| | | | | 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 ourits 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 ourthe 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 unanticipated
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. In the past, the Company has identified a material weakness in our internal control over financial reporting, which has been remediated, but theThe 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 ourits operations and result in material misstatements in ourits 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 the coronavirus diseaseCOVID-19. In addition to the factors described in this paragraph, as well as those factors identified from time to time in ourthe Company’s filings with the Securities and Exchange Commission, Part I, Item 1A Risk Factors of ourthe 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 ourthe Company’s forward-looking statements.
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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | General and administrative | | | | | | | | | | | | | | | | | Acquisition-related costs | | | | | | | | | | | | | | | | | Change in fair value of contingent consideration obligation | | | | ) | | | | | | | | ) | | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | Total other income (expense) | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | EARNINGS BEFORE INCOME TAXES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | BASIC EARNINGS PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | | DILUTED EARNINGS PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | | | | | | | | | | | | | | | | | EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ANTI-DILUTIVE SECURITIES: | | | | | | | | | | | | | | | | | Common share options and restricted share units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | DIVIDENDS DECLARED PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 92,917 | | | $ | 47,421 | | | | | 31,369 | | | | 19,770 | | | | | | | | | | | | | | 61,548 | | | | 27,651 | | | | | | | | | | | | | | | | | | | | | | | 5,651 | | | | 4,763 | | | | | 7,021 | | | | 6,728 | | General and administrative | | | 11,938 | | | | 8,984 | | Change in fair value of acquisition consideration | | | 1,047 | | | | 1,187 | | | | | — | | | | 275 | | | | | 1,227 | | | | 320 | | | | | | | | | | | | | | 26,884 | | | | 22,257 | | | | | | | | | | | | | | 34,664 | | | | 5,394 | | | | | | | | | | | | | | | | | 9 | | | | 111 | | | | | (534 | ) | | | (767 | ) | RADx grant income | | | | | | | | | | | | (691 | ) | | | (712 | ) | | | | | | | | | | Total other expense, net | | | (416 | ) | | | (1,368 | ) | | | | | | | | | | EARNINGS BEFORE INCOME TAXES | | | 34,248 | | | | 4,026 | | | | | | | | 7,469 | | | | 1,199 | | | | | | | | | | | | | $ | 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.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES | | | | | | | | | | | | | | | | | Condensed Consolidated Statements of Comprehensive Income (Unaudited) (dollar amounts in thousands) MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
| | Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | (dollar amounts in thousands)
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 9,359 | | | $ | 7,094 | | | $ | 12,186 | | | $ | 15,200 | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | ) | | | | | | | | ) | | | | ) | Unrealized loss on cash flow hedge | | | | ) | | | | ) | | | | ) | | | | ) | Reclassification of gain on cash flow hedge | | | | ) | | | | | | | | ) | | | | | Income taxes related to items of other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss), net of tax | | | | ) | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Three Months Ended December 31, | | | | | | | | | | | $ | 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 | | | | | | | | | | | | | $ | 30,038 | | | $ | 5,537 | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (dollar amounts in thousands) | | | | | | | | | Six Months Ended March 31, | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | $ | | | | $ | | | Non-cash items included in net earnings: | | | | | | | | | Depreciation of property, plant and equipment | | | | | | | | | Amortization of intangible ass e ts | | | | | | | | | | | | | | | | | | | | | | | | | | ) | Change in accrued contingent consideration | | | | ) | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | ) | | | | | Prepaid expenses and other current assets | | | | | | | | | Accounts payable and accrued expenses | | | | | | | | ) | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | Net cash provided by operating activities | | | | | | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | Purchase of property, plant and equipment | | | | ) | | | | ) | | | | | | | | | | Net cash used for investing activities | | | | ) | | | | ) | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | ) | Payment on revolving credit facility | | | (27,000 | | | | — | | Payment of debt issuance costs | | | (116 | | | | — | | | | | | | | | | ) | Proceeds from exercise of stock options | | | | | | | | | | | | | | | | | | Net cash used for financing activities | | | | ) | | | | ) | | | | | | | | | | Effect of Exchange Rate Changes on Cash and Equivalents and Restricted Cash | | | | | | | | ) | | | | | | | | | | Net Increase (Decrease) in Cash and Equivalents and Restricted Cash | | | | ) | | | | | Cash and Equivalents and Restricted Cash at Beginning of Perio d | | | 62,397 | | | | 60,763 | | | | | | | | | | | Cash and Equivalents and Restricted Cash at End of Period | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | | | | | 1,000 | | | | | | | | | | | Cash and Equivalents and Restricted Cash at End of Period | | $ | | | | $ | | | | | | | | | | | |
| | | | | | | | | Three Months Ended December 31, | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | $ | 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 | | | | | 1,241 | | | | 788 | | | | | (852 | ) | | | 419 | | Change in acquisition consideration | | | 1,047 | | | | 1,187 | | | | | | | | | | | | | | (1,776 | ) | | | 550 | | | | | (5,941 | ) | | | (3,526 | ) | Prepaid expenses and other current assets | | | 2,682 | | | | 1,434 | | Accounts payable and accrued expenses | | | (5,826 | ) | | | (664 | ) | | | | 4,032 | | | | (464 | ) | | | | 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.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | Accounts receivable, less allowances of $521 and $537, respectivel y | | | | | | | | | | | | | | | | | | Prepaid expenses and other current asset s | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | PROPERTY, PLANT AND EQUIPMENT, at Cost | | | | | | | | | | | | | | | | | | Buildings and improvements | | | | | | | | | Machinery, equipment and furniture | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: accumulated depreciation and amortization | | | | | | | | | | | | | | | | | | Net property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other intangible assets, net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | |
| | | | | | | | | | | December 31, 2020 (Unaudited) | | | | |
| | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | 177,616 | | | | 162,190 | | | | | | | | | | | PROPERTY, PLANT AND EQUIPMENT, at Cost | | | | | | | | | | | | 997 | | | | 991 | | Buildings and improvements | | | 32,320 | | | | 32,188 | | Machinery, equipment and furniture | | | 71,647 | | | | 69,854 | | | | | 6,118 | | | | 1,200 | | | | | | | | | | | | | | 111,082 | | | | 104,233 | | Less: accumulated depreciation and amortization | | | 75,094 | | | | 73,113 | | | | | | | | | | | Property, plant and equipment, net | | | 35,988 | | | | 31,120 | | | | | | | | | | | | | | | | | | | | | | | 114,868 | | | | 114,186 | | Other intangible assets, net | | | 80,976 | | | | 83,197 | | | | | 6,213 | | | | 6,336 | | | | | 7,714 | | | | 7,647 | | | | | 555 | | | | 585 | | | | | | | | | | | | | | 210,326 | | | | 211,951 | | | | | | | | | | | | | $ | 423,930 | | | $ | 405,261 | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (dollar amounts in thousands) LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | Accrued employee compensation costs | | | | | | | | | | | | | | | | | | Current portion of acquisition consideration | | | | | | | | | Current operating lease obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisition consideration | | | | | | | | | | | | | | | | | | Fair value of interest rate swaps | | | | | | | | | Long-term operating lease obligations | | | | | | | | | | | | | | | | | | Long-term income taxes payable | | | | | | | | | | | | | | | | | | Total non-current liabilities | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred stock, no par value; 1,000,000 shares authorized; 0ne issued | | | | | | | | | Common shares, no par value; 71,000,000 shares authorized, 42,831,267 and 42,712,296 shares issued, respectively | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated other comprehensive loss | | | | ) | | | | ) | Total shareholders’ equity | | | | | | | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | | | | $ | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollar and share amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | THREE MONTHS ENDED MARCH 31, 2020 | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | Conversion of restricted share units | | | | | | | | ) | | | | | | | | | | | | ) | Stock compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) | Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) | Balance at March 31, 2020 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | THREE MONTHS ENDED MARCH 31, 2019 | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2018 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | Cash dividends paid $0.125 per share | | | | | | | | | | | | ) | | | | | | | | ) | Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | | Stock compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) | Balance at March 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | SIX MONTHS ENDED MARCH 31, 2020 | | | | | | | | | | | | | | | | | | | | | Balance at September 30, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | Conversion of restricted share units | | | | | | | | ) | | | | | | | | | | | | ) | Stock compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) | Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) | Balance at March 31, 2020 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | SIX MONTHS ENDED MARCH 31, 2019 | | | | | | | | | | | | | | | | | | | | | Balance at September 30, 2018 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | Cash dividends paid - $0.250 per share | | | | | | | | | | | | ) | | | | | | | | ) | Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | | Stock compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) | Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | ) | | | | | | | | ) | Balance at March 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | $ | 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 | | | | | 6,052 | | | | 5,362 | | | | | 7,985 | | | | 3,524 | | | | | | | | | | | Total current liabilities | | | 53,831 | | | | 52,524 | | | | | | | | | | | | | | | | | | | | Acquisition consideration | | | 10,653 | | | | 13,290 | | | | | 2,494 | | | | 2,493 | | Fair value of interest rate swaps | | | 693 | | | | 713 | | Long-term operating lease obligations | | | 4,513 | | | | 4,678 | | | | | 58,824 | | | | 68,824 | | Government grant obligations | | | 10,495 | | | | 10,524 | | Long-term income taxes payable | | | 384 | | | | 549 | | | | | 3,007 | | | | 3,804 | | Other non-current liabilities | | | 169 | | | | 233 | | | | | | | | | | | Total non-current liabilities | | | 91,232 | | | | 105,108 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | 0 | | | | 0 | | | | | | | | | | | | | | Preferred stock, 0 par value; 1,000,000 shares authorized; NaN issued | | | 0— | | | | 0— | | Common shares, 0 par value; 71,000,000 shares authorized, 43,124,190 and 43,068,842 shares issued, respectively | | | 0— | | | | 0— | | | | | 141,395 | | | | 140,195 | | | | | 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.
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 | | | | | — | | | | — | | | | 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 | | | | | — | | | | — | | | | 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.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Dollars in Thousands, Except Per Share Amounts 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). The interim condensed consolidated financial statementsCondensed Consolidated Financial Statements are unaudited and are prepared in accordance with United States (“U.S.”) generally accepted accounting principles generally accepted in the United States of America(“GAAP”) for interim financial information, and the rules and regulations of the Securities and Exchange Commission.Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principlesGAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the interim financial statements Condensed Consolidated Financial Statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of MarchDecember 31, 2020 and the results of its operations, cash flows and shareholders’ equity for the three- and six-month
three-month periods ended March 31, 2020 and 2019, and its cash flows for the six-month periods ended MarchDecember 31, 2020 and 2019. These statementsCondensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s fiscal 20192020 Annual Report on Form 10-K filed with the SEC on November 23, 2020. 10-K.
It should be noted that the terms revenue and/or revenues are utilized throughout these notes to the Condensed Consolidated Financial information as of September 30, 2019 has been derived from the Company’s audited consolidated financial statements.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 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 a global pandemic. In January 2021, the U.S. Department of Health and Human Services extended the public health emergency declaration forCOVID-19 into April 2021. Governments around the world have implemented lockdown and orders, requiring many non-essential businesses to shut down operations, formany of which remain in effect as of the time being. The Company’sdate of this filing. Our business, however, iswas deemed “essential” and it haswe have continued to operate, manufacture and distribute its products to customers globally.
While revenues within our Life Science segment have been positively impacted by theCOVID-19 has not had a materialpandemic, to date, the negative impact on the Company’s operations, financial condition or cash flows as of the date of this filing, we cannot reasonably predict the extent of the impactimpacts of COVID-19 on the Company have been limited to decreased demand for most of our future resultsDiagnostics segment’s products and the pausing and/or slowing of operations clinical trials for new product development programs, as diagnostics testing has focused primarily onCOVID-19 and cash flowscritical 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 forCOVID-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 topre-pandemic non-critical care testing and treatments, and we begin to offer COVID-19 tests. However, due to the continued uncertainty aroundmany uncertainties surrounding the duration and severityCOVID-19 pandemic, we can provide no assurances with respect to our views of the longevity, severity or impacts to our financial condition of theCOVID-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. 2. | 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 20192020 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 current significant accounting policies, with the exception of Revenue Recognitionpolicies. and Fair Value Measurements
, which
(a) Revenue RecognitionRecent Accounting Pronouncements – Revenue DisaggregationPronouncements Adopted
The following tables presentOn October 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)2016-13, Measurement of Credit Losses , 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 revenues disaggregated by major geographic region, major product platform and disease state (Diagnostics only):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 RevenueIn March 2020, the FASB issued ASU2020-04, 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 Reportable Segment & Geographic Regionreference 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% | | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | )% | | | | | | | | | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | |
In December 2019, the FASB issued ASU2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU2019-12”). ASU2019-12 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. ASU2019-12 will be effective for the Company’s fiscal year beginning on October 1, 2021. The Company is currently evaluating the impact of ASU2019-12 but does not expect its application to have a material impact on the Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | )% | | | | | | | | | | | | )% | | | | | | | | | | | | | % | | | | | | | | | | | | )% | | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Product Platform/TypeCertain 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% | Immunoassays & blood chemistry assays | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | )% | | | | | | | | | | | | ) % | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Disease State (Diagnostics only)
| | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | Respiratory illness assays | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | |
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 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. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Such accruals are netted against accounts receivable. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
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, | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 23,551 | | | $ | 27,735 | | | | (15 | )% | | | | 6,020 | | | | 6,500 | | | | (7 | )% | | | | 750 | | | | 556 | | | | 35 | % | | | | | | | | | | | | | | | | | 30,321 | | | | 34,791 | | | | (13 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,755 | | | | 4,012 | | | | 367 | % | | | | 32,311 | | | | 4,960 | | | | 551 | % | | | | 11,530 | | | | 3,658 | | | | 215 | % | | | | | | | | | | | | | | | | | 62,596 | | | | 12,630 | | | | 396 | % | | | | | | | | | | | | | | | | $ | 92,917 | | | $ | 47,421 | | | | 96 | % | | | | | | | | | | | | | |
Revenue by Product Platform/Type | | Three Months Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 4,590 | | | $ | 6,903 | | | | (34 | )% | | | | 25,731 | | | | 27,888 | | | | (8 | )% | | | | | | | | | | | | | | | | $ | 30,321 | | | $ | 34,791 | | | | (13 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 46,029 | | | $ | 5,367 | | | | 758 | % | | | | 16,567 | | | | 7,263 | | | | 128 | % | | | | | | | | | | | | | | | | $ | 62,596 | | | $ | 12,630 | | | | 396 | % | | | | | | | | | | | | | |
Our payment terms differRevenue by jurisdiction and customer but payment is generally required in a term ranging from 30 to 90 days from the date of shipment or satisfaction of the performance obligation. Trade accounts receivable are recorded in the accompanyingCondensedDisease State (Diagnostics segment only)
Consolidated Balance Sheets at invoiced amounts less provisions for distributor price adjustments under local contracts and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historicalwrite-off
experience and known conditions that would likely lead tonon-payment.
Customer invoices are charged off against the allowance when we believe it is probable that the invoices will not be paid. Practical Expedients and Exemptions
| | | | | | | | | | | | | | | Three Months Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 15,452 | | | $ | 16,251 | | | | (5 | )% | Respiratory illness assays | | | 4,806 | | | | 7,778 | | | | (38 | )% | | | | 4,394 | | | | 4,951 | | | | (11 | )% | | | | 5,669 | | | | 5,811 | | | | (2 | )% | | | | | | | | | | | | | | | | $ | 30,321 | | | $ | 34,791 | | | | (13 | )% | | | | | | | | | | | | | |
Revenue is recognized net of any taxes collected from customers (sales tax, value added tax, etc.), which are subsequently remitted to government authorities.
Our diagnostic assay products are generally not subject to a customer right of return except for product recall events under the rules and regulations of the Food and Drug Administration or equivalent agencies outside the United States. In this circumstance, the costs to replace affected products would be accrued at the time a loss was probable and estimable.
We expense as incurred the costs to obtain contracts, as the amortization period would be one year or less. These costs, recorded within selling and marketing expense, include our internal sales force compensation programs and certain partner sales incentive programs, as we have determined that annual compensation is commensurate with annual selling activities.
Reagent Rental Arrangements Certain of our Diagnostics segment’s product platforms require the use of instruments for the tests to be processed. In many cases, a customer is given use of the instrument provided they continue purchasing the associated tests, also referred to as “consumables” or “reagents”. If a customer stops purchasing the consumables, the instrument must be returned to us. Such arrangements are common practice in the diagnostics industry and are referred to as “Reagent Rentals”. Reagent Rentals may also include instrument related services such as a limited replacement warranty, training and installation. We concluded that the use of the instrument and related services (collectively known as “lease elements”) are not within the scope of Accounting StandardsCodification (“ASC”) 606,Revenue from Contracts with Customersbut ratherASC 842,
. Accordingly, we first allocate the transaction price between the lease elements and thenon-lease
elements based on estimates of relative standalone selling prices. Lease revenue is derived solely from the sale of consumables and is therefore recognized monthly as earned, which coincides with the transfer of control of thenon-lease
elements.For the portion of the transaction price allocated to thenon-lease
elements, which are principally the test kits, the related revenue is recognized at apoint-in-time
when control transfers.Revenue allocated to the lease elements of these Reagent Rental arrangements totaled approximately $1,125$880 and $1,050$1,150 in the three months ended MarchDecember 31, 2020 and 2019, respectively, and $2,250 and $2,100 in the six months ended March 31, 2020 and 2019
, respectively. Such revenue is included as part of net revenues in our Condensed Consolidated Statements of Operations. | | Fair Value Measurements – |
Certain assets and liabilities are recorded at fair value in accordance with ASC 820-10, Accounting Standards Codification (“ASC”) 820,Fair Value Measurements and Disclosures (“ASC 820”). ASC 820-10 820 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 820-10 820 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: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly 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 has entered into interest rate swap agreements, which effectively convert the variable interest rate on $50,000of the outstanding revolving credit facilityNote 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 3,6, we acquired the business of GenePOCExalenz Bioscience Ltd. (“Exalenz”) in fiscal 2019.2020. 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 approximated their carrying value at the acquisition date. Inventories, property, plant and equipment, intangiblewere valued using Level 2 inputs, which included data points that were observable, such as appraisals or established values of comparable assets and contingent consideration (market approach). Intangible assets
were valued using Level 3 inputs. The following table provides informationinputs, which are unobservable by level for financial assetsnature, and liabilities that are measured atincluded 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 onmeasurement. Management engaged a recurring basis: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.
| | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements Using | | | | | | | | | | | | | | | Interest rate swaps (see Note 9) - | | | | | | | | | | | | | | | | | | | | | ) | | $ | | | | $ | | ) | | $ | | | | | $ | | | | $ | | | | $ | | | | $ | | | Contingent consideration - | | | | | | | | | | | | | | | | | | | $ | | ) | | $ | | | | $ | | | | $ | | ) | | | $ | | ) | | $ | | | | $ | | | | $ | | ) |
In connection with the acquisition of the business of GenePOC, Inc. (“GenePOC”) in fiscal 2019 and as described in Note 3,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 $20,000$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 paymentsconsideration recognized upon the acquisition as part of the purchase accounting opening balance sheet totaled $27,202. price allocation was $27,202.The fair value of the development milestone payments wasis estimated by disco
untingdiscounting 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.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 revenue,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 liability is considered to be a Level 3 financial liability that isre-measured
each reporting period, resulting in a value of $25,898 as of March 31, 2020.Page 10The 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 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (693 | ) | | $ | 0 | | | $ | (693 | ) | | $ | 0 | | | | $ | (713 | ) | | $ | 0 | | | $ | (713 | ) | | $ | 0 | | Contingent consideration (GeneP OC ) | | | | | | | | | | | | | | | | | | | $ | (21,956 | ) | | $ | 0 | | | $ | 0 | | | $ | (21,956 | ) | | | $ | (20,909 | ) | | $ | 0 | | | $ | 0 | | | $ | (20,909 | ) |
| Recent Accounting Pronouncements –Business Combinations |
On October 1, 2019, April 30, 2020 (“the Company adopted ASC 842,. ASC 842 was issued to increase transparency and comparability among entities by recognizingright-of-use
assets (“ROU assets”acquisition date”) and lease liabilities on the balance sheet and disclosing key information about lease arrangements. The Company elected to adopt ASC 842 effective October 1, 2019 using the modified retrospective transition method, which was applied to leases that existed or will be entered into on or after such date, with no adjustment made to prior comparative periods. The comparative periods presented herein reflect the former lease accounting guidance and the required comparative disclosures are included in Note 7,. There was no cumulative-effect adjustment to beginning retained earnings as a result of adopting ASC 842, and additional operating lease ROU assets and obligations of approximately $5,880 were recognized as of October 1, 2019. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term. The Company elected the package of practical expedients permitted under the new guidance to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior to October 1, 2019. Additionally, the elections were made to not use hindsight to determine lease terms and to not separatenon-lease
components within the lease portfolio. See Note 7 for further information.Pronouncements Issued but Not Yet Adopted as of March 31, 2020
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation, we acquired 100% of the Effectsoutstanding common shares and voting interest 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 U.S. 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 plans to apply this guidance to such transactions and modifications of arrangements but does not expect application to haveExalenz, a material impact on financial condition, results of operations or cash flows.In June 2016, the FASB issued ASU 2016-13,Measurement of Credit Losses on Financial Instruments
, which changes the impairment model used to measure credit losses for most financial assets. We will be required to use a new forward-looking expected credit loss model that will replace the existing incurred credit loss model for our accounts receivables. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years (fiscal 2021 for the Company), with early adoption permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Such reclassifications had no impact on net earnings or shareholders’ equity.
| Acquisition of Business of GenePOC
|
On June 3, 2019, we acquired the business of GenePOC Inc. (“GenePOC”), a Quebec City, Quebec Province, CanadaModi’in, Israel based provider of molecular diagnostic instrumentsthe BreathID Breath Test Systems (“BreathID”), a breath test platform for the detection ofCash consideration totaled 168.6 million New Israeli Shekels (“NIS”), which equated to $48,237 at the date of closing. Including debt assumed and assays. The purchase agreement contemplates a maximumrepaid shortly after closing, the total consideration of up to $120,000, whichtransferred was estimated at a total fair value of $77,526 as of the acquisition date. Pursuant to the purchase agreement, the maximum consideration is comprised of the following (noting that the valuationset
the contingent consideration identified in (ii) and (iii) below at an aggregate amount of $27,202 as of the acquisition date): | (i) | a $50,000 cash payment on June 3, 2019, subject to a working capital adjustment and a holdback of $5,000 to secure selling party’s performance of certain post-closing obligations; |
| (ii) | two $10,000 installments contingent upon the achievement of certain product development milestones if achieved by September 30, 2020 and March 31, 2021, respectively; and |
| (iii) | up to $50,000 of contingent consideration payable if certain financial performance targets are achieved during the twelve-month period ending September 30, 2022. |
The total of the holdback identified in (i) above and the currently estimated value of the contingent consideration identified in (ii) and (iii) above are reflected within the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020 as follows:
Reflects anticipated settlement of the first product milestone payment and the holdback amounts in the first quarter of fiscal 2021.
Non-current liabilities
-
$17,242Reflects anticipated settlement of the second product milestone payment and the financial performance targets payments in the third quarter of fiscal 2021 and first quarter of fiscal 2023, respectively.
$56,305. To finance the acquisition, wethe 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.
see Note 9 for a discussion of subsequent amendments to the credit facility. Proceeds from the credit facility were also utilized to repay and settle the outstanding principal and interest due on our term loan (see Note 9). As a result of estimated total consideration exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $34,582$24,503 was recorded in connection with this acquisition, most none of
which will be deductible for U.S. tax purposes ratably over 15 years.purposes. The goodwill results largely from our ability to market and sell GenePOC’s technology and instrumentthe BreathID platform through our established customer base and distribution channels. Purchase Price Allocation Page 11
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 anon-compete agreement, trade name, technology and customer relationships. The recognized preliminary amounts of identifiable assets acquired and liabilities assumed in the acquisition of the GenePOC businessExalenz are as follows: | | | | | | | | | | | | | | | | | | Measurement Period Adjustments | | | | | Fair value of assets acquired - | | | | | | | | | | | | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | Property, plant and equipment | | | | | | | | ) | | | | | | | | | | | | | | | | | | Other intangible assets (estimated useful life): | | | | | | | | | | | | | License agreement (10 years) | | | | | | | | | | | | | | | | | | | | | | | | | | Government grant (1.33 years) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of liabilities assumed - | | | | | | | | | | | | | Accounts payable and accrued expenses | | | | | | | | ) | | | | | | | | | | | | | | | | | | Total consideration paid (including contingent consideration originally estimated at $27,202) | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | |
| | | | | |
| | | Measurement Period Adjustments | | |
| | Fair value of assets acquired - | | | | | | | | | | | | | | | $ | 5,006 | | | $ | — | | | $ | 5,006 | | | | | 637 | | | | — | | | | 637 | | | | | 4,329 | | | | — | | | | 4,329 | | | | | 851 | | | | 1,825 | | | | 2,676 | | Property, plant and equipment | | | 544 | | | | 39 | | | | 583 | | | | | 29,288 | | | | (4,785 | ) | | | 24,503 | | Other intangible assets (estimated useful life): | | | | | | | | | | | | | Non-compete agreement (5 years) | | | 120 | | | | (10 | ) | | | 110 | | | | | 3,540 | | | | 320 | | | | 3,860 | | | | | 5,590 | | | | 530 | | | | 6,120 | | Customer relationships (10 years) | | | 19,370 | | | | 1,270 | | | | 20,640 | | | | | 1,358 | | | | (47 | ) | | | 1,311 | | | | | 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 .
The following table provides the unaudited condensed consolidated pro forma results for the periods presented as if the business of GenePOCExalenz had been acquired as of the beginning of fiscal 2019.2020. 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, | | | | | | | | | $ | 92,917 | | | $ | 51,194 | | | | $ | 26,779 | | | $ | 1,182 | |
These unaudited pro forma amounts have been calculated by including the results of GenePOC,Exalenz and adjusting the combined results to give effect to the following, as if the acquisition had been consummated on October 1, 2018,2019, together with the consequential tax effects thereon: | | | | | | | | | | | | | | | | Adjustments to Net Revenues | | | | | | | | | GenePOC pre-acquisition revenues | | $ | | | | $ | | | Adjustments to Net Earnings | | | | | | | | | GenePOC pre-acquisition net loss | | $ | | ) | | $ | | ) | | | | | | | | | | Expenses related to non-continuing personnel, locations or activities | | | | | | | | | Incremental depreciation and amortization | | | | ) | | | | ) | Incremental interest costs | | | | ) | | | | ) | Tax effects of pro forma adjustments | | | | | | | | | | | | | | | | | | Total Adjustments to Net Earnings | | $ | | ) | | $ | | ) | | | | | | | | | |
| | | | | | | | | Three Months Ended December 31, | | | | | | | Adjustments to Net Revenues | | | | | | | | | Exalenz pre-acquisition revenues | | | | | | $ | 3,773 | | | | | | | | | | | Adjustments to Net Earnings | | | | | | | | | Exalenz pre-acquisition net losses | | | | | | $ | (752 | ) | | | | | | | | | | 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 | | $ | 0 | | | $ | (1,645 | ) | | | | | | | | | |
Cash and cash equivalents include the following: | | | | | | | | | | | | | | | | | Institutional money market funds | | $ | 1,017 | | | $ | 1,017 | | Cash on hand, unrestricted | | | 62,176 | | | | 52,497 | | | | | | | | | | | | | $ | 63,193 | | | $ | 53,514 | | | | | | | | | | |
Inventories, net are comprised of the following: | | | | | | | | | | | | | | | | | | | $ | 13,868 | | | $ | 11,966 | | | | | 20,874 | | | | 19,477 | | Finished goods - instruments | | | 1,532 | | | | 1,594 | | Finished goods - kits and reagents | | | 30,969 | | | | 28,227 | | | | | | | | | | | | | $ | 67,243 | | | $ | 61,264 | | | | | | | | | | |
During the second quarter of fiscal 2018, the Company began implementation of a plan to realign its business structure into two business units, Diagnostics and Life Science, supported by a global corporate team. Since that time and as part of this plan, certain functions and locations within both business units have been streamlined, including: (i) the elimination of certain executive management and commercial sales positions; (ii) the closing of Life Science locations in Taunton, Massachusetts and Singapore, the operations of which were transferred to our locations in Memphis, Tennessee and London, England, respectively; and (iii) the transfer of certain functions performed in the Billerica, Massachusetts Diagnostics facility to the corporate headquarters in Cincinnati, Ohio. Further restructuring costs were incurred in fiscal 2019 and the first half of fiscal 2020, as refinements to each business unit’s cost structure continued to be made and the Company incurred severance payment obligations relating to the transition of its previous chief financial officer.
As a result of these activities, restructuring costs totaling $252$2,839 were
recorded during the three and six months ended March 31, 2020 and the fiscal year ended September 30, 2019, respectively.
A reconciliation of the changes in the liabilities associated with the restructuring charges from September 30, 2019 through March 31, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | Employee Separation and Related Costs | | | Lease and Other Contract Termination Fees | | | | | | | | Balance at September 30, 2019 | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | Reversal of prior period accruals | | | | ) | | | | | | | | | | | | ) | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | Balance at March 31, 2020 | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | |
Cash and equivalents include the following:
| | | | | | | | | | | | | | | | | Institutional money market funds | | $ | | | | $ | | | Cash on hand, unrestricted | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | |
Inventories are comprised of the following:
| | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | | Finished goods - instruments | | | | | | | | | Finished goods - kits and reagents | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | |
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 Sheet.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 StatementOperations for the three months ended MarchDecember 31, 2020 reflectreflects lease costs for these operating leases of $
130 $158 and $ 292$374within cost of sales and
operating expenses, respectively ;respectively; and $ 259129 and $559 $267within cost of sales and operating expenses, respectively, for the sixthree months ended MarchDecember 31, 2020.2019 . 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 balance sheetCondensed Consolidated Balance Sheets and the related lease expense is immaterial for the three and six months ended MarchDecember 31, 2020.2020 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 MarchDecember 31, 2020 and September 30, 2020 was 3.9wyears and 4.2 years, respectively.
as 4.4 years.
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 MarchDecember 31, 2020 and September 30, 2020 was 3.6% and 3.7%, respectively. was 3.7%.
Supplemental cash flow information related to the Company’s operating leases are as follows:
| | | | | | | | | | | | | | | | | | | Three Months | | | Six Months | | | | | | | | | | | | | | | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | | | | | | Operating cash flows from operating leases | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | |
Maturities of lease liabilities by fiscal year for the Company’s operating lease liabilities were as follows as of MarchDecember 31, 2020: | | | | | | | | | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less amount of lease payment representing interest | | | | ) | | | | | | Total present value of lease payments | | $ | | | | | | | |
| | | | | | | | | | 2021 (represents remainder of fiscal year) | | $ | 1,590 | | | | | 1,873 | | | | | 1,346 | | | | | 1,002 | | | | | 707 | | | | | 292 | | | | | | | | | | 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, | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | Operating cash flows from operating leases | | $ | 494 | | | $ | 387 | | | | | | | | | | |
As of September 30, 2019, future minimum lease payments under noncancelable operating leases were as follows:
8. | Goodwill and Other Intangible Assets, Net |
In light ofDuring the economic impacts ofCOVID-19,
the Company performed a review of the assets on our consolidated balance sheet as of Marchthree months ended December 31, 2020, including goodwill intangible and other long-lived assets. 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 assets. As such, no impairments or other write-downsincreased $682, reflecting: (i) an additional $37 acquisition measurement period adjustment upward related to COVID-19
have been recorded during fiscal 2020. Our assessment was based on information currently available and relies on various assumptions based on estimates of future cash flows and Exalenz (Diagnostics segment; see Note 6); (ii) a $52 increase from the probability of achieving the estimated cash flows. Future changes in market, economic or other conditions may lead to impairmentscurrency translation adjustment ongoodwill in the future.Diagnostics segment; and (iii) a $593 increase from the currency translation adjustmentgoodwillin the Life Science segment. A summary of our acquiredother intangible assets, net subject to amortization as of March 31, 2020 and September 30, 2019, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Manufacturing technologies, core products and cell lines | | $ | | | | $ | | | | $ | | | | $ | | | Trade names, licenses and patents | | | | | | | | | | | | | | | | | Customer lists, customer relationships and supply agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | 847 | | | | 847 | | | | 810 | | | | 810 | | | | | 110 | | | | 15 | | | | 110 | | | | 11 | | | | | | | | | | | | | | | | | | | | | $ | 127,166 | | | $ | 46,190 | | | $ | 126,779 | | | $ | 43,582 | | | | | | | | | | | | | | | | | | |
The actual aggregate amortization expense for these other intangible assets was $1,727 $2,221 and $829$1,722 for the three months ended MarchDecember 31, 2020 and 2019, respectively, and $3,449 and $1,658 for the six months ended March 31, 2020 and 2019, respectively. The estimated aggregate amortization expense for these other intangible assets for each of the fiscal years through fiscal 20252026 is as follows: remainder of fiscal 2020 – $3,306, fiscal 2021 – $5,490,$6,289, fiscal 2022 – $5,113,$7,993, fiscal 2023 – $5,100,$7,980, fiscal 2024 – $5,096, and$7,976, fiscal 2025 – $5,096.$7,967, and fiscal 2026 – $7,296.In anticipation of the acquisition of the business of GenePOC, (see Note 3), on May 24, 2019 the Company entered into a credit facility agreement with a commercial bank .bank. The Company amended the credit facility agreement
on February 19, 2020 in anticipation of the Company’s pending acquisition of Exalenz Bioscience Ltd. (see Note 12)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
$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 4.15%2.54% and 4.04% 3.96%on the revolving credit facility during the three and six months ended MarchDecember 31, 2020 and 2019, respectively. Since entering into the revolving credit facility, through March 31, 2020, twothree draws totaling
$75,824 $125,824 have been made on the credit facility, with aprincipal repayments in January 2020, principal repaymentSeptember 2020 and December 2020 of $27,000, $30,000 and $10,000, respectively, resulting in an outstanding principal balance of $48,824$58,824and $68,824 at MarchDecember 31, 2020 and September 30, 2020, respectively. The (see Note 12 for activity subsequent to quarter-end)
. 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 acquisition closing payment. 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 March both December 31, 2020 and September 30, 2020 approximates the current carrying value reflected in the accompanying Condensed Consolidated Balance SheetSheets..
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 MarchDecember 31, 2020, the Company iswas in compliance with all covenants. In order to limit exposure to volatility in the LIBOR interest rate, during March 2020 the Company and the commercial bank entered into two interest rate swap agreements that will effectively convert the variable interest rate on $25,000
Consequently | Contingent Obligations andNon-Current Liabilities |
, the interest rate swaps have been designated as effective cash flow hedges, with changes in fair
values
reflected as a separate component of other comprehensive income in the accompanying Condensed Consolidated Statements of Comprehensive Income. At March 31, 2020, the fair value of the interest rate swaps
was reported as
a liability of $313, which is reflected as anon-current
liability in the accompanying Condensed Consolidated Balance Sheet. This fair value was determined by information provided by the counterparty and is considered a Level 2 input within the fair value hierarchy of valuation techniques.In connection with the Company’s term loan repayment in May 2019,acquisition of Exalenz (see Note 6), the Company also settledassumed several Israeli government grant obligations. The repayment of the grants, along with interest rate swap that had been entered into to limit exposure to volatility in the term loan’sincurred at varying stated fixed rates based on LIBOR interest rate. Atat the time of settlement,each grant was received (ranging from 0.58% to 6.60%), is not dictated by an established repayment schedule. Rather, the Company received a cash payment in an amount equalgrants and related interest are required to the $563
then-current fair valuebe repaid using 3% of the interest rate swap. Accordingly, there isrevenues 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 balance for this interest rate swap reflected within assetscollateral or liabilities within the accompanying Consolidated Balance Sheetsfinancial covenant provisions generally associated with traditional borrowing instruments. These obligation amounts total $11,222 and $11,124 as of March 31, 2020 or September 30, 2019. The fair value of the swap that had been reflected within a separate component of other comprehensive income in the accompanying Consolidated Statements of Comprehensive Income, as a result of the interest rate swap having been designated as an effective cash flow hedge, is being released ratably into income through March 31, 2021, the interest rate swap’s original term.
The balance reflected within accumulated other comprehensive income related to the interest rate swap agreements associated with both the current credit facility and the former term loan totaled ($6)
and $461 at MarchDecember 31, 2020 and September 30, 2019,2020,respectively, and are reflected in the Condensed Consolidated Balance Sheets as follows: As of December 31, 2020 – $727 As of September 30, 2020 – $600 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 . 10. | 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 $1,000under 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. | Reportable SegmentsSegment and Major Customers Information |
During the three months ended December 31, 2020, productsrelated toCOVID-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 1 Diagnostics segment customer rising to such a level of concentration (11%) during the three months ended December 31, 2019. ContentsOur reportable segments are DiagnosticsReportable segment revenues were concentrated as follows during the three months ended December 31, 2020 and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio and Quebec City, Canada, manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston), and 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.2019: | | | | | | | | | Three Months Ended December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | 10 | % | | | 4 | % | | | | 11 | % | | | 3 | % | | | | 12 | % | | | 4 | % | | | | | | | | | | | | | 33 | % | | | 11 | % | | | | | | | | | | | | | | | | | | | | | | 3 | % | | | 2 | % | | | | 5 | % | | �� | 4 | % | | | | 14 | % | | | 9 | % | | | | | | | | | | | | | 22 | % | | | 15 | % | | | | | | | | | |
| | | | | | | | | Three Months Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | 15 | % | | | 11 | % | | | | 6 | % | | | 4 | % | | | | 12 | % | | | 9 | % | | | | | | | | | | | | | 33 | % | | | 24 | % | | | | | | | | | | | | | | | | | | | | | | 8 | %�� | | | 2 | % | | | | 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.
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 in Beijing, China to further 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).Amounts due from 2 Diagnostics distributor customers accounted for 13% of consolidated accounts receivable atboth
March 31, 2020 and September 30, 2019. Revenues from these 2 distributor customers accounted for 23% and 25% of the Diagnostics segment third-party revenues during the three months ended March 31, 2020 and 2019, respectively, and 25% and
30% during the six-
month periods ended March 31, 2020 and 2019, respectively
. These distributors represented 14% and 17% of consolidated revenues for the fiscal 2020 and 2019 second quarters, respectively, and 17% and
21% for the respectiveyear-to-date
six-
month periods.Within our Life Science segment, two diagnostic manufacturing customers accounted for 17% and 27% of the segment’s third-party revenues during the three months ended March 31, 2020 and 2019, respectively, and 16% and 27% during the six months ended March 31, 2020 and 2019, respectively.
Segment information for the interim periods is as follows: | | | | | | | | | | | | | | | | | | | | | | | Diagnostics | | | Life Science | | | | | | | | | Total | | Three Months Ended March 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | Goodwill (March 31, 2020) | | | | | | | | | | | | | | | | | | | | | Other intangible assets, net (March 31, 2020) | | | | | | | | | | | | | | | | | | | | | Total assets (March 31, 2020) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | Goodwill (September 30, 2019) | | | | | | | | | | | | | | | | | | | | | Other intangible assets, net (September 30, 2019) | | | | | | | | | | | | | | | | | | | | | Total assets (September 30, 2019) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 30,321 | | | $ | 62,596 | | | $ | — | | | $ | — | | | $ | 92,917 | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 34,791 | | | $ | 12,630 | | | $ | — | | | $ | — | | | $ | 47,421 | | | | | 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 $1,227in the three months ended December 31, 2020 and Restructuring Costs and Selected Legal Costs of $685 and $603 $370in the three months ended MarchDecember 31, 2020 and 2019, respectively,2019. and
$1,055 and $1,192 in thesix months ended March 31,
2020 and 2019, respectively.
|
(2) | Eliminations consist of inter-segment transactions. |
A reconciliation of segment operating income (loss) to consolidated earnings before income taxes for the three and six months ended MarchDecember 31, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | | | Three Months | | | Six Months | | | | Ended March 31, | | | Ended March 31, | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | | $ | | | | $ | | | | $ | | | | $ | | | Corporate operating expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | Consolidated earnings before income taxes | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total operating income | | | 38,627 | | | | 7,481 | | | | | (3,963 | ) | | | (2,087 | ) | | | | 9 | | | | 111 | | | | | (534 | ) | | | (767 | ) | RADx initiative grant income | | | | | | | | | | | | (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.
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 theUnited Kingdom (“U.K.”). On November 15, 2017, Barbara Forman filed a class action complaint in the United States District Court for the Southern District of Ohio (the Court) naming Meridian, its former Chief Executive Officer and former Chief Financial Officer (in their capacities as such) as defendants. An amended complaint was filed on April 16, 2018 and the Company believes the essential elements of the amended complaint are the same. On July 9, 2019, a settlement was reached with the plaintiff that provides for a $2,100 payment by the Company. On October 9, 2019, the Court granted a motion for preliminary approval of the settlement, and on November 7, 2019, the settlement amount was paid from the Company’s directors and officers insurance policy into a plaintiff escrow account. After
a final approval hearingon
March2020, on March 17, 2020, the Court issued an order and judgment approving the settlement
.
Because the settlement was a covered claim under our directors and officers insurance policy, no provision for litigation losses has been included within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2020 or March 31, 2019.
On December 6, 2017, Michael Edelson filed a derivative complaint in the United States District Court for the Southern District of Ohio naming Meridian, its former Chief Executive Officer, former Chief Financial Officer and certain members of Meridian’s Board of Directors and Audit Committee (in their capacities as such) as defendants. The complaint alleges that Meridian made false and misleading representations concerning certain of Magellan’s lead test systems at or around the time of Meridian’s acquisition of Magellan and subsequent thereto, and the complaint alleges that certain members of the Board of Directors and Audit Committee breached their fiduciary duties in their oversight of the Company’s public disclosures and corporate governance matters. The complaint sought compensatory damages, equitable relief relating to corporate governance matters and attorneys’ fees. On October 9, 2019, the Court granted plaintiff’s motion for voluntary dismissal.
Accordingly, no provision for litigation losses has been included within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2020 or March 31, 2019.
On April 17, 2018 Meridian’s wholly-owned subsidiary, ,Magellan Diagnostics, Inc. received a subpoena from the United StatesU.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 multiple
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 $725 $ 1,227and $560 $ 280of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated Statements of Operations for the three months ended MarchDecember 31, , 2020
and March 31 , 2019,
, respectively; approximately $1,005
and $1,100
for the six months ended March 31
, 2020
and March 31
, 2019
, respectively.
On EApril 30ffective February 1
, 2020,2021, the Company a second grant contract under the RADx initiative, the purpose of which is to support the Company’s manufacturing productionscale-up and expansion to meet the demand forCOVID-19 testing. The contract is a twelve-month term service contract, with payment of up to $5,500 being made based on the Company acquiredachieving key milestones related to increasing its capacity to produceCOVID-19 all oftests. No amounts related to this contract are reflected within the outstanding capital stock ofCondensed Consolidated Financial Statements. Exalenz Bioscience Ltd. (“Exalenz”), a manufacturer of a urea breath diagnostic testing platform headquartered in Modi’in, Israel, for approximately $48,000in cash. In addition, the Company paid approximately $8,000 in cash for Exalenz to repay two bank loans
. During 2019, Exalenz generated approximately $14,000 of revenue from sales of its BreathID®
Breath Test Systems. This purchase will be included in our Diagnostics operating segment and accounted for as a business combination. In connection with the merger consideration for the acquisition and repayment of the Exalenz bank loans, the Company executed two forward contracts with a total notional amount of 187,000 New Israeli Shekels, both of which settled on April 20, 2020
In anticipation of the Exalenz acquisition, in April 2020, an additional $50,000 was drawn on the revolving credit facility, resulting in an outstanding principal balance of $98,424 as of the date of this filing.
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 Meridian’sthe financial condition, changes in financial condition and results of operations.operations of Meridian Bioscience, Inc. (“Meridian”, the “Company”, “We”). This discussion should be read in conjunction with the financial statementsCondensed 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. 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. Impact of COVID-19 Pandemic In December 2019, the 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 a global pandemic. In January 2021, the United States (“U.S.”) Department of Health and Human Services extended the public health emergency declaration forCOVID-19 into April 2021. Governments around the world have implemented lockdown and orders, requiring many non-essential businesses to shut down operations, formany of which remain in effect as of the time being.date of this filing. Our business, however, iswas deemed “essential” and haswe have continued to operate, and 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. TheCOVID-19 pandemic has had both positive and negative effects on our businesses. Our Life Science segment’s products were well positioned to respond toin-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 ontesting 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. Inmid-March
2020, we institutedWe have implemented a work from homework-from-home process for employees whose on-site presence is designated as non-essential to the ongoing functionfunctions of our manufacturing site,sites, distribution centers, and new product development facilities. We havecontinue to utilize this work-from-home process as needed on abasis. We also implemented enhanced cleaning and sanitizing procedures and provided additional personal hygiene supplies at all of our sites. We have 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. We have closedrelease, including a negative active infection test result. Access to our facilities toby outside persons who are not critical to continuing our operations.operations continues to be limited. To date, we have been able to manufacture and distribute products globally, and all our sites continue to operate, without interruption.with little, if any, impact on shipments to customers to date. As the pandemic continues to spread, over time,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 homework-from-home processes, have not materially impacted the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls. Currently and as anticipated for the near future, our supplySupply 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 are regularly communicatingcommunicate with our 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.
As a result of the pandemic, certain of our clinical trials which were underway or scheduled to begin have beenwere 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 willcontinue 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 ongoingCOVID-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. Our Life Science segment manufactures, markets and sells a number of immunoassaymolecular and molecularimmunological reagents to IVD customers, including those who are making both molecular and immunoassay COVID-19 tests. During ourSince late in the second quarter of fiscal 2020, we began seeinghave experienced unprecedented demand for certain of our molecular reagents (e.g., ribonucleic acid (“RNA”) master mixes and nucleotides) , and such demand has continued into our third fiscal quarter.. Although we are unable to predict when this demand may subside, we expect materially higher revenue levels for these products to be materially higher than historical levels during at least the next threesix to sixnine months. TheseOur products are currently being used byin over 35 IVD companies100 approvedCOVID-19 related assays around the worldworld. COVID-related reagent revenues totaled approximately $43,000 in the development ofCOVID-19
molecular tests. In addition,fiscal 2021 first quarter, following approximately $71,500 during April we announced the launch of several recombinant antigens critical for the development of antibody tests forfull year fiscal 2020.COVID-19.
Based upon the launch of these immunological reagent products and the strong demand for molecular reagent products noted above, we are currently expecting third quarter Life Science revenues of at least double that of normal quarterly levels.Our Diagnostics segment manufactures, markets and sells a number of molecular, immunoassay, and blood chemistry assays and urea breath testsfor 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. In addition, theTheCOVID-19 pandemic also has greatly slowedcontinued to affect our instrument placementsplacements. The launch of our Curian platform has been slower than expected as diagnostic testing sites have turned their attention to critical care testing. DuringHowever, beginning in our fiscal 2020 fourth quarter and continuing through the monthfiscal 2021 first quarter, we have experienced an acceleration in Revogene instrument placements due to the January 2021 launch of April,aassay (the “RevogeneCOVID-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 weekly shipments of Diagnostic products were approximately 50% of expected volume levels. Givenapplication for EUA to the nature of our diagnostic assays (i.e., infectious diseaseFDA on December 7, 2020 and blood-lead), we expect to returnreceive approval of the submission during our fiscal 2021 second quarter. In response to expected sales volume levels within three to six months assuming shelter in place orders relax and health care facilities return to normal,pre-pandemic
operationsthe 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 term.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 ofCOVID-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 RevogeneCOVID-19 assay, no assurances can be made in this regard. In light ofConsidering the economic impacts of COVID-19, the Companywe performed a reviewan analysis of theour business to determine if there were triggering events that would require us to further test our long-lived assets on our consolidated balance sheet as of March 31, 2020, including intangible and other 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 werehave been recorded during the fiscal 2020. Our assessment was based on information currently available and relies on various assumptions based on estimates of future cash flows and the probability of achieving the estimated cash flows. Future changes in market, economic2021 first quarter or other conditions may lead to future impairments.prior year period.As of March 31, 2020, the Company’s outstanding debt balance on its revolving credit facility was $48,824. The impacts of COVID-19 have adversely affected the capital markets and 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
also maintain a shelf registration statement on file with the SEC. The Company believes it hasthese resources will provide sufficient liquidity and cash flows to meet its operating and debt service requirements for at least the next twelve months. We drew $50,000 on our revolving credit facility in April to complete the acquisition of Exalenz Bioscience Ltd. (“Exalenz”) described in Note 12, “of the accompanying condensed consolidated financial statements. The Companymonths and expects to be in compliance with its financial covenants during thethis same period. However, given the Company is currently unable to predictunusual nature of the impact thatCOVID-19 will have on its ability to access capitalpandemic and the rapidly changing environment, we can provide no assurances in the future. If the Company is unable to access additional capital and liquidity on acceptable terms, it could adversely impact the Company’s results of operations and ability to meet its future obligations beyond the next twelve months.
Based on the foregoing, the Company cannot reasonably predict the extent of the impact ofCOVID-19
on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic. TheCOVID-19
situation is changing rapidlythis regard and future impacts may materialize that are not yetcurrently 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 Form10-K as of and for theyear-end September 30, 2020. 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. Three and Six Months Ended MarchDecember 31, 2020 Net earnings for the secondfirst quarter of fiscal 20202021 increased 32%847% to $9,359,$26,779, or $0.22$0.61 per diluted share, from net earnings for the secondfirst quarter of fiscal 20192020 of $7,094,$2,827, or $0.17 per diluted share. For thesix-month
period ended March 31, 2020, net earnings were $12,186, or $0.28$0.07 per diluted share. The level of net earnings in the secondfiscal 2021 first quarter (“QTD”) and first six months (“YTD”) of fiscal 2020 werewas 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 revenuerevenues in the Life Science operating segment, due in large part to supplying key molecular components and antibodies to diagnostic test manufacturers for use in COVID-19 related tests;PCR and antibody tests (up $49,966); |
| (ii) | higher research and development spending in the Diagnostics segment ($1,618 QTD; $2,731 YTD);(up $895) under new product development programs; |
| (iii) | increased cash-based incentive compensation ($2,045 QTD; $2,570 YTD);(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 the GenePOC businessExalenz in June 2019 ($825 QTD; $1,715 YTD)April 2020 (up $499); |
| (v) | increased acquisition-related costs in connection with the fiscal 2020 Exalenz transaction, as compared to thoselegal expenses related to the GenePOC transaction in fiscal 2019 ($902 QTD; $815 YTD)DOJ matter at the Billerica, Massachusetts facility (up $947) (see “Lead Testing Matters” below); and |
| (vi) | a decreasethe fiscal 2021 first quarter including $800 in grant income related to the fair valueNational Institutes of Health RADx initiative (see Note 13 of the earnout obligation for the acquisition of the GenePOC business ($2,491 QTD; $1,304 YTD); andaccompanying Condensed Consolidated Financial Statements). |
| (vii) | significantly higher gains related to foreign currency, particularly as it relates to the British pound sterling ($1,704 QTD; $643 YTD). |
Consolidated revenues for the secondfirst quarter of fiscal 2021 totaled $92,917, an increase of 96% compared to the first quarter of fiscal 2020 totaled $57,296, an increase of 14% compared to the second quarter of fiscal 2019 (15%(93% increase on a constant-currency basis). Revenues for the Diagnostics segment for the secondfirst quarter of fiscal 2021 decreased 13% compared to the first quarter of fiscal 2020 increased 4% compared to the second quarter of fiscal 2019 (5% increase(14% on a constant-currency basis), comprised of a 2% increase34% decrease in molecular assay products and a 5% increasean 8% decrease in immunoassay and blood chemistrynon-molecular assay products. As previously noted, despite the COVID-19 pandemic continuing to dramatically slowed the placementslow sales of our molecular assay products during the quarter, resulting in 35 Revogene®
systems being installed during the secondfirst quarter of fiscal 20202021, the acceleration of Revogene instrument placements in anticipation of the RevogeneCOVID-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 148288 systems as of MarchDecember 31, 2020. With a 114%758% increase in revenues from molecular reagents products and a 5% decrease128% increase in revenues from immunological reagents products, revenues for our Life Science segment increased 33%396% during the secondfirst quarter of fiscal 20202021 compared to the secondfirst quarter of fiscal 2019.2020. On a constant-currency basis, revenues for the Life Science segment increased 34%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 inCOVID-19 antibody tests. In addition, our core Life Science segment business (other thanCOVID-19 contributions) experienced growth of approximately $7,000, or approximately 55%, compared to the first quarter of fiscal 2020. This growth, including a fourfoldan approximate 88% increase in revenuerevenues from sales into China.China, resulted in large part from obtaining business fromCOVID-19 Consolidated revenues increased 3% to $104,717customers who are now using our products for the first six months of fiscal 2020 compared to the same period of the prior year (also 3% onothernon-COVID related purposes, as well as a constant-currency basis). On an operating segment basis, Diagnostics revenues decreased 1% (flat on a constant-currency basis) and Life Science revenues increased 11% (12% increase on a constant-currency basis).rebound in volumes in core immunological products.On June 29, 2017, the United States Food and Drug Administration (“FDA”), in connection with its Safety Notification related to Magellan’s LeadCare testing systems for venous blood samples, issued to Magellan its Form 483, Inspectional Observations. The FDA issued a related Warning Letter on October 23, 2017. On April 17, 2018, Magellan received a subpoena from the United StatesU.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 multiple 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 including review by an FDA Advisory Committee, 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 and Advisory Committee review areis completed. During October 2019, the FDA performed a follow-up inspection of Magellan’s manufacturing facility. The FDA issued five Form FDA 483 observations. In November 2019, we submitted to the FDA our written responses to the five Form FDA 483 observations and have implemented a remediation plan that we are actively working. In January and February 2020, we submitted to the FDA additional written responses to the 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.
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, andand/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 or on terms substantially similar to those on which we currently operate. Below are analyses of the Company’s revenue,revenues, provided for each of the following: | - | By Reportable Segment & Geographic Region |
Revenue Overview- By Reportable Segment & Geographic Region Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease diagnostic products in Cincinnati, Ohio and Quebec City, Canada, 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.
Revenues for the Diagnostics segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and severity of seasonal diseases and outbreaks (including theCOVID-19 pandemic), and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected
from quarter to quarter by buying patterns of major IVD manufacturing customers, severity of disease outbreaks and foreign currency exchange rates. The severity of theCOVID-19 pandemic contributed approximately $71,500 of new revenue for our Life Science segment during fiscal 2020, and approximately $43,000 during the first quarter of fiscal 2021.See the “Revenue Disaggregation” section of Note 2,4,“Significant Accounting Policies”Revenue Recognition” of the accompanying Condensed Consolidated Financial Statements for detailed revenue disaggregation information. Following is a discussion of the revenues generated by these product platforms/types and/or disease states: Diagnostics Segment Products The acquisitionacquisitions of the Revogene molecular diagnostics platform and the BreathID breath test system, the development of the Curian ®
immunoassay platform, and the expansion of the related assay-menu for each of these platforms are important steps in addressing competitive pressures in our gastrointestinal and respiratory illness assay families. We are actively convertingcontinue to convert our existing Alethia ®
install base to the Revogene platform for , Group A (“Group A Strep”) and Group B (“Group B Strep”) assays. As previously noted, despite the COVID-19 pandemic continuing to dramatically slowed the placementslow sales of our molecular assay products during the quarter, resulting in 35 Revogene systems being installed during the secondfirst quarter of fiscal 20202021, the acceleration of Revogene instrument placements in anticipation of the RevogeneCOVID-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 148288 systems as of MarchDecember 31, 2020. In March 2020, we received clearance from the FDA for the Curian immunoassay diagnostics instrument and its first assay, a test for antigen in stool. We expect to begin clinical trials for the CurianCommon Antigen and Toxins A and B test in February 2021. We believe the advantages of the Curian analyzer will help protect our existing rapid test accounts.accounts, and in the case of thetest, provide meaningful revenue growth opportunities.Gastrointestinal, Respiratory Illness and Blood Chemistry Assays As previously noted, the ongoingCOVID-19 pandemic has had a negative impact on revenue levels from sales of our gastrointestinal, respiratory illness and blood chemistry products. During the secondfirst quarter and first six months of fiscal 2020,2021, revenues from oureach of these product categories decreased from fiscal 2020 first quarter levels as follows: (i) gastrointestinal products, which include tests for , and certain foodborne pathogens, among others, totaled $14,014decreased 5% to $15,452; (ii) respiratory illness products, which include tests for Group A Strep, Mycoplasma pneumonia, Influenza, and $30,060, respectively. These revenuePertussis, among others, decreased 38% to $4,806; and (iii) blood chemistry products, which test for elevated levels represent 13% and 14% decreases for this product category from the fiscal 2019 quarterly andyear-to-date
periods, respectively. These decreases resultof lead in large part fromblood, decreased 11% to $4,394.
In order to combat certain of the pricing and volume pressures we continue to face within thisthe gastrointestinal product category. Wecategory, we have executed on a number of measures including: (i) entering into a strategic collaboration with DiaSorin to selltests; (ii) executing multi-year supply agreements with our two largest reference laboratory customers for tests to secure volume, albeit at lower selling prices. We continue to believe there are ongoing benefits to be realized from: (i) the health and economic benefits of a test and treat strategy; (ii) changes in policies that discourage the use of traditional serology methods and promote the utilization of active infection testing methods;prices; and (iii) physician behavior movement away from serology-based testing. Beginning in April, we began seeing lower order demand for most of our gastrointestinal products as a result of theCOVID-19
pandemic. Contributing to the competitive pressures being faced in this product category, the patents for ourproducts, owned by us, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to ourproducts to continue to increase, and such competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. We intend for our Curian HpSA®
assay, cleared by theupon FDA clearance in March 2020, tolaunching Curian HpSA, our first assay on the Curian platform, which we expect will help protect our existing customer base using lateral flow tests. We also maintainexpect the acquisition of the Exalenz BreathID platform to combat competitive pressures, as we believe that we are now the only company withFDA-cleared, non-invasive assays for both stool antigen and urea breath samples, providing physicians a strategic collaboration with DiaSorin to selltests.choice in test format from a single supplier. We are unable to provide assurances that we will be successful with any strategy or that any strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit. Respiratory Illness Assays Life Science Segment ProductsOvercoming lower sales volumes inDuring the first quarter of fiscal 2020, revenues for our respiratory illness products, which include tests for Group A Strep, Mycoplasma pneumonia, Influenza, and Pertussis, among others, increased 44% and 20% in the second quarter and first six months of fiscal 2020, respectively. These increases primarily reflect volume increases in Group A Strep, Influenza and Mycoplasma related products from a very strong respiratory season, including theCOVID-19
pandemic.Revenues from our sale of products to test for elevated levels of lead in blood remained flat during the second quarter of fiscal 2020 at a level of $4,329 and increased 8% for the fiscalyear-to-date
period to $9,479. During the latter part of March, we began seeing lower order demand for our blood-lead test as a result of theCOVID-19
pandemic.
During the second quarter of fiscal 2020,2021, revenues from our Life Science segment increased 33% compared to the fiscal 2019 second quarter,396%, with revenues from molecular reagent sales increasing 114%758% from the comparable fiscal 2020 quarter and revenues from immunological reagent sales decreasing 5%increasing 128%. Life Science segment revenues increased 11% for the first six months of fiscal 2020, reflecting a 41% increase in revenues from molecular reagent sales and an 8% decrease in immunological reagent sales. Our Life Science segment’s revenue growthperformance was slightlynominally impacted by the movement in currency exchange rates since the first quarter of fiscal 2019 periods,2020, with revenues increasing 34% and 12% over the second quarter and first six months of fiscal 2019, respectively,387% on a constant-currency basis.basis over the first quarter of fiscal 2020. The increase in revenues was primarily attributable to the increased demand forsales of key molecular components such as RNA master mixes and dNTPs fromdeoxyribonucleotide triphosphates (“dNTPs”) to diagnostic test manufacturers for use in COVID-19 related tests. LargelyPCR tests, as well as sales of monoclonal antibody pairs used in antigen tests and to a result of thislesser degree, recombinant antigens used inCOVID-19 related demand,antibody tests. COVID-related reagent revenues totaled approximately $43,000 during the first quarter of fiscal 2021.Revenue from core Life Science segment business (other thanCOVID-19 contributions) grew approximately 55% over the first quarter of fiscal 2020 to approximately $19,500. This growth, including an approximate 88% increase in revenue from sales into China, totaled approximately $5,300resulted in large part from obtaining business fromCOVID-19 customers who are now using our products for the second quarter of fiscal 2020,othernon-COVID related purposes, as well as a fourfold increase over the comparable fiscal 2019 quarter. For the first six months of fiscal 2020, revenue from sales into China totaled approximately $7,100, or a threefold increase over the comparable fiscal 2019 period. Additionally, order patterns fornon-COVID-19
related products from many of our top IVD manufacturing customers returned to more normal levels during the current quarter. However, it remains unclear whether the shortfall experienced from these customers during the fiscal 2020 first quarter will be overcome throughout the remainder of the fiscal year.rebound in volumes in core immunological products.Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 10,“Reportable Segments and Major Customers Information”
14 of the accompanying Condensed Consolidated Financial Statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % | | | | | % | | | | % | | | | | | | | % | | | | % | | | | |
| | | | | | | | | | | | | | | Three Months Ended December 31, | | | | | | | | | | | | | | $ | 61,548 | | | $ | 27,651 | | | | 123 | % | | | | 66 | % | | | 58 | % | | | 8 points | |
The increase in gross profit margin increase experienced induring the secondfirst quarter of fiscal 20202021 results primarily from the positive impactsoverall shift in sales mix the Company has experienced, largely as a result of a significantly higher percentagetheCOVID-19 pandemic. During first quarter of the Life Science segment’s revenue relatingfiscal 2021, approximately 50% of consolidated revenues relate to sales of molecular reagent products, and the segment’s manufacturing of larger-than-normal batch sizes for the RNA master mixes, both in response to theCOVID-19
pandemic demand. The decrease during the six month fiscalyear-to-date
period primarily reflects the effect of this increasedCOVID-19
demand being more than offset by the combined effects of: (i) previously-noted pricing changes within ourproduct line; (ii) mix of products sold, particularly decreased contribution from certainwhich are some of our higher margin gastrointestinal assays; and (iii) production capacityramp-up
costs for our Quebec facility where Revogene instruments and test devices are made.products, as compared to sales of such products comprising only approximately 11% of consolidated revenues during the first quarter of fiscal 2020.
Operating Expenses - Segment Detail
| | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Expenses (2019 Quarter) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Expenses (2020 Quarter) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Expenses (2019 Year-to-Date) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Expenses (2020 Year-to-Date) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses – Comparisons to Prior Year Periods
| | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2020 | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | Fiscal 2020 Increases/(Decreases): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | )% | | | | % | | | | )% | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, 2020 | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | Fiscal 2020 Increases/(Decreases): | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | )% | | | | % | | | | % | | | | % |
Operating Expenses – Segment Detail | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2020 First Quarter: | | | | | | | | | | | | | | | | | | | | | | | $ | 4,175 | | | $ | 5,396 | | | $ | 4,929 | | | $ | 1,317 | | | $ | 15,817 | | | | | 588 | | | | 1,332 | | | | 2,338 | | | | 95 | | | | 4,353 | | | | | — | | | | — | | | | 1,717 | | | | 370 | | | | 2,087 | | | | | | | | | | | | | | | | | | | | | | | Total 2020 First Quarter Expenses | | $ | 4,763 | | | $ | 6,728 | | | $ | 8,984 | | | $ | 1,782 | | | $ | 22,257 | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2021 First Quarter: | | | | | | | | | | | | | | | | | | | | | | | $ | 5,070 | | | $ | 5,728 | | | $ | 5,748 | | | $ | 1,047 | | | $ | 17,593 | | | | | 581 | | | | 1,293 | | | | 3,454 | | | | — | | | | 5,328 | | | | | — | | | | — | | | | 2,736 | | | | 1,227 | | | | 3,963 | | | | | | | | | | | | | | | | | | | | | | | Total 2021 First Quarter Expenses | | $ | 5,651 | | | $ | 7,021 | | | $ | 11,938 | | | $ | 2,274 | | | $ | 26,884 | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses – Comparison to Prior Year Periods | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 First Quarter Expenses | | $ | 4,763 | | | $ | 6,728 | | | $ | 8,984 | | | $ | 1,782 | | | $ | 22,257 | | | | | 10 | % | | | 14 | % | | | 19 | % | | | 4 | % | | | 47 | % | Fiscal 2021 Increases (Decreases): | | | | | | | | | | | | | | | | | | | | | | | | 895 | | | | 332 | | | | 819 | | | | (270 | ) | | | 1,776 | | | | | (7 | ) | | | (39 | ) | | | 1,116 | | | | (95 | ) | | | 975 | | | | | — | | | | — | | | | 1,019 | | | | 857 | | | | 1,876 | | | | | | | | | | | | | | | | | | | | | | | 2021 First Quarter Expenses | | $ | 5,651 | | | $ | 7,021 | | | $ | 11,938 | | | $ | 2,274 | | | $ | 26,884 | | | | | | | | | | | | | | | | | | | | | | | | | | 6 | % | | | 8 | % | | | 13 | % | | | 2 | % | | | 29 | % | | | | 19 | % | | | 4 | % | | | 33 | % | | | 28 | % | | | 21 | % |
The changes in operating expenses primarily reflect the combined effects of the following: Increased Research & Development costs, primarily forreflecting the development of the Revogene system GImolecularassay and RImolecular gastrointestinal and respiratory panel assays for the Diagnostics operating segment;segment, and the addition of research and development expenses related to Exalenz, acquired in April 2020;DecreasedIncreased Selling & Marketing costs, primarily reflecting increased bonus and commissions paid to sustain the Diagnostics segment sales force during the downturn caused by theCOVID-19 pandemic, partially offset by the effects of reorganizationreduced travel from restrictions imposed during the pandemic and streamlining initiatives;the effect such restrictions have had on general sales and marketing activities;Increased General & Administrative costs, primarily reflecting additional investment in incentive compensation, along with the addition of expenses related to Exalenz, including purchase accounting amortization from the acquisition of the GenePOC business;amortization; and Increased acquisition and restructuring costs, along withSelected Legal Costs, partially offset by a decrease in restructuring costs and a decrease in the effect of changes in the fair value of the contingent consideration obligation for the GenePOC business all of which are reflected(reflected within “Other” in the above tables.tables).
Operating income increased 20%543% to $11,791$34,664 for the secondfirst quarter of fiscal 2020 and decreased 16% to $17,185 for the first six months of fiscal 2020,2021, as a result of the factors discussed above. The effective rate for income taxes was 26% and 27%22% for the secondfirst quarter and first six months of fiscal 2020, respectively,2021, compared to 23%30% for both corresponding periods inthe first quarter of 2020. This lower fiscal 2019. This higher fiscal 20202021 tax rate results largelyprimarily from thenon-deductibility a significantly higher percentage of the acquisition-related costs related to Exalenz, alongpretax income being generated in in foreign jurisdictions with the tax impact of restricted share units lapsing on a date when the share price was significantlyrates lower than the share price onU.S., particularly the date the restricted share units were granted. In accordance with current applicable guidance, the tax effect of this difference is recorded directly to income tax expense. We expect our effective tax rate for the full fiscal year to approximate 25.5% to 26.5%.U.K.Liquidity and Capital Resources Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets and debt service. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities. We have an investment policy that guides the holdings of our investment portfolio, which presently consists of bank savings accounts and institutional money market mutual funds. Our objectives in managing the investment portfolio
are to: (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective. We intend to continue to fund our working capital requirements from current cash flows from operating activities and cash on hand. If needed, we also have an additional source of liquidity through the amount remaining available on our $160,000 bank revolving credit facility, which totaled approximately $61,200$101,200 as of April 30, 2020, following the additional $50,000 drawn on the credit facility in April to complete the acquisition of Exalenz.December 31, 2020. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services. During the first quarter of fiscal 2021, we generated cash flow from operations totaling $25,121. This level of cash resulted from the achievement of record quarterly revenues, along with well-managed accounts receivable balances, including the requirement of advance payments in certain instances, as illustrated by an approximate 45% increase in consolidated revenues over the fourth quarter of fiscal 2020 and only an approximate 6% increase in accounts receivable balances since September 30, 2020. Our levels of inventories increased approximately $6,000 to $67,243 between September 30, 2020 and December 31, 2020. This increase was attributable to inventory builds in both our Diagnostics and Life Science segments to protect against future supply interruptions and to meetCOVID-19 related demand. For our Diagnostics segment, we also have maintained inventory levels in anticipation of a return topre-pandemic diagnostic testing activity. We are continuing to actively manage our inventory levels. As of MarchDecember 31, 2020, our cash and cash equivalents balance was $49,550$63,193 or $17,547 lower$9,679 higher than at the end of the fiscal 2019 second quarter, and $12,847 lower than at the end of fiscal 2019, resulting in large part from the $27,000 revolving credit facility payment in January 2020. As a result of the cash generated from operations during the first six monthsquarter of fiscal 2020, since the beginning of fiscal 2020,2021, our balance of net debt (defined as bank debt, government grant obligations and total contingent obligations related to the acquisition of the GenePOC business, net of cash and equivalents on-hand) has decreased approximately $15,500$23,500 to approximately $30,200$28,800 at MarchDecember 31, 2020. Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements, capital expenditures and debt service during the next twelve months. The impacts of COVID-19 have adversely affected the capital markets and the ability of many companies to access capital and liquidity on favorable terms or at all. The Company expects to be in compliance with its financial covenants for at least the next twelve months. However, the Company is currently unable to predict the impact that COVID-19 will have on its ability to access capital in the future. If the Company is unable to access additional capital and liquidity on acceptable terms, it could adversely impact the Company’s results of operations and ability to meet its future obligations beyond the next twelve months.
In April 2019, we suspended the payment of our quarterly cash dividend. The dividend was suspended as part of our regular evaluation of capital allocation, with the action taken in order to deploy cash into new product development activities for the Revogene molecular diagnostic platform, as well as the Curian and Pediastat®
platforms, among other investments, and to preserve capital resources and liquidity for general corporate purposes.As described in Note 9,11,“Bank Credit Arrangements” of the accompanying Condensed Consolidated Financial Statements, and above, the Company maintains a $160,000 revolving credit facility, which is secured by substantially all of our U.S. assets and includes certain restrictive financial covenants. The Company also maintains a shelf registration statement on file with the SEC.
Our capital expenditures are estimated to range between approximately $18,000 and $23,000. Our Diagnostics segment capital expenditures could be as high as $20,000, depending upon the level and timing of the previously noted RevogeneCOVID-19 assay production capacity expansion andscale-up efforts, and our Life Science segment capital expenditures could be as high as $3,000, to $4,000 for fiscal 2020, with the actual amount dependent upon actual operating results and the phasing of certain projects.reflecting manufacturing capacity expansion at various locations. Such expenditures may be funded with cash and cash equivalents on hand, operating cash flows and/or availability under the $160,000 revolving credit facility discussed above. In addition, a portion of the Diagnostics segment expansion may be funded by the previously noted $5,500 RADx grant entered into on February 1, 2021 (see Note 17 of the accompanying Condensed Consolidated Financial Statements).We do not utilize any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Other than the impact of the recent outbreak ofCOVID-19
on our business and results of operations as discussed elsewhere in this report, thereThere have been no material changes in the Company’s exposure to market risk since September 30, 2019.2020.ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of MarchDecember 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of MarchDecember 31, 2020. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended MarchDecember 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 11,16,of the accompanying Condensed Consolidated Financial Statements. There have been no material changes from risk factors as previously disclosed in the Company’s fiscal 20192020 Annual Report on Form 10-K in response to Item 1A to Part I of Form 10-K,
except that we are adding the following risk factor discussion relating to coronavirusCOVID-19.10-K.
Our financial condition, results of operations and cash flows could be adversely affected by the ongoing coronavirus(COVID-19)
outbreak.Any outbreak of contagious diseases, such asCOVID-19,
or other adverse public health developments, could have material and adverse effects on our business operations. Such adverse effects could include diversion or prioritization of health care resources away from the conduct of diagnostic testing, disruptions of or restrictions on the ability of laboratories to process our tests, and delays with respect to or difficulties in patients accessing our tests, including those resulting from an inability to travel as a result of quarantines or other restrictions resulting fromCOVID-19.
AsCOVID-19
continues to affect individuals and businesses around the globe, we may experience disruptions that could severely impact our business, including:decreased volume of testing and related sales of certain of our Diagnostics products as a result of disruptions to health care providers and limitations on the ability of providers to administer tests;
disruptions or restrictions on the ability of our, our collaborators’, or our suppliers’ personnel to travel, and temporary closures of our facilities or the facilities of our collaborators or suppliers;
limitations on employee resources that would otherwise be focused on the development of our products, processing our diagnostic tests, and the conduct of our clinical trials, including because
| | of sickness of employees or their families or requirements imposed on employees to avoid contact with large groups of people; and |
delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees.
In addition, the continued spread ofCOVID-19
globally could adversely affect our manufacturing and supply chains. Parts of our direct and indirect supply chains are located overseas, including in China, and may accordingly be subject to disruption. Additionally, our results of operations could be adversely affected to the extent thatCOVID-19
or any other epidemic harms our business or the economy in general either domestically or in any other region in which we do business. The extent to whichCOVID-19
affects our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity ofCOVID-19,
and the actions to containCOVID-19
or treat its impact, among others, which could have an adverse effect on our business, results of operations and financial condition.To date, we are seeing that the outbreak has slowed our assay instrument placements and sales of related test kits as diagnostic testing sites have turned their attention to critical care testing. We are unable to predict when expected sales volume levels for our instruments and related test kits will return. Also, as a result of the pandemic, certain clinical trials related to our products which were underway or scheduled to begin have been temporarily placed on hold. Such delays will 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 pandemic could 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.
The following exhibits are being filed or furnished as a part of this Quarterly Report on Form 10-Q:
* | Certain portions of this exhibit have been omitted pursuant to Item 601(b)(2) of RegulationS-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request. |
† | Management Compensatory Agreement |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | | | | | | | | | | MERIDIAN BIOSCIENCE, INC. | | | | | | | | | By: | | | | | | | | | Bryan T. Baldasare | | | | | | | | | | | | | | | | | | | | | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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