease term
  
 
3.8 years
 
 
 
4.2 years
 
Average discount rate
  
 
3.4
 
 
3.7
%
Maturities of lease liabilities by fiscal year for the Company’s operating leases
were
as follows as of March 31, 2021:
       
2021 (represents remainder of fiscal year)
   $ 1,108  
2022
     2,016  
2023
     1,482  
2024
     1,108  
2025
     806  
Thereafter
     331  
    
 
 
 
Total lease payments
     6,851  
Less amount of lease payments representing interest
     (404