SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

Commission file number    0-14902

MERIDIAN BIOSCIENCE, INC.

Incorporated under the laws of Ohio

31-0888197

(I.R.S. Employer Identification No.)

3471 River Hills Drive

Cincinnati, Ohio 45244

(513) 271-3700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	VIVO	NASDAQ Global Select Market

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding April 30, 2021
Common Stock, no par value	43,330,038

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q

		Page(s)
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations Three and Six Months Ended March 31, 2021 and 2020		1
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended March 31, 2021 and 2020		2
	Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2021 and 2020		3
	Condensed Consolidated Balance Sheets March 31, 2021 and September 30, 2020		4-5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity Three and Six Months Ended March 31, 2021 and 2020		6
	Notes to Condensed Consolidated Financial Statements		7-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21-30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 6.	Exhibits		31
Signature			32

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “continues”, “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “signals”, “should”, “can” and similar expressions or the negative versions thereof and which also may be identified by their context. All statements that address operating performance or events or developments that Meridian Bioscience, Inc. (“Meridian” or “the Company”) expects or anticipates will occur in the future, including, but not limited to, statements relating to per share diluted net earnings, sales, product demand, net revenues, operating margin, other guidance and the impact of COVID-19 on its business and prospects, are forward-looking statements. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Specifically, Meridian’s forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance. Meridian assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following:

Meridian’s operating results, financial condition and continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition, its ability to effectively sell such products and its ability to successfully expand and effectively manage increased sales and marketing operations. While Meridian has introduced a number of internally developed products and acquired products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis or in protecting its intellectual property, and unexpected or costly manufacturing costs associated with its introduction of new products or acquired products could cause actual results to differ from expectations. Meridian relies on proprietary, patented and licensed technologies. As such, the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would impact its results. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which the Company’s customers operate, as well as adverse trends in buying patterns from customers, can change expected results. Costs and difficulties in complying with laws and regulations, including those administered by the United States Food and Drug Administration, can result

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(dollar and share amounts in thousands, except per share data)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2021			2020			2021			2020
NET REVENUES	$	85,264		$	57,296		$	178,181		$	104,717
COST OF SALES		27,492			22,750			58,861			42,520
GROSS PROFIT		57,772			34,546			119,320			62,197
OPERATING EXPENSES
Research and development		6,065			5,315			11,716			10,078
Selling and marketing		6,540			6,529			13,561			13,257
General and administrative		12,925			10,628			24,863			19,612
Acquisition-related costs		—			1,787			—			1,787
Change in fair value of acquisition consideration		(2,989	)		(2,491	)		(1,942	)		(1,304	)
Restructuring costs		—			252			—			527
Selected legal costs		1,030			735			2,257			1,055
Total operating expenses		23,571			22,755			50,455			45,012
OPERATING INCOME		34,201			11,791			68,865			17,185
OTHER INCOME (EXPENSE)
Interest income		6			23			15			134
Interest expense		(472	)		(532	)		(1,006	)		(1,299	)
RADx grant income		200			—			1,000			—
Other, net		(883	)		1,365			(1,574	)		653
Total other income (expense)		(1,149	)		856			(1,565	)		(512	)
EARNINGS BEFORE INCOME TAXES		33,052			12,647			67,300			16,673
INCOME TAX PROVISION		6,750			3,288			14,219			4,487
NET EARNINGS	$	26,302		$	9,359		$	53,081		$	12,186
BASIC EARNINGS PER COMMON SHARE	$	0.61		$	0.22		$	1.23		$	0.28
DILUTED EARNINGS PER COMMON SHARE	$	0.60		$	0.22		$	1.21		$	0.28
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—BASIC		43,244			42,830			43,171			42,810
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS		878			138			789			143
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—DILUTED		44,122			42,968			43,960			42,953
ANTI-DILUTIVE SECURITIES:
Common share options and restricted share units		166			1,635			169			1,520

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 1

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(dollar amounts in thousands)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2021			2020			2021			2020
NET EARNINGS	$	26,302		$	9,359		$	53,081		$	12,186
Other comprehensive income (loss):
Foreign currency translation adjustment		79			(2,786	)		3,380			(18	)
Unrealized gain (loss) on cash flow hedge		439			(313	)		460			(313	)
Reclassification of amortization of gain on cash flow hedge		(77	)		(77	)		(154	)		(154	)
Income taxes related to items of other comprehensive income (loss)		(80	)		96			(66	)		115
Other comprehensive income (loss), net of tax		361			(3,080	)		3,620			(370	)
COMPREHENSIVE INCOME	$	26,663		$	6,279		$	56,701		$	11,816

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 2

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollar amounts in thousands)

Six Months Ended March 31,	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	53,081		$	12,186
Non-cash items included in net earnings:
Depreciation of property, plant and equipment		3,072			2,439
Amortization of intangible assets		4,363			3,449
Stock compensation expense		2,291			1,759
Deferred income taxes		(777	)		656
Change in fair value of acquisition consideration		(1,942	)		(1,304	)
Change in the following:
Accounts receivable		(5,267	)		(4,950	)
Inventories		(12,185	)		(2,511	)
Prepaid expenses and other current assets		1,440			1,278
Accounts payable and accrued expenses		77			1,621
Income taxes payable		(2,698	)		400
Other, net		36			692
Net cash provided by operating activities		41,491			15,715
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(11,955	)		(1,543	)
Payment of acquisition consideration holdback		(5,000	)		—
Net cash used in investing activities		(16,955	)		(1,543	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on revolving credit facility		(18,824	)		(27,000	)
Payment of debt issuance costs		—			(116	)
Proceeds from exercise of stock options		2,852			—
Net cash used in financing activities		(15,972	)		(27,116	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		1,296			97
Net Increase (Decrease) in Cash and Cash Equivalents		9,860			(12,847	)
Cash and Cash Equivalents at Beginning of Period		53,514			62,397
Cash and Cash Equivalents at End of Period	$	63,374		$	49,550

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 3

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollar amounts in thousands)

ASSETS

	March 31,
	2021		September 30,
	(Unaudited)		2020
CURRENT ASSETS
Cash and cash equivalents	$	63,374	$	53,514
Accounts receivable, less allowances of $505 and $513, respectively		44,895		38,512
Inventories, net		72,534		61,264
Prepaid expenses and other current assets		7,491		8,900
Total current assets		188,294		162,190
PROPERTY, PLANT AND EQUIPMENT, at Cost
Land		991		991
Buildings and improvements		32,326		32,188
Machinery, equipment and furniture		74,173		69,854
Construction in progress		10,779		1,200
Subtotal		118,269		104,233
Less: accumulated depreciation and amortization		76,303		73,113
Property, plant and equipment, net		41,966		31,120
OTHER ASSETS
Goodwill		115,296		114,186
Other intangible assets, net		78,834		83,197
Right-of-use assets, net		6,297		6,336
Deferred income taxes		8,017		7,647
Other assets		465		585
Total other assets		208,909		211,951
TOTAL ASSETS	$	439,169	$	405,261

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
	March 31,		September 30,
	2021		2020
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	16,714	$	11,969
Accrued employee compensation costs		12,634		16,661
Current portion of acquisition consideration		11,296		12,619
Current operating lease obligations		1,892		1,789
Current government grant obligations		608		600
Other accrued expenses		5,664		5,362
Income taxes payable		1,502		3,524
Total current liabilities		50,310		52,524
NON-CURRENT LIABILITIES
Acquisition consideration		7,671		13,290
Post-employment benefits		2,429		2,493
Fair value of interest rate swaps		254		713
Long-term operating lease obligations		4,555		4,678
Long-term debt		50,000		68,824
Government grant obligations		10,537		10,524
Long-term income taxes payable		374		549
Deferred income taxes		3,389		3,804
Other non-current liabilities		177		233
Total non-current liabilities		79,386		105,108
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; 1,000,000 shares authorized; none issued		—		—
Common shares, no par value; 71,000,000 shares authorized, 43,329,294 and 43,068,842 shares issued, respectively		—		—
Additional paid-in capital		145,338		140,195
Retained earnings		162,375		109,294
Accumulated other comprehensive income (loss)		1,760		(1,860	)
Total shareholders’ equity		309,473		247,629
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	439,169	$	405,261

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollar and share amounts in thousands)

	Common Shares Issued		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
THREE MONTHS ENDED MARCH 31, 2021
Balance at December 31, 2020		43,124	$	141,395		$	136,073	$	1,399		$	278,867
Conversion of restricted share units and exercise of stock options		205		2,893			—		—			2,893
Stock compensation expense		—		1,050			—		—			1,050
Net earnings		—		—			26,302		—			26,302
Foreign currency translation adjustment		—		—			—		79			79
Hedging activity, net of tax		—		—			—		282			282
Balance at March 31, 2021		43,329	$	145,338		$	162,375	$	1,760		$	309,473
THREE MONTHS ENDED MARCH 31, 2020
Balance at December 31, 2019		42,828	$	133,622		$	65,935	$	(2,265	)	$	197,292
Conversion of restricted share units and exercise of stock options		3		(9	)		—		—			(9	)
Stock compensation expense		—		971			—		—			971
Net earnings		—		—			9,359		—			9,359
Foreign currency translation adjustment		—		—			—		(2,786	)		(2,786	)
Hedging activity, net of tax		—		—			—		(294	)		(294	)
Balance at March 31, 2020		42,831	$	134,584		$	75,294	$	(5,345	)	$	204,533

	Common Shares Issued		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
SIX MONTHS ENDED MARCH 31, 2021
Balance at September 30, 2020		43,069	$	140,195		$	109,294	$	(1,860	)	$	247,629
Conversion of restricted share units and exercise of stock options		260		2,852			—		—			2,852
Stock compensation expense		—		2,291			—		—			2,291
Net earnings		—		—			53,081		—			53,081
Foreign currency translation adjustment		—		—			—		3,380			3,380
Hedging activity, net of tax		—		—			—		240			240
Balance at March 31, 2021		43,329	$	145,338		$	162,375	$	1,760		$	309,473
SIX MONTHS ENDED MARCH 31, 2020
Balance at September 30, 2019		42,712	$	132,834		$	63,108	$	(4,975	)	$	190,967
Conversion of restricted share units and exercise of stock options		119		(9	)		—		—			(9	)
Stock compensation expense		—		1,759			—		—			1,759
Net earnings		—		—			12,186		—			12,186
Foreign currency translation adjustment		—		—			—		(18	)		(18	)
Hedging activity, net of tax		—		—			—		(352	)		(352	)
Balance at March 31, 2020		42,831	$	134,584		$	75,294	$	(5,345	)	$	204,533

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Dollars in Thousands, Except Per Share Amounts

(Unaudited)

1. Nature of Business

Meridian Bioscience, Inc. (“Meridian” or “the Company”) was formed in 1976 and functions as a fully-integrated life science company with principal businesses in: (i) the development, manufacture, sale and distribution of diagnostic testing systems and kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, immunoassay blocking reagents, various Polymerase Chain Reaction (“PCR”) master mixes, and bioresearch reagents used by other diagnostic manufacturers and researchers.

Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of: (i) manufacturing operations for infectious disease products in Cincinnati, Ohio; Quebec City, Canada; and Modi’in, Israel; (ii) manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston); and (iii) the sale and distribution of diagnostics products domestically and abroad. This segment’s products are used by hospitals, reference labs and physician offices to detect infectious diseases and elevated lead levels in blood.

The Life Science segment consists of: (i) manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany; and (ii) the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to pursue revenue opportunities in Asia. This segment’s products are used by manufacturers and researchers in a variety of applications (e.g., in-vitro medical device manufacturing, microRNA detection, next-generation sequencing, plant genotyping, and mutation detection, among others).

2. Basis of Presentation

The Condensed Consolidated Financial Statements are unaudited and are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information, and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the Condensed Consolidated Financial Statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2021 and the results of its operations, cash flows and shareholders’ equity for the three- and six-month periods ended March 31, 2021 and 2020. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s fiscal 2020 Annual Report on Form 10-K filed with the SEC on November 23, 2020.

It should be noted that the terms revenue and/or revenues are utilized throughout these notes to the Condensed Consolidated Financial Statements to indicate net revenue and/or net revenues.

The results of operations for interim periods are not necessarily indicative of the results to be expected for the year. In December 2019, the SARS-CoV-2 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated COVID-19 (the disease caused by SARS-CoV-2) a global pandemic. In April 2021, the U.S. Department of Health and Human Services extended the public health emergency declaration for COVID-19. During the past year, governments around the world have implemented lockdown and shelter-in-place orders, requiring many non-essential businesses to shut down operations, many of which remain in effect as of the date of this filing. Our business, however, was deemed “essential” and we have continued to operate, manufacture and distribute products to customers globally.

Page 7

While revenues within our Life Science segment have been positively impacted by the COVID-19 pandemic, to date, the negative impacts of COVID-19 on the Company have been limited to decreased demand for most of our Diagnostics segment’s products and the pausing and/or slowing of clinical trials for new product development programs, as diagnostics testing over the last year has focused primarily on COVID-19 and critical care ailments. For the second half of our fiscal 2021, we expect demand for our Life Science segment’s reagent products used in COVID-19 tests will be lower than that experienced during the six months ended March 31, 2021, as health care systems transition to more asymptomatic testing versus the predominant symptomatic testing we have seen over the last year. However, this varies by country based on their individual COVID-19 case statistics. Due to the many uncertainties surrounding the COVID-19 pandemic, we can provide no assurances with respect to our views of the longevity, severity or impacts to our financial condition of the COVID-19 pandemic. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein for additional discussion of the effects of the COVID-19 pandemic on the Company and its results of operations.

The preparation of these Condensed Consolidated Financial Statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

3. Significant Accounting Policies

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form 10-K filed with the SEC on November 23, 2020 and should be referred to for a description of the Company’s significant accounting policies.

(a) Recent Accounting Pronouncements –

Pronouncements Adopted

On October 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, which changed the impairment model used to measure credit losses for most financial assets. Use of the new forward-looking expected credit loss model for our accounts receivable valuation, rather than the previously utilized incurred credit loss model, resulted in an immaterial impact on the Condensed Consolidated Financial Statements.

Pronouncements Issued but Not Yet Adopted as of March 31, 2021

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide temporary optional guidance relating to reference rate reform, particularly as it relates to easing the potential burden resulting from the expected discontinuation of the LIBOR rate. The guidance provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met, which may be applied through December 31, 2022. The Company continues to evaluate the impacts of this guidance but does not expect its application to have a material impact on the Condensed Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. ASU 2019-12 will be effective for the Company’s fiscal year beginning on October 1, 2021. The Company is currently evaluating the impact of ASU 2019-12 but does not expect its application to have a material impact on the Condensed Consolidated Financial Statements.

(b) Reclassifications –

Certain reclassifications have been made to the prior year Condensed Consolidated Financial Statements to conform to the current year presentation. Such reclassifications had no impact on net earnings or shareholders’ equity.

Page 8

4. Revenue Recognition

Overview

Revenue from contracts with customers is recognized in an amount that reflects the consideration we expect to receive in exchange for products when obligations under such contracts are satisfied. Revenue is generally recognized at a point-in-time when products are shipped, and control has passed to the customer. Such contracts can include various combinations of products that are generally accounted for as distinct performance obligations. Revenue is reduced in the period of sale for fees paid to distributors, which are inseparable from the distributor’s purchase of our product and for which we receive no goods or services in return. Revenue for the Diagnostics segment is reduced at the date of sale for product price adjustments payable to certain distributors under local contracts.

Revenue Disaggregation

The following tables present our revenues disaggregated by major geographic region, major product platform and disease state (Diagnostics segment only):

Revenue by Reportable Segment & Geographic Region

	Three Months Ended March 31,							Six Months Ended March 31,
	2021		2020		Inc (Dec)			2021		2020		Inc (Dec)
Diagnostics-
Americas	$	25,290	$	27,670		(9	)%	$	48,824	$	55,405		(12	)%
EMEA		6,071		6,777		(10	)%		12,101		13,277		(9	)%
ROW		588		495		19	%		1,345		1,051		28	%
Total Diagnostics		31,949		34,942		(9	)%		62,270		69,733		(11	)%
Life Science-
Americas		13,550		4,612		194	%		32,296		8,623		275	%
EMEA		21,773		9,946		119	%		54,066		14,907		263	%
ROW		17,992		7,796		131	%		29,549		11,454		158	%
Total Life Science		53,315		22,354		139	%		115,911		34,984		231	%
Consolidated	$	85,264	$	57,296		49	%	$	178,181	$	104,717		70	%

Revenue by Product Platform/Type

	Three Months Ended March 31,							Six Months Ended March 31,
	2021		2020		Inc (Dec)			2021		2020		Inc (Dec)
Diagnostics-
Molecular assays	$	4,395	$	7,238		(39	)%	$	8,985	$	14,077		(36	)%
Non-molecular assays		27,554		27,704		(1	)%		53,285		55,656		(4	)%
Total Diagnostics	$	31,949	$	34,942		(9	)%	$	62,270	$	69,733		(11	)%
Life Science-
Molecular reagents	$	37,752	$	11,534		227	%	$	83,776	$	16,902		396	%
Immunological reagents		15,563		10,820		44	%		32,135		18,082		78	%
Total Life Science	$	53,315	$	22,354		139	%	$	115,911	$	34,984		231	%

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Revenue by Disease State (Diagnostics segment only)

	Three Months Ended March 31,							Six Months Ended March 31,
	2021		2020		Inc (Dec)			2021		2020		Inc (Dec)
Diagnostics-
Gastrointestinal assays	$	15,666	$	14,014		12	%	$	31,118	$	30,060		4	%
Respiratory illness assays		3,686		10,863		(66	)%		8,492		18,612		(54	)%
Blood chemistry assays		4,358		4,194		4	%		8,753		9,142		(4	)%
Other		8,239		5,871		40	%		13,907		11,919		17	%
Total Diagnostics	$	31,949	$	34,942		(9	)%	$	62,270	$	69,733		(11	)%

Royalty Income

Royalty income received from DiaSorin, which primarily related to sales of H. pylori products, totaled approximately $2,845 and $1,280 in the three months ended March 31, 2021 and 2020, respectively, and $3,705 and $2,205 in the six months ended March 31, 2021 and 2020, respectively. Such revenue is included as part of Non-molecular assays and Other within the Revenue by Product Platform/Type and Revenue by Disease State tables, respectively, above.

Reagent Rental Arrangements

Revenue allocated to the lease elements of Reagent Rental arrangements totaled approximately $900 and $1,125 in the three months ended March 31, 2021 and 2020, respectively, and $1,780 and 2,250 in the six months ended March 31, 2021 and 2020, respectively. Such revenue is included as part of net revenues in our Condensed Consolidated Statements of Operations.

5. Fair Value Measurements

Certain assets and liabilities are recorded at fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each asset and liability is based on the assessment of the transparency and reliability of the inputs used in the valuation of such items at the measurement date based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities

Level 2

Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly

Level 3

Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable

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 $50,000 of the outstanding revolving credit facility discussed in Note 11 to a fixed rate. The fair values of the interest rate swap agreements were determined by reference to a third-party valuation and is considered a Level 2 input within the fair value hierarchy of valuation techniques.

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As described in Note 6, we acquired Exalenz Bioscience Ltd. (“Exalenz”) in fiscal 2020. The fair values of the acquired accounts receivable, inventories, property, plant and equipment, and other current assets and the fair values of the assumed accounts payable and accrued expenses were valued using Level 2 inputs, which included data points that were observable, such as appraisals or established values of comparable assets (market approach). Intangible assets were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flows (income approach). Significant increases (decreases) in any of those unobservable inputs, as of the date of the acquisition, in isolation would result in a significantly lower (higher) fair value measurement. Management engaged a third-party valuation firm to assist in the determination of the preliminary purchase accounting fair values, and specifically those considered Level 3 measurements. Management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.

In connection with the acquisition of the business of GenePOC, Inc. (“GenePOC”) in fiscal 2019 and subsequent amendments to modify certain terms of the agreement related to contingent consideration achievement levels and milestone dates, the Company is required to make contingent consideration payments of up to $64,000 (originally $70,000 at the acquisition date), comprised of up to $14,000 for achievement of product development milestones (originally $20,000 at the acquisition date) and up to $50,000 for achievement of certain financial targets. The fair value for the contingent consideration recognized upon the acquisition as part of the purchase price allocation was $27,202. The fair value of the product development milestone payments is estimated by discounting the probability-weighted contingent payments to present value. Assumptions used in the calculations include probability of success, duration of the earn-out and discount rate, and such calculations were updated for the effect of the previously noted amendments to the contingent consideration achievement levels and milestone dates. The fair value of the financial performance target payments was determined using a Monte Carlo simulation-based model. Assumptions used in these calculations include expected revenues, probability of certain developments, expected expenses and discount rate. The ultimate settlement of contingent consideration could deviate significantly from the current Level 3 measurement estimates, based on the actual results of these financial measures.

The following table provides information by level for financial assets and liabilities that are measured at fair value on a recurring basis:

				Fair Value Measurements Using Inputs Considered as
	Carrying Value			Level 1		Level 2			Level 3
Interest rate swaps -
As of March 31, 2021	$	(254	)	$	—	$	(254	)	$	—
As of September 30, 2020	$	(713	)	$	—	$	(713	)	$	—
Contingent consideration -
As of March 31, 2021	$	(18,967	)	$	—	$	—		$	(18,967	)
As of September 30, 2020	$	(20,909	)	$	—	$	—		$	(20,909	)

6. Business Combinations

On April 30, 2020 (“the acquisition date”), we acquired 100% of the outstanding common shares and voting interest of Exalenz, a Modi’in, Israel based provider of the BreathID® Breath Test Systems (“BreathID”), a breath test platform for the detection of Helicobacter pylori. Cash consideration totaled 168.6 million New Israeli Shekels (“NIS”), which equated to $48,237 at the date of closing. Including debt assumed and repaid shortly after closing, the total consideration transferred was $56,305. To finance the acquisition, the Company utilized cash and cash equivalents on hand and proceeds drawn from our revolving credit facility (see Note 11). In anticipation of the transaction, we executed forward currency contracts to acquire the NIS required for the acquisition. As a result, the net cash outlay for the transaction prior to the repayment of debt was $47,392.

As a result of total consideration exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $24,827 was recorded in connection with this acquisition, none of which will be deductible for U.S. tax purposes. The goodwill results largely from our ability to market and sell the BreathID platform through our established customer base and distribution channels.

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The Company’s consolidated results for the three and six months ended March 31, 2021 include the following from Exalenz:

	Three Months Ended March 31, 2021			Six Months Ended March 31, 2021
Net revenues	$	2,784		$	5,882
Net loss	$	(947	)	$	(1,739	)

These results for the three and six months ended March 31, 2021, which are reported as part of the Diagnostics segment, include $720 and $1,520, respectively, of  amortization expense related to specific identifiable assets recorded in the preliminary purchase price allocation, including a non-compete agreement, trade name, technology and customer relationships.

The recognized preliminary amounts of identifiable assets acquired and liabilities assumed in the acquisition of Exalenz are as follows:

	PRELIMINARY
	April 30, 2020 (as initially reported)		Measurement Period Adjustments			April 30, 2020 (as adjusted)
Fair value of assets acquired -
Cash	$	5,006	$	—		$	5,006
Accounts receivable		637		—			637
Inventories		4,329		(296	)		4,033
Other current assets		851		1,825			2,676
Property, plant and equipment		544		(16	)		528
Goodwill		29,288		(4,461	)		24,827
Other intangible assets (estimated useful life):
Non-compete agreement (5 years)		120		(10	)		110
Trade name (10 years)		3,540		320			3,860
Technology (15 years)		5,590		530			6,120
Customer relationships (10 years)		19,370		1,270			20,640
Right-of-use assets		1,358		(47	)		1,311
Deferred tax assets, net		5,566		1,178			6,744
		76,199		293			76,492
Fair value of liabilities assumed -
Accounts payable and accrued expenses (including current portion of lease and government grant obligations)		7,757		251			8,008
Long-term lease obligations		1,054		42			1,096
Long-term government grant obligations		10,792		—			10,792
Other non-current liabilities		291		—			291
		19,894		293			20,187
Total consideration paid (including $8,068 to pay off long-term debt)	$	56,305	$	—		$	56,305

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As indicated, the allocation of the purchase price is preliminary, pending final completion of valuations. As a result of further refining its estimates and assumptions since the date of the acquisition, the Company recorded measurement period adjustments to the initial opening balance sheet as shown in the table above. Adjustments were primarily made to other current assets, goodwill, other intangible assets, and deferred tax assets. There were no measurement period adjustments materially impacting net earnings that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. Currently, we are primarily assessing the results of the valuation of intangible assets and the tax implications thereon. Upon completion of these analyses, any required adjustments are expected to result in an amount being reclassified among goodwill, other intangible assets and deferred taxes, as applicable.

Pro Forma Information

The following table provides the unaudited condensed consolidated pro forma results for the periods presented as if Exalenz had been acquired as of the beginning of fiscal 2020 (October 1, 2019). Pro forma results do not include the effect of any synergies achieved or anticipated to be achieved from the acquisition, and accordingly, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Net revenues	$	85,264	$	60,701	$	178,181	$	111,895
Net earnings	$	26,302	$	8,064	$	53,081	$	9,246

These unaudited pro forma amounts have been calculated by including the results of Exalenz and adjusting the results to give effect to the following, as if the acquisition had been consummated on October 1, 2019, together with the consequential tax effects thereon:

	Three Months Ended March 31,					Six Months Ended March 31,
	2021		2020			2021		2020
Adjustments to net revenues
Exalenz pre-acquisition net revenues	$	—	$	3,405		$	—	$	7,178
Adjustments to net earnings
Exalenz pre-acquisition net loss	$	—	$	(752	)	$	—	$	(1,504	)
Pro forma adjustments:
Remove net impact of non-continuing personnel, locations or activities		—		490			—		591
Incremental depreciation and amortization		—		(911	)		—		(1,824	)
Incremental interest costs, net		—		(381	)		—		(772	)
Tax effects of pro forma adjustments and recognizing benefit on resulting Exalenz losses		—		259			—		569
Total adjustments to net earnings	$	—	$	(1,295	)	$	—	$	(2,940	)

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7. Cash and Cash Equivalents

Cash and cash equivalents include the following:

	March 31, 2021		September 30, 2020
Institutional money market funds	$	1,017	$	1,017
Cash on hand, unrestricted		62,357		52,497
Total	$	63,374	$	53,514

8. Inventories, Net

Inventories, net are comprised of the following:

	March 31, 2021		September 30, 2020
Raw materials	$	18,706	$	11,966
Work-in-process		22,987		19,477
Finished goods - instruments		1,933		1,594
Finished goods - kits and reagents		28,908		28,227
Total	$	72,534	$	61,264

9. Leasing Arrangements

The Company is party to a number of operating leases, the majority of which are related to office, warehouse and manufacturing space. The related operating lease assets and obligations are reflected within right-of-use assets, net, current operating lease obligations and long-term operating lease obligations on the Condensed Consolidated Balance Sheets. Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.

The lease costs for these operating leases reflected in  our Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2021 and 2020, as well as the right-of-use assets, net obtained during these periods in exchange for operating lease liabilities, are as follows: 

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Lease costs within cost of sales	$	198	$	130	$	356	$	259
Lease costs within operating expenses		387		292		761		559
Right-of-use assets, net obtained in exchange for operating lease liabilities		612		222		692		222

In addition, the Company periodically enters into other short-term operating leases, generally with an initial term of twelve months or less. These leases are not recorded on the Condensed Consolidated Balance Sheets and the related lease expense is immaterial for the three and six months ended March 31, 2021 and 2020.

The Company often has options to renew lease terms, with the exercise of lease renewal options generally at the Company’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion. We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The discount rate implicit within our leases is generally not

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determinable and, therefore, the Company uses its incremental borrowing rate as the basis for its discount rate. The weighted average remaining lease term for our operating leases and the weighted average discount rate used to measure our operating leases as of March 31, 2021 and September 30, 2020 were as follows:

	March 31, 2021			September 30, 2020
Weighted average remaining lease term		3.8 years			4.2 years
Average discount rate		3.4	%		3.7	%

Maturities of lease liabilities by fiscal year for the Company’s operating leases were as follows as of March 31, 2021:

2021 (represents remainder of fiscal year)	$	1,108
2022		2,016
2023		1,482
2024		1,108
2025		806
Thereafter		331
Total lease payments		6,851