Table of Contents
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2021-12-31 iso4217:USD xbrli:shares xbrli:pure utr:Month utr:Year iso4217:USD xbrli:shares
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
December 31
,
2022
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
 
LOGO
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.
 
Class
  
Outstanding January 3
0
,
2023
Common Stock, no par value   44,041,635

Table of Contents

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 Months Ended December 31, 2022 and 2021

     
 1
  
  

Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended December 31, 2022 and 2021

      2  
  

Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 2022 and 2021

      3  
  

Condensed Consolidated Balance Sheets
December 31, 2022 and September 30, 2022

      4-5  
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended December 31, 2022 and 2021

      6  
  

Notes to Condensed Consolidated Financial Statements

      7-18  

Item 2.

    Management’s Discussion and Analysis of Financial Condition and Results of Operations      19-26  

Item 3.

    Quantitative and Qualitative Disclosures About Market Risk      26  

Item 4.

    Controls and Procedures      26  

PART II.

    OTHER INFORMATION   

Item 1.

    Legal Proceedings      27  

Item 1A.

    Risk Factors      27  

Item 6.

    Exhibits      27  

Signatures

         28  

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, and in

Table of Contents

complying with the ongoing investigation of the Department of Justice described in Meridian’s reports filed with the SEC, 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. 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 that 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 any modification or repeal of any of the provisions of current U.S. health care legislation, and any similar initiatives in other countries on Meridian’s 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 and adversely affect its operations and result in material misstatements in its consolidated financial statements. Meridian also is subject to risks and uncertainties related to the acquisition by SD Biosensor, Inc., as well as 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, including, without limitation, related supply chain interruptions. In addition to the factors described in this paragraph, as well as those factors identified from time to time in the Company’s filings with the Securities and Exchange Commission, Part I, Item 1A Risk Factors of the Company’s most recent Annual Report on Form 10-K contains a list and description of uncertainties, risks and other matters that may affect the Company. Readers should carefully review these forward-looking statements and risk factors, and not place undue reliance on the Company’s forward-looking statements.

Table of Contents
http://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrenthttp://fasb.org/us-gaap/2022#OtherAssetsNoncurrent
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(dollar and share amounts in thousands, except per share data)
 
    
Three Months Ended
December 31,
  
    
2022
     
2021
  
NET REVENUES
    $ 56,902      $ 88,341  
COST OF SALES
      25,397        39,182  
    
 
 
     
 
 
  
GROSS PROFIT
      31,505        49,159  
    
 
 
     
 
 
  
OPERATING EXPENSES
                  
Research and development
      6,177        6,194  
Selling and marketing
      8,294        7,741  
General and administrative
      11,073        14,660  
Acquisition and transaction related costs
      1,188        —    
Litigation and select legal costs
      32,888        281  
    
 
 
     
 
 
  
Total operating expenses
      59,620        28,876  
    
 
 
     
 
 
  
OPERATING INCOME (LOSS)
      (28,115 )       20,283  
OTHER INCOME (EXPENSE)
                  
Interest income
      3        1  
Interest expense
      (148 )       (372 ) 
Other, net
      (837 )       (161 ) 
    
 
 
     
 
 
  
Total other expense, net
      (982 )       (532 ) 
    
 
 
     
 
 
  
EARNINGS
(LOSS) 
BEFORE INCOME TAXES
      (29,097 )       19,751  
     
INCOME TAX PROVISION
      724        4,411  
    
 
 
     
 
 
  
NET EARNINGS (LOSS)
    $ (29,821 )     $ 15,340  
    
 
 
     
 
 
  
BASIC EARNINGS (LOSS) PER COMMON SHARE
    $ (0.68 )     $ 0.35  
DILUTED EARNINGS (LOSS) PER COMMON SHARE
    $ (0.68 )     $ 0.35  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
—
BASIC
      43,896        43,439  
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS
      —        589  
    
 
 
     
 
 
  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
—
DILUTED
      43,896        44,028  
    
 
 
     
 
 
  
ANTI-DILUTIVE SECURITIES:
                  
Common share options and restricted share units
      813        425  
    
 
 
     
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 1
Table of Contents
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollar amounts in thousands)
 
 
  
Three Months Ended
December 31,
 
 
  
2022
 
 
2021
 
NET EARNINGS (LOSS)
    $ (29,821 )     $ 15,340  
Other comprehensive income (loss):
                  
Foreign currency translation adjustment
      3,481        (58 ) 
Unrealized gain
(loss) 
on cash flow hedge
      (68 )       550  
Income taxes related to items of other comprehensive income (loss)
      17        (135 ) 
    
 
 
     
 
 
  
Other comprehensive income, net of tax
      3,430        357  
    
 
 
     
 
 
  
COMPREHENSIVE INCOME (LOSS)
    $ (26,391 )     $ 15,697  
    
 
 
     
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)
 
    
Three Months Ended
December 31,
  
    
2022
     
2021
  
CASH FLOWS FROM OPERATING ACTIVITIES
                  
Net earnings (loss)
    $ (29,821 )     $ 15,340  
Non-cash
items included in net earnings
 (loss):
                  
Depreciation of property, plant and equipment
      1,643        1,700  
Amortization of intangible assets
      2,541        2,483  
Stock compensation expense
      1,393        1,903  
Deferred income taxes
      216        927  
Estimated litigation costs
      32,000        —    
Change in the following, net of acquisition:
                  
Accounts receivable
      6,083        9,424  
Inventories
      (3,496 )      2,093  
Prepaid expenses and other current assets
      894        200  
Accounts payable and accrued expenses
      (10,833 )      1,018  
Income taxes payable
      (2,023 )      1,113  
Other, net
      (946 )       (646 ) 
    
 
 
     
 
 
  
Net cash
(used in) 
provided by operating activities
      (2,349 )      35,555  
    
 
 
     
 
 
  
CASH FLOWS FROM INVESTING ACTIVITIES
                  
Purchase of property, plant and equipment
      (2,654 )       (1,708 ) 
Acquisition, net of holdback
      (2,000 )       —    
    
 
 
     
 
 
  
Net cash used in investing activities
      (4,654 )       (1,708 ) 
    
 
 
     
 
 
  
CASH FLOWS FROM FINANCING ACTIVITIES
                  
Payment on revolving credit facility
      —          (10,000 ) 
Payment of deferred financing costs
      —          (404 ) 
Proceeds from exercise of stock options
      799        80  
Employee taxes paid upon net share settlement of restricted share units
      (3,323 )       (763 ) 
    
 
 
     
 
 
  
Net cash used in financing activities
      (2,524 )       (11,087 ) 
    
 
 
     
 
 
  
Effect of Exchange Rate Changes on Cash and Cash Equivalents
      2,172        198  
    
 
 
     
 
 
  
Net Increase (Decrease) in Cash and Cash Equivalents
      (7,355 )       22,958  
Cash and Cash Equivalents at Beginning of Period
      81,453        49,771  
    
 
 
     
 
 
  
Cash and Cash Equivalents at End of Period
    $ 74,098      $ 72,729  
    
 
 
     
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
ASSETS
 
    
December 31,

2022

(Unaudited)
     
September 30,

2022
  
CURRENT ASSETS
                  
Cash and cash equivalents
    $ 74,098      $ 81,453  
Accounts receivable, less allowances of $1,327 and $1,325,
respectively
      41,573        47,235  
Inventories, net
      72,663        67,814  
Prepaid expenses and other current assets
      13,200        14,095  
    
 
 
     
 
 
  
Total current assets
      201,534        210,597  
    
 
 
     
 
 
  
PROPERTY, PLANT AND EQUIPMENT
                  
Land
      979        968  
Buildings and improvements
      33,068        32,983  
Machinery, equipment and furniture
      86,732        79,517  
Construction in progress
      5,693        10,589  
    
 
 
     
 
 
  
Subtotal
      126,472        124,057  
Less: accumulated depreciation and amortization
      81,051        79,199  
    
 
 
     
 
 
  
Net property, plant and equipment
      45,421        44,858  
    
 
 
     
 
 
  
OTHER ASSETS
                  
Goodwill
      120,567        116,302  
Other intangible assets, net
      71,572        74,131  
Right-of-use
assets, net
      6,041        5,850  
Deferred income taxes
      9,650        9,278  
Other assets
      1,978        2,081  
    
 
 
     
 
 
  
Total other assets
      209,808        207,642  
    
 
 
     
 
 
  
TOTAL ASSETS
    $ 456,763      $ 463,097  
    
 
 
     
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
    
December 31,
2022

(Unaudited)
    
September 30,
2022
  
CURRENT LIABILITIES
                 
Accounts payable
    $ 14,413     $ 17,759  
Accrued employee compensation costs
      9,894       17,682  
Accrued estimated litigation costs
      42,000       10,000  
Accrued product recall costs
      997       1,157  
Current operating lease obligations
      1,954       1,830  
Current government grant obligations
      799       667  
Other accrued expenses
      6,288       5,048  
Income taxes payable
      2,232       3,808  
    
 
 
    
 
 
  
Total current liabilities
      78,577       57,951  
    
 
 
    
 
 
  
NON-CURRENT
LIABILITIES
                 
Post-employment benefits
      1,728       1,673  
Long-term operating lease obligations
      4,187       4,127  
Long-term debt
      25,000       25,000  
Government grant obligations
      4,521       4,620  
Long-term income taxes payable
      395       395  
Deferred income taxes
      1,104       578  
Other
non-current
liabilities
      712       692  
    
 
 
    
 
 
  
Total
non-current
liabilities
      37,647       37,085  
    
 
 
    
 
 
  
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, 43,999,659 and 43,755,188 shares issued and outstanding, respectively
      —         —    
Additional
paid-in
capital
      154,533       155,664  
Treasury stock, at cost, 9,655 shares
      (259 )      (259 ) 
Retained earnings
      193,339       223,160  
Accumulated other comprehensive loss
      (7,074 )      (10,504 ) 
    
 
 
    
 
 
  
Total shareholders’ equity
      340,539       368,061  
    
 
 
    
 
 
  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
    $ 456,763     $ 463,097  
    
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollar and share amounts in thousands)
 
    
Common
Shares
     
Additional
Paid-In

Capital
    
Treasury Stock
    
Retained
Earnings
    
Accumulated

Other Comp.
Income (Loss)
    
Total
Shareholders’
Equity
  
   
Sh.
    
Amt.
  
Balance at September 30, 2022
      43,755      $ 155,664       (10 )    $ (259 )    $ 223,160     $ (10,504)     $ 368,061  
Conversion of restricted share units and exercise of stock options
      245        (2,524 )      —         —         —         —         (2,524 ) 
Stock compensation expense
      —          1,393       —         —         —         —         1,393  
Net loss
      —          —         —         —         (29,821 )      —         (29,821 ) 
Foreign currency translation adjustment
      —          —         —         —         —         3,481       3,481  
Hedging activity, net of tax
      —          —         —         —         —         (51 )      (51 ) 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at December 31, 2022
      44,000      $ 154,533       (10 )    $ (259 )    $ 193,339     $ (7,074)     $ 340,539  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at September 30, 2021
      43,362      $ 147,403       —       $ —       $ 180,701     $ 198     $ 328,302  
Conversion of restricted share units and exercise of stock options
      152        (683 )      —         —         —         —         (683 ) 
Stock compensation expense
      —          1,903       —         —         —         —         1,903  
Net earnings
      —          —         —         —         15,340       —         15,340  
Foreign currency translation adjustment
      —          —         —         —         —         (58 )      (58 ) 
Hedging activity, net of tax
      —          —         —         —         —         415       415  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at December 31, 2021
      43,514      $ 148,623       —       $ —       $ 196,041     $ 555     $ 345,219  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Dollars in Thousands, Except Per Share Amounts
(Unaudited)
 
1.
Nature of Business
Meridian Bioscience, Inc. (“Meridian” or “the Company”) was formed in 1976 and functions as a fully-integrated life science company with principal businesses in: (i) the development, manufacture, sale and distribution of diagnostic testing systems and kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, immunoassay blocking reagents, various Polymerase Chain Reaction (“PCR”) master mixes, isothermal mixes, enzymes, 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; 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; North Brunswick, New Jersey; 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 consolidated financial position as of December 31, 2022, and the results of its operations, cash flows, and shareholders’ equity for the three months ended December 31, 2022 and 2021. 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 2022 Annual Report on Form
10-K,
filed with the SEC on November 22, 2022.
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 consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full fiscal year. 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 the estimates made by management.
 
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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 2022 Annual Report on Form
10-K,
filed with the SEC on November 22, 2022, and should be referred to for a description of the Company’s significant accounting policies.
 
(a)
Recent Accounting Pronouncements –
Pronouncements Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 London Interbank Offered Rate (“LIBOR”). 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, 2024. Application of this guidance did not have a material impact on the Condensed Consolidated Financial Statements.
No other new accounting pronouncements recently adopted or issued had or are expected to have a material impact on the Condensed Consolidated Financial Statements.
 
(b)
Reclassifications –
Within the notes to the Condensed Consolidated Financial Statements, certain reclassifications have been made to the prior year allocation of expenses between segments in order to conform to the current year presentation. Such reclassifications had no impact on any consolidated figures or segment net revenues.
 
4.
Revenue Recognition
Revenue Disaggregation
The following tables present our net revenues disaggregated by major geographic region, major product platform and disease state (Diagnostics segment only):
Net Revenues by Reportable Segment & Geographic Region
 
 
  
Three Months Ended December 31,
 
 
  
2022
 
  
2021
 
  
Inc (Dec)
 
Diagnostics-
  
  
  
Americas
    $ 33,182      $ 26,613        25 % 
EMEA
      5,694        6,093        (7 )% 
ROW
      490        498        (2 )% 
    
 
 
     
 
 
     
 
 
  
Total Diagnostics
      39,366        33,204        19 % 
    
 
 
     
 
 
     
 
 
  
Life Science-
                           
Americas
      5,859        8,137        (28 )% 
EMEA
      6,944        28,648        (76 )% 
ROW
      4,733        18,352        (74 )% 
    
 
 
     
 
 
     
 
 
  
Total Life Science
      17,536        55,137        (68 )% 
    
 
 
     
 
 
     
 
 
  
Consolidated
    $ 56,902      $ 88,341        (36 )% 
    
 
 
     
 
 
     
 
 
  
 
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Net Revenues by Product Platform/Type
 
 
  
Three Months Ended December 31,
 
 
  
2022
 
  
2021
 
  
Inc (Dec)
 
Diagnostics-
  
  
  
Molecular assays
    $ 4,490      $ 4,752        (6 )% 
Non-molecular
assays
      34,876        28,452        23 % 
    
 
 
     
 
 
     
 
 
  
Total Diagnostics
      39,366        33,204        19 % 
    
 
 
     
 
 
     
 
 
  
Life Science-
                           
Molecular reagents
      7,574        31,488        (76 )% 
Immunological reagents
      9,962        23,649        (58 )% 
    
 
 
     
 
 
     
 
 
  
Total Life Science
      17,536        55,137        (68 )% 
    
 
 
     
 
 
     
 
 
  
Consolidated
    $ 56,902      $ 88,341        (36 )% 
    
 
 
     
 
 
     
 
 
  
Net Revenues by Disease State (Diagnostics segment only)
 
    
Three Months Ended December 31,
  
    
2022
     
2021
     
Inc (Dec)
  
Diagnostics-
                           
Gastrointestinal assays
    $ 21,273      $ 21,619        (2 )% 
Respiratory illness assays
      6,714        6,380        5 % 
Blood chemistry assays
      4,620        78        5823 % 
Other
      6,759        5,127        32 % 
    
 
 
     
 
 
     
 
 
  
Total Diagnostics
    $ 39,366      $ 33,204        19 % 
    
 
 
     
 
 
     
 
 
  
Royalty Income
Royalty income received from a third party related to sales of
H. pylori
products, totaled $1,650 and $1,040 in the three months ended December 31, 2022 and 2021, respectively. Such revenue is included as part of
Non-molecular
assays and Other within the Net Revenues by Product Platform/Type and Net Revenues by Disease State tables, respectively, above.
Reagent Rental Arrangements
Revenue allocated to the lease elements of Reagent Rental arrangements totaled $1,135 and $995 in the three months ended December 31, 2022 and 2021, respectively. Such revenue is included as part of net revenues in our Condensed Consolidated Statements of Operations.
5.
Fair Value Measurements
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 the outstanding revolving credit facility discussed in Note 12 to a fixed rate. The fair values of the interest rate swap agreements were determined by reference to a third-party valuation, which is considered a Level 2 input within the fair value hierarchy of valuation techniques.
As indicated in Note 6, we acquired Estel Biosciences, Inc. of San Diego, California (“Estel”) on October 26, 2022 and EUPROTEIN Inc. of North Brunswick, New Jersey (“EUPROTEIN”) on April 30, 2022. The fair values of inventories acquired, if applicable, were valued using Level 2 inputs, which included data points that were observable, such as established values of comparable assets and historical sales information (market approach). Identifiable intangible assets, if applicable and specifically the acquired customer relationships, were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flows and attrition rates (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.
 
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The following table provides information by level for financial assets and liabilities that are measured at fair value on a recurring basis, the carrying values for which are included within other assets of the December 31, 2022 and September 30, 2022 Condensed Consolidated Balance Sheets, respectively:
 

 
  
 
 
  
Fair Value Measurements Using
Inputs Considered as
 
 
  
Carrying

Value
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Interest rate swap agreements -
                                    
As of December 31, 2022
    $ 1,353      $ —        $ 1,353      $ —    
As of September 30, 2022
    $ 1,421      $ —        $ 1,421      $ —    
 
6.
Business Combinations
On October 26, 2022, we acquired substantially all of the assets of Estel for $3,500 in cash, of which $2,000 was paid at closing, with the remainder held back pending the achievement of certain milestones, which is payable within 18 months of the acquisition date. The amount held back is recorded in other accrued expenses ($1,125) and other
non-current
liabilities ($375) on the December 31, 2022 Condensed Consolidated Balance Sheet. Estel offers development and production of high-quality bioresearch reagents developed in the areas of tropical disease and autoimmune through a proprietary insect cell expression system. Based on the
timing
of
this transaction
, the full $3,500 of consideration represents goodwill, which is attributable to combining Estel and Meridian’s products and capabilities to give the Company’s customers access to new immunological reagents. The goodwill is included within the Life Science segment and is not expected to be deductible for income tax purposes. The preliminary purchase price allocation may change in the future as the fair valuing of assets is completed.
 
There were no material changes in the preliminary purchase price allocation during the three months ended December 31, 2022. 
On April 30, 2022, we acquired substantially all of the assets of EUPROTEIN for $4,250 in cash, of which $3,750 was paid at closing, with the remainder held back for final closing adjustments, which is recorded in other
accrued expenses
on the Condensed Consolidated Balance Sheets and is payable within 18 months of the acquisition date. EUPROTEIN offers custom development and production of high-quality bioresearch reagents, with a particular focus on human and other mammalian proteins and recombinant monoclonal antibodies. The acquired assets of EUPROTEIN are included within the Life Science segment and are expected to help the Company accelerate its pipeline of new immunological reagents, while expanding recombinant capabilities. The acquired assets, which are comprised of goodwill, property, plant and equipment, prepaid expenses, and inventories, were valued on April 30, 2022, on a preliminary basis at $3,947, $279, $14 and $10, respectively. The goodwill for EUPROTEIN is attributable to combining EUPROTEIN and Meridian’s products and capabilities to give the Company’s customers access to new immunological reagents. The goodwill is not expected to be deductible for income tax purposes. The preliminary purchase price allocation may change in the future as the fair valuing of assets is completed.
 
There were no material changes in the preliminary purchase price allocation during the three months ended December 31, 2022. 
Based on the nature of both the Estel and EUPROTEIN businesses, Estel and EUPROTEIN are not expected to contribute materially to net revenues and net earnings
(loss).
 
7.
Lead Testing Matters
On September 1, 2021, the Company’s wholly owned subsidiary Magellan announced the expansion of the Class I voluntary recall of its LeadCare test kits for the detection of lead in blood, which it had initiated in May 2021 after identifying an issue in certain manufactured lots of its LeadCare test kits. As a result of the identified issue, impacted test kit lots could potentially underestimate blood lead levels when processing patient blood samples. Although it was initially believed that the root cause of the issue related to the plastic containers used for the treatment reagent, additional studies have indicated that the root cause related to the third-party-sourced cardboard trays that held the treatment reagent containers. Upon correction of the identified supplier issue, shipment of product resumed during the second quarter of fiscal 2022. The Company continues to work closely with the U.S. Food and Drug Administration (“FDA”) in its execution
 
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of the recall activities, which has included Magellan notifying customers and distributors affected by the recall and providing instructions for the return of impacted test kits. Remaining accrued LeadCare product recall costs totaling approximately
$177 and $430 are reflected within the Condensed Consolidated Balance Sheets at December 31, 2022 and September 30, 2022, respectively. Anticipated recall-related costs primarily include temporary labor costs, product replacement and/or refund costs, mailing/shipping costs, attorneys’ fees and other miscellaneous costs. Information utilized in the accrual estimation process includes observable inputs such as customer
on-hand
inventory data, product sales data, average sales price, and product inventory turns, among other things.
On April 17, 2018, the Company’s wholly owned subsidiary Magellan received a subpoena from the U.S. Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlined 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 that have followed receipt of the subpoena in April 2018. The Company has executed tolling agreements to extend the statute of limitations. In March and April 2021, DOJ issued two subpoenas, both to former employees of Magellan, calling for witnesses to testify before a federal grand jury related to this matter. In September and October 2021, DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. It is the Company’s understanding that multiple witnesses have testified before the federal grand jury and the DOJ’s investigation is ongoing. Discussions continue with the DOJ to explore resolution of the matter. The Company believes a loss is probable in the DOJ LeadCare legal matter and, in accordance with applicable accounting guidance, has accrued $42,000 and $10,000 as of December 31, 2022 and September 30, 2022, respectively, as an estimate of the cost to resolve the DOJ LeadCare legal matter. The increase in the estimated cost to resolve the DOJ LeadCare legal matter is based upon additional information received by the Company during discussions held with the DOJ subsequent
to 
September 30, 2022. The $32,000 expense resulting from the increase in the accrual is reflected in litigation and select legal costs within the
Condensed 
Consolidated Statement of Operations for the three months ended December 
31
, 2022. The Company cannot predict when the investigation will be resolved or the outcome of the investigation, and the ultimate resolution of the DOJ LeadCare legal matter may exceed the amount accrued at
December 31
, 2022 and could be material to the Company. Approximately $814 and $281 of expense for attorneys’ fees related to this matter is included within the Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and 2021, respectively.
 
8.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of the following:
 
 
  
December 31,
2022
 
  
September 30,
2022
 
Institutional money market funds
    $ 1,027      $ 1,027  
Cash on hand, unrestricted
      73,071        80,426  
    
 
 
     
 
 
  
Total
    $ 74,098      $ 81,453  
    
 
 
     
 
 
  
Cash equivalents and institutional money market funds are classified within Level 1 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets. The Company does not adjust the quoted market price for such financial instruments.
 
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9.
Inventories, Net
Inventories, net are comprised of the following:
 
 
  
December 31,
2022
 
  
September 30,
2022
 
Raw materials
    $ 18,063      $ 15,726  
Work-in-process
      25,329        21,570  
Finished goods - instruments
      2,126        1,796  
Finished goods - kits and reagents
      27,145        28,722  
    
 
 
     
 
 
  
Total
    $ 72,663      $ 67,814  
    
 
 
     
 
 
  
 
10.
Goodwill and Other Intangible Assets, Net
Goodwill is not amortized but is subject to an annual impairment test. Goodwill has been assigned to reporting units within the reportable segments. The Company assesses the carrying value of goodwill annually, or more often if events or changes in circumstances indicate there may be impairment. Impairment testing is performed at a reporting unit level. During the three months ended December 31, 2022, goodwill increased $4,265, comprised of: (i) a $20 increase in Diagnostics segment goodwill; and (ii) a $4,245 increase in Life Science segment goodwill. This overall net increase in goodwill reflects $3,500 of goodwill acquired in the Estel acquisition (see Note 6), along with the effects of foreign currency translation. During the three months ended December 31, 2022, the Company did not observe any triggering events or substantive changes in circumstances requiring the need for an interim impairment assessment
.
A summary of other intangible assets, net, subject to amortization is as follows:
 
    
December 31, 2022
     
September 30, 2022
  
    
Gross
Carrying
Value
     
Accumulated
Amortization
     
Gross
Carrying
Value
     
Accumulated
Amortization
  
Manufacturing technologies, core products and cell lines
    $ 56,380      $ 21,366      $ 56,289      $ 20,321  
Trade names, licenses and patents
      18,363        10,906        18,257        10,491  
Customer lists, customer relationships and supply agreements
      52,829        23,779        52,703        22,363  
Non-compete
agreements
      110        59        110        53  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 127,682      $ 56,110      $ 127,359      $ 53,228  
    
 
 
     
 
 
     
 
 
     
 
 
  
The aggregate amortization expense for these other intangible assets was $2,541 and $2,483 for the three months ended December 31, 2022 and 2021, respectively. The estimated aggregate amortization expense for these other intangible assets for each of the fiscal years through fiscal 2028 is as follows: remainder of fiscal 2023 – $7,425, fiscal 2024
—
$9,900, fiscal 2025
—
$9,890, fiscal 2026
—
$8,900, fiscal 2027
—
$6,645, and fiscal 2028 – $6,645.
 
11.
Leasing Arrangements
The Company is party to several 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.
 
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The lease costs for these operating leases reflected in our Condensed Consolidated Statements of Operations, 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 December 31,
   
2022
     
2021
  
Lease costs within cost of sales
    $ 226      $ 225  
Lease costs within operating expenses
      349        388  
Right-of-use
assets, net, obtained in exchange for operating lease liabilities
      423        218  
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 three months ended December 31, 2022 and 2021.
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 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 were as follows:
 
 
  
December 31,
2022
 
 
September 30,
2022
 
Weighted average remaining lease term
      3.6 years       3.9 years  
Average discount rate
      3.5 %      3.5 %
Maturities of lease liabilities by fiscal year for the Company’s operating leases were as follows as of December 31, 2022:
 
2023 (represents remainder of fiscal year)
    $ 1,571  
2024
      1,796  
2025
      1,519  
2026
      796  
2027
      545  
Thereafter
      136  
    
 
 
  
Total lease payments
      6,363  
Less amount of lease payments representing interest
      (222 ) 
    
 
 
  
Total present value of lease payments
    $ 6,141  
    
 
 
  
Supplemental cash flow information related to the Company’s operating leases is as follows:
 

Three Months Ended December 31,
  
2022
 
  
2021
 
Cash paid for amounts included in the measurement of lease liabilities:
                  
Operating cash flows from operating leases
    $ 580      $ 627  
 
12.
Bank Credit Arrangements
The Company maintains a revolving credit facility with a commercial bank in an aggregate principal amount not to exceed $200,000, which expires in October 2026. Outstanding principal amounts bear 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 3.46% and 2.22% on the revolving credit facility during the three months ended December 31, 2022 and 2021, respectively.
 
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In light of the interest being determined on a variable rate basis, the fair value of the borrowings under the credit facility at both December 31, 2022 and September 30, 2022 approximates the $25,000 carrying value reflected in the Condensed Consolidated Balance Sheets, which is consistent with a level 2 fair value measurement.
The revolving credit facility is collateralized by the business assets of the Company’s U.S. subsidiaries and requires compliance with financial covenants that limit the amount of debt obligations and require a minimum level of coverage of fixed charges, as defined in the revolving credit facility agreement. As of December 31, 2022, the Company was in compliance with all covenants.
See Note 18 for a discussion of activities related to the Company’s bank credit arrangements occurring subsequent to the December 31, 2022 Condensed Consolidated Balance Sheet date.
 
13.
Contingent Obligations and
Non-Current
Liabilities
In connection with the acquisition of Exalenz Bioscience Ltd. (“Exalenz”) in fiscal 2020, the Company assumed several Israeli government grant obligations. The repayment of the grants, along with interest incurred at varying stated fixed rates based on LIBOR at the time each grant was received, is not dictated by an established repayment schedule. Rather, the grants and related interest are required to be repaid using 3% of the net revenues generated from the sales of BreathID products, with the timing of repayment contingent upon the level and timing of such revenues. In addition, the grants have no collateral or financial covenant provisions generally associated with traditional borrowing instruments. These obligation amounts total $5,320 and $5,287 as of December 31, 2022 and September 30, 2022, respectively, bearing interest at rates ranging from 0.58% to 2.02%.
The grant obligations are reflected in the Condensed Consolidated Balance Sheets as follows:
 
    
December 31,
2022
    
September 30,
2022
  
Current liabilities
    $ 799     $ 667  
Non-current
liabilities
    $ 4,521     $ 4,620  
Additionally, the Company has provided certain post-employment benefits to its former Chief Executive Officer, and these obligations total $1,254 and $1,284 at December 31, 2022 and September 30, 2022, 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 $652 and $566 at December 31, 2022 and September 30, 2022, respectively.
 
14.
National Institutes of Health Contracts
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 has received $1,000 under the grant contract for reimbursement of eligible research and development expenditures.
On January 25, 2022, the Company entered into a contract to amend the Company’s second grant contract under the RADx initiative, which was originally effective February 1, 2021. The purpose of the grant is to support the Company’s manufacturing production
scale-up
and expansion to meet the demand for
COVID-19
testing, as well as the Company’s Revogene respiratory panel. The amended contract is a
24-month
service contract through January 2023, with
a subsequent extension to January 2025 and 
payment of up to $6,250 being made based on the Company achieving key milestones related to increasing its capacity to produce
COVID-19
tests and the Revogene respiratory panel. As of December 31, 2022, $2,750 has been received related to this contract and is reflected as a reduction in the cost of building and improvements on the Condensed Consolidated Balance Sheets, in accordance with applicable accounting guidance.
 
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15.
Reportable Segment and Major Customers Information
The Company’s reportable segments maintain separate financial information for which results of operations are evaluated on a regular basis by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company records the direct costs of business operations to the reportable segments, including allocations for certain corporate-wide costs such as treasury management, human resources and technology, among others. Corporate provides certain executive management and administrative services to each reportable segment. These services primarily include executive oversight by
non-segment-specific
executives, including the Board of Directors, along with certain other corporate-wide support functions such as insurance, legal and business development. The Company generally does not allocate these types of corporate expenses to the reportable segments.
Reportable segment and corporate information for the interim periods is as follows:
 
    
Diagnostics
    
Life Science
     
Corporate
(1)
    
Eliminations
(2)
    
Total
  
Three Months Ended December 31, 2022
 
Net revenues -
                                          
Third-party
    $ 39,366     $ 17,536      $ —       $ —       $ 56,902  
Inter-segment
      86       8        —         (94 )      —    
Operating
income 
(loss)
      3,160       5,383        (36,693 )      35       (28,115 ) 
Goodwill (December 31, 2022)
      94,432       26,135        —         —         120,567  
Other intangible assets, net (December 31, 2022)
      71,570       2        —         —         71,572  
Total assets (December 31, 2022)
      353,997       102,775        —         (9 )      456,763  
    
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Three Months Ended December 31, 2021
                                          
Net revenues -
                                          
Third-party
    $ 33,204     $ 55,137      $ —       $ —       $ 88,341  
Inter-segment
      34       55        —         (89 )      —    
Operating income (loss)
      (1,763 )      26,602        (4,571 )      15       20,283  
Goodwill (September 30, 2022)
      94,412       21,890        —         —         116,302  
Other intangible assets, net (September 30, 2022)
      74,129       2        —         —         74,131  
Total assets (September 30, 2022)
      357,630       105,511        —         (44 )      463,097  
    
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
 
(1)
 
Includes acquisition and transaction related costs and litigation and select legal costs of $34,048 and $281 in the three months ended December 31, 2022 and 2021, respectively.
(2)
 
Eliminations consist of inter-segment transactions.
A reconciliation of reportable segment operating income (loss) to consolidated earnings
 (loss)
before income taxes is as follows:
 
Three Months Ended December 31,
   
2022
     
2021
  
Operating income
 (loss):
                  
Diagnostics segment
    $ 3,160      $ (1,763)
Life Science segment
      5,383        26,602  
Eliminations
      35        15  
    
 
 
     
 
 
  
Total operating income
      8,578        24,854  
Corporate expenses
      (36,693 )       (4,571 ) 
Interest income
      3        1  
Interest expense
      (148 )       (372 ) 
Other, net
      (837 )       (161 ) 
    
 
 
     
 
 
  
Consolidated earnings
(loss) 
before income taxes
    $ (29,097 )    $ 19,751  
    
 
 
     
 
 
  
 
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Transactions between reportable segments are accounted for at established intercompany prices for internal and management purposes, with all intercompany amounts eliminated in consolidation.
Net revenues generated by the Company’s three major Diagnostics segment product families – gastrointestinal, respiratory illnesses and blood chemistry – accounted for 57% and 32% of consolidated net revenues during the three months ended December 31, 2022 and 2021, respectively.
Three individual Diagnostics and two Life Science segment customers, including their affiliates, comprising 10% or more of reportable segment net revenues were as follows:
 

Three Months Ended December 31,
  
2022
 
 
2021
 
Diagnostics
                 
Customer A
      7 %     10 %
Customer B
      10 %     11 %
Customer C
      12 %     11 %
Life Science
  
 
Customer D
  
 
—
%
 
 
23
%
Customer
E
      4 %     14 %
Customer 
F
      12 %     5 %
In addition,
one of 
the Life Science segment customers, including their affiliates, identified above accounted for greater than 10% of consolidated net revenues as follows:
 

Three Months Ended December 31,
  
2022
 
 
2021
 
Life Science
                 
Customer D
      — %     14 %
No individual Diagnostics segment customer accounted for greater than 10% of
consolidated
net revenues during the three months ended December 31, 2022 or 2021.
During the three months ended December 31, 2022 and 2021, the Life Science segment’s ten largest customers, including their affiliates, accounted for approximately 42% and 67%, respectively, of Life Science segment net revenues, and 13% and 42%, respectively, of consolidated net revenues.
No Diagnostics or Life Science segment customer accounted for greater than 10% of consolidated accounts receivable as of December 31,
2022
, while one Diagnostics segment customer (Customer B above) and one Life Science segment customer (
Customer F
above) accounted for approximately 12% and 11%, respectively, of consolidated accounts receivable as of September 30, 2022.
 
16.
Income Taxes
The effective rate for income taxes was (2%) and 22% for the three months ended December 31, 2022 and 2021, respectively. The negative effective rate for the three months ended December 31, 2022 relates primarily to the anticipated
non-deductibility
of
litigation and select legal costs associated with 
the previously discussed DOJ LeadCare legal matter (see Note 7).
 
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17.
The Merger
On July 7, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”) with SD Biosensor, Inc., a corporation with limited liability organized under the laws of the Republic of Korea (“SDB”), Columbus Holding Company, a Delaware corporation (“Parent”), and Madeira Acquisition Corp., an Ohio corporation and a direct wholly owned subsidiary of Parent (“Merger Sub,” and together with SDB and Parent, the “Parent Parties”). Pursuant to the Merger Agreement, Merger Sub merged with and into Meridian (the “Merger”), with Meridian surviving the Merger as a direct wholly owned subsidiary of Parent.
On December 9, 2022, Meridian and the Parent Parties entered into a Letter Agreement (the “Letter Agreement”), modifying the Merger Agreement, such that all of the conditions to the Parent Parties’ obligation to complete the Merger have been satisfied (and are deemed to remain satisfied through the completion of the Merger), provided that Meridian is required to comply with certain covenants in the Merger Agreement through the completion of the Merger. Under the Letter Agreement, Meridian and the Parent Parties also agreed to, among other things, consummate the Merger on January 31, 2023.
On January 31, 2023, the Merger was consummated in accordance with the terms of the Merger Agreement and the Letter Agreement, and Parent, which at the time of Closing was wholly-owned and controlled by SDB, became the sole shareholder of Meridian. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Meridian’s common stock (subject to certain exceptions set forth in the Merger Agreement) was canceled and converted into the right to receive
 
$
34.00
 
i
n cash, without interest (the “Merger Consideration”). See Note 18 below regarding consummation of the Merger. 
The foregoing description of the Merger, the Merger Agreement, and the Letter Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of (i) the Merger Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s Current Report on Form
8-K
filed on July 7, 2022 and is incorporated herein by reference, and (ii) the Letter Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s Current Report on Form
8-K
filed on December 12, 2022 and is incorporated herein by reference.
The Company incurred transaction related costs of approximately $1,160 during the three months ended December 31, 2022 related to the Merger, which is recorded in acquisition and transaction related costs in the Condensed Consolidated Statement of Operations.
 
18.
Subsequent Events
On January 31, 2023, the Merger was consummated in accordance with the terms of the Merger Agreement and the Letter Agreement, as described in Note 17. Upon completion of the Merger, effective January 31, 2023:
 
 
•
 
Meridian named Jack Kenny and Andrew Kitzmiller as the sole directors of Meridian’s Board of Directors (the “Board”), and all other previously named directors tendered their resignations and resigned from the Board effective January 31, 2023;
 
 
•
 
Meridian amended and restated its Articles of Incorporation and Code of Regulations in accordance with the Merger Agreement which, among other things, changed the fiscal year of the Company to an annual calendar year;
 
 
•
 
Meridian: (i) notified the Nasdaq Stock Market LLC (“Nasdaq”) of the consummation of the Merger, and (ii) requested that Nasdaq (A) suspend trading of Meridian’s common stock effective before the opening of trading on January 31, 2023, and (B) file with the SEC a Form 25 Notification of Removal from Listing and/or Registration to delist and deregister the Shares under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”);
 
 
•
 
Meridian terminated its Amended and Restated Credit Agreement, dated as of October 25, 2021, by and among Meridian, as borrower, the guarantors party thereto, the lenders party thereto, PNC Bank,
 
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National Association, as administrative agent, PNC Capital Markets LLC, as joint lead arranger and sole bookrunner, and Fifth Third Bank, National Association, as joint lead arranger and syndication agent; and
 
 
•
 
Meridian, entered into: (i) a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with Standard Chartered Bank (“SCB”), as administrative agent, SCB, Industrial Bank of Korea, The Export-Import Bank of Korea, JPMorgan Chase Bank, N.A., Kookmin Bank, New York Branch and Citibank N.A., Hong Kong Branch, as joint lead arrangers, and SCB, as coordinating bank; and (ii) a Revolving Credit Facility Credit Agreement (the “RCF Credit Agreement”, and together with the Term Loan Credit Agreement, the “Credit Agreements”) with PNC Bank, National Association (“PNC”), as administrative agent, and PNC Capital Markets LLC, as sole lead arranger, sole bookrunner and syndication agent. The Term Loan Credit Agreement made available to Meridian an aggregate principal amount of $500,000, in the form of a term loan credit facility (the “Term Loan”). The RCF Agreement makes available to Meridian revolving loan commitments in an aggregate principal amount of $50,000 (the “RCF Loan”, and together with the Term Loan, the “Credit Facilities”). As of January 31, 2023, the principal amount of the RCF Loan outstanding was $25,000. The Credit Facilities mature on January 31, 2028.
The foregoing descriptions of events occurring on or about the consummation of the Merger, including the foregoing description of the Credit Facilities, do not purport to be complete and are subject to and qualified in their entirety by reference to the respective agreements, articles of incorporation and other documents, each of which are attached as an exhibit to our Current Report on Form
8-K
filed with the SEC on February 1, 2023.
 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Refer to “Forward-Looking Statements” following the Table of Contents in front of this Form 10-Q. In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data.

 

The purpose of Management’s Discussion and Analysis is to provide an understanding of the financial condition, changes in financial condition and results of operations of Meridian Bioscience, Inc. (“Meridian”, the “Company”, “We”). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes. It should be noted that the terms revenue and/or revenues are utilized throughout the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) to indicate net revenue and/or net revenues. In addition, throughout the MD&A, we refer to certain product tradenames and trademarks, which are protected under applicable intellectual property laws and are our property. Solely for convenience, these tradenames and trademarks are referred to without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent of the law, our rights to these tradenames and trademarks.

Reportable Segments

Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio; Quebec City, Canada; and Modi’in, Israel; and manufacturing operations for blood chemistry products in Billerica, Massachusetts. 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; North Brunswick, New Jersey; London, England; and Luckenwalde, Germany, and the sale and distribution of bulk antigens, antibodies, immunoassay blocking reagents, various Polymerase Chain Reaction (“PCR”) and isothermal amplification master mixes, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to further pursue growing revenue opportunities in Asia.

 

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Recent Developments

Agreement and Plan of Merger

On July 7, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”) with SD Biosensor, Inc., a corporation with limited liability organized under the laws of the Republic of Korea (“SDB”), Columbus Holding Company, a Delaware corporation (“Parent”), and Madeira Acquisition Corp., an Ohio corporation and a direct wholly owned subsidiary of Parent (“Merger Sub,” and together with SDB and Parent, the “Parent Parties”). Pursuant to the Merger Agreement, Merger Sub merged with and into Meridian (the “Merger”), with Meridian surviving the Merger as a direct wholly owned subsidiary of Parent.

On December 9, 2022, Meridian and the Parent Parties entered into a Letter Agreement (the “Letter Agreement”), modifying the Merger Agreement, such that all of the conditions to the Parent Parties’ obligation to complete the Merger have been satisfied (and are deemed to remain satisfied through the completion of the Merger), provided that Meridian is required to comply with certain covenants in the Merger Agreement through the completion of the Merger. Under the Letter Agreement, Meridian and the Parent Parties also agreed to, among other things, consummate the Merger on January 31, 2023.

On January 31, 2023, the Merger was consummated in accordance with the terms of the Merger Agreement and the Letter Agreement, and Parent, which at the time of Closing was wholly-owned and controlled by SDB, became the sole shareholder of Meridian. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Meridian’s common stock (subject to certain exceptions set forth in the Merger Agreement) was canceled and converted into the right to receive $34.00 in cash, without interest (the “Merger Consideration”). See Note 18, “Subsequent Events” of the Condensed Consolidated Financial Statements regarding consummation of the Merger.

The foregoing description of the Merger, the Merger Agreement, and the Letter Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of (i) the Merger Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s Current Report on Form 8-K filed on July 7, 2022 and is incorporated herein by reference, and (ii) the Letter Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s Current Report on Form 8-K filed on December 12, 2022 and is incorporated herein by reference.

The Company incurred transaction related costs of approximately $1,160 during the three months ended December 31, 2022 related to the Merger, which is recorded in acquisition and transaction related costs in the Condensed Consolidated Statement of Operations.

Impact of COVID-19 Pandemic

Starting in the latter half of fiscal 2020 and continuing to the date of this filing, the ongoing COVID-19 pandemic has had both positive and negative effects on our business.

Our Life Science segment’s products were well positioned to respond to in vitro device (“IVD”) manufacturers’ increased demand for reagents used in the manufacture of molecular, rapid antigen and serology tests. Consequently, through the end of the second quarter of fiscal 2022, our Life Science segment consistently delivered significantly higher levels of net revenues and operating income than those achieved prior to the COVID-19 pandemic, with the peak to date in such levels occurring during the second quarter of fiscal 2022. This revenue peak has been followed by a significant decrease in such net revenue levels since the second quarter of fiscal 2022, reflecting the softening in demand for COVID-19 related reagents.

Our Diagnostics segment, on the other hand, has generally been negatively impacted by health systems’ increased focus on COVID-19 testing over traditional infectious disease testing. Revenues from our respiratory illness assays were most dramatically impacted by the COVID-19 pandemic. However, we are continuing to experience what we believe to be a continuation of a return to pre-pandemic activity levels.

There continues to be many uncertainties surrounding the COVID-19 pandemic, and we can provide no assurances with respect to our views of the longevity or severity of the positive or negative impacts to our consolidated financial condition of the ongoing COVID-19 pandemic.

 

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Employee Safety

While the majority of our employee base has returned to working on-site at our facilities, we have implemented a hybrid work-from-home program for certain personnel whose on-site presence has been deemed to be non-essential. We also continue to utilize enhanced cleaning and sanitizing procedures, and provide additional personal hygiene supplies at all our sites. We have implemented policies for employees to adhere to Centers for Disease Control and Prevention (“CDC”) guidelines on social distancing, and similar guidelines by authorities outside the U.S. To date, we have been able to manufacture and distribute products globally, and all our sites have continued to operate with little, if any, impact on shipments to customers. As the COVID-19 pandemic continues, along with continuing governmental restrictions which vary by locale and jurisdiction, there is an increased risk of employee absenteeism, which could materially impact our operations at one or more sites. To date, the steps we have taken, including our work-from-home processes, have not materially impacted the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls.

Supply Chains

Supply chains supporting our products have generally remained intact, providing access to sufficient inventory of the key materials needed for manufacturing. While we have experienced extended lead times for certain select raw materials, delays and allocations for raw materials have to date been limited and have not had a material impact on our results of operations. From time to time, we identify alternative suppliers to address the risk of a current supplier’s inability to deliver materials in volumes sufficient to meet our manufacturing needs; or we may choose to purchase certain materials in bulk volumes where we have supply chain scarcity concerns. It remains possible 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.

Since the second half of fiscal 2021, we have experienced input cost inflation, including materials, labor and transportation costs. Pricing actions and supply chain productivity initiatives have mitigated and are expected to continue to mitigate some of these inflationary pressures, but we may not be successful in fully offsetting these incremental costs, which could have an impact on the Company’s results of operations and cash flows in the future.

Product Development and Clinical Trials

Our Diagnostics segment’s new product development programs are continuing to progress at a slower pace than normal, due in part to the prevalence of certain infectious diseases having been lower than normal during the COVID-19 pandemic. These matters continue to impact our timing for filing applications for product clearances with the U.S. Food and Drug Administration (“FDA”), as well as related timing of FDA clearances of such filings. Additionally, the ongoing COVID-19 pandemic has slowed and could continue to slow down our efforts to expand our product portfolio, impacting the speed with which we are able to bring additional products to market.

Lead Testing Matters

On September 1, 2021, the Company’s wholly owned subsidiary Magellan announced the expansion of the Class I voluntary recall of its LeadCare test kits for the detection of lead in blood, which it had initiated in May 2021 after identifying an issue in certain manufactured lots of its LeadCare test kits. As a result of the identified issue, impacted test kit lots could potentially underestimate blood lead levels when processing patient blood samples. Although it was initially believed that the root cause of the issue related to the plastic containers used for the treatment reagent, additional studies have indicated that the root cause related to the third-party-sourced cardboard trays that held the treatment reagent containers. Upon correction of the identified supplier issue, shipment of product resumed during the second quarter of fiscal 2022. The Company continues to work closely with the FDA in its execution of the recall activities, which has included Magellan notifying customers and distributors affected by the recall and providing instructions for the return of impacted test kits. Remaining accrued LeadCare product recall costs totaling approximately $177 and $430 are reflected within the Condensed Consolidated Balance Sheets at December 31, 2022 and September 30, 2022, respectively. Anticipated recall-related costs primarily include temporary labor costs, product replacement and/or refund costs, mailing/shipping costs, attorneys’ fees and other miscellaneous costs.

 

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On April 17, 2018, the Company’s wholly owned subsidiary Magellan received a subpoena from the U.S. Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlined 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 that have followed receipt of the subpoena in April 2018. The Company has executed tolling agreements to extend the statute of limitations. In March and April 2021, DOJ issued two subpoenas, both to former employees of Magellan, calling for witnesses to testify before a federal grand jury related to this matter. In September and October 2021, DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. It is the Company’s understanding that multiple witnesses have testified before the federal grand jury and the DOJ’s investigation is ongoing. Discussions continue with the DOJ to explore resolution of the matter. The Company believes a loss is probable in the DOJ LeadCare legal matter and, in accordance with applicable accounting guidance, has accrued $42,000 and $10,000 as of December 31, 2022 and September 30, 2022, respectively, as an estimate of the cost to resolve the DOJ LeadCare legal matter. The increase in the estimated cost to resolve the DOJ LeadCare legal matter is based upon additional information received by the Company during discussions held with the DOJ subsequent to September 30, 2022. The $32,000 expense resulting from the increase in the accrual is reflected in litigation and select legal costs within the Condensed Consolidated Statement of Operations for the three months ended December 31, 2022. The Company cannot predict when the investigation will be resolved or the outcome of the investigation, and the ultimate resolution of the DOJ LeadCare legal matter may exceed the amount accrued at December 31, 2022 and could be material to the Company. Approximately $814 and $281 of expense for attorneys’ fees related to this matter is included within the Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and 2021, respectively.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2022

A net loss of $29,821, or $0.68 per diluted share, was generated during the first quarter of fiscal 2023, compared to $15,340 of net earnings, or $0.35 per diluted share, during the first quarter of fiscal 2022. The net loss in the first quarter of fiscal 2023 reflects primarily the overall increase in operating expenses described in the Operating Expenses section below, along with the decline in net revenues and operating income in our Life Science segment, stemming from the dramatic softening in demand for COVID-19 related reagents during the quarter.

Consolidated net revenues for the first quarter of fiscal 2023 totaled $56,902, a decrease of 36% compared to the first quarter of fiscal 2022.

Net revenues from the Diagnostics segment for the first quarter of fiscal 2023 increased 19% to $39,366, compared to the first quarter of fiscal 2022, comprised of a 23% increase in non-molecular assay products, partially offset by a 6% decrease in molecular assay products. The first quarter of fiscal 2023 represents the seventh consecutive quarter our Diagnostics segment has shown positive revenue growth versus the same quarter in the prior fiscal year. Our Diagnostics segment generated $3,160 of operating income in the first quarter of fiscal 2023, compared to an operating loss of $1,763 in the first quarter of fiscal 2022, reflecting the increase in net revenues and gross profit margins, along with relatively flat operating expenses, as described in the respective sections below.

With a 76% decrease in net revenues from molecular reagents products and a 58% decrease in net revenues from immunological reagents products, net revenues for our Life Science segment decreased 68% during the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. Our Life Science segment generated $5,383 of operating income, or a margin of 31%, for the first quarter of fiscal 2023, a decrease of $21,219 from $26,602, or a margin of 48%, achieved in the first quarter of fiscal 2022. This decrease primarily results the decrease in net revenues and associated gross profit, which result in large part from the aforementioned dramatic softening in demand for COVID-19 related reagents.

 

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REVENUE OVERVIEW

Below are analyses of the Company’s net revenues, provided for each of the following:

- By Reportable Segment & Geographic Region

- By Product Platform/Type

Revenue Overview- By Reportable Segment & Geographic Region

Revenues for the Diagnostics segment, in the normal course of business, may be affected from year to year by buying patterns of major distributors and reference laboratories, seasonality and severity of seasonal diseases and outbreaks (including the ongoing COVID-19 pandemic), and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from year to year by buying patterns of major IVD manufacturing customers, severity of disease outbreaks (specifically the ongoing COVID-19 pandemic), and foreign currency exchange rates.

See the “Revenue Disaggregation” section of Note 4, “Revenue Recognition” of the Condensed Consolidated Financial Statements for detailed revenue disaggregation information.

Following is a discussion of the net revenues generated by these product platforms/types and/or disease states:

Diagnostics Segment Products

During the first quarter of fiscal 2023, Diagnostics segment net revenues increased $6,162, or 19%, compared to the first quarter of fiscal 2022. This growth primarily resulted from the $4,542 increase in net revenues from sales of blood chemistry products, as sales of the LeadCare product have continued to rebound since shipment of the product resumed in the second quarter of fiscal 2022. LeadCare shipments resumed upon correction of the identified supplier issue that caused the LeadCare product recall, which commenced in May 2021 (see Note 7, “Lead Testing Matters” of the Condensed Consolidated Financial Statements).

Life Science Segment Products

During the first quarter of fiscal 2023, net revenues for our Life Science segment decreased 68% compared to the first quarter of fiscal 2022. While the level of net revenues during the first quarter of fiscal 2023 reflects the significant decline in demand for COVID-19 related reagents, such level of quarterly net revenues significantly outpaced the pre-pandemic level of net revenues generated in the first quarter of fiscal 2020; increasing 39% in total, 41% for molecular reagents and 37% for immunological reagents.

Significant Customers

Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 15, “Reportable Segment and Major Customers Information” of the Condensed Consolidated Financial Statements.

Gross Profit

 

     Three Months Ended December 31,  
     2022     2021     Change  

Gross Profit

    $ 31,505   $ 49,159     (36 )% 

Gross Profit Margin

      55 %      56 %      -1 point  

Overall gross profit margins during the first quarter of fiscal 2023 are relatively consistent with the fiscal 2022 first quarter margins, with the slight decline largely reflecting the shift in segment revenue mix. During the first quarter of fiscal 2023, approximately 31% of consolidated net revenues were generated from the Life Science segment, the products of which generally generate higher gross profit margins relative to the Diagnostics segment. This compares to the Life Science comprising approximately 62% of consolidated net revenues in the first quarter of fiscal 2022.

 

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In addition, Diagnostics segment gross profit margins were favorably impacted by the previously discussed resumption of blood chemistry product sales in the second quarter of fiscal 2022 (see “Diagnostics Segment Products” above). This resulted in $4,620 of net revenues from sales of such products in the first quarter of fiscal 2023, compared to only $78 in the fiscal 2022 first quarter.

Operating Expenses – Segment Detail and Corporate

 

     Research &
Development		      Selling &
Marketing		      General &
Administrative		      Other      Total
Operating
Expenses		  

Fiscal 2023 First Quarter:

 

Diagnostics

    $ 5,230    $ 6,280    $ 6,010    $ —        $ 17,520

Life Science

      947      2,014      2,418      28      5,407

Corporate

      —        —        2,645      34,048      36,693
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total 2023 First Quarter Expenses

    $ 6,177    $ 8,294    $ 11,073    $ 34,076    $ 59,620
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Fiscal 2022 First Quarter:

 

Diagnostics

    $ 5,556    $ 6,009    $ 6,294    $ —        $ 17,859

Life Science

      638      1,732      4,076      —        6,446

Corporate

      —        —        4,290      281      4,571
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total 2022 First Quarter Expenses

    $ 6,194    $ 7,741    $ 14,660    $ 281    $ 28,876
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Compared to the prior year first quarter, operating expenses increased $30,744 to $59,620 in the first quarter of fiscal 2023. Major components of this increase were as follows:

 

  •  

A $32,607 increase in litigation and select legal costs, reflected within Corporate and primarily related to the previously discussed LeadCare legal matter (see “Lead Testing Matters” above); and

 

  •  

A $1,188 increase in acquisition and transaction related costs, primarily within Corporate and related to the previously discussed merger (see “Agreement and Plan of Merger” above).

Partially offsetting these increases was a $2,124 decrease in incentive compensation expense across both segments, tied to the Company’s financial performance.

Operating Income (Loss)

An operating loss of $28,115 was generated in the first quarter of fiscal 2023, compared to $20,283 of operating income during the first quarter of fiscal 2022. These operating income (loss) levels result from the factors discussed above.

Income Taxes

The effective rate for income taxes was (2%) and 22% for the three months ended December 31, 2022 and 2021, respectively. The negative effective rate for the three months ended December 31, 2022 relates primarily to the anticipated non-deductibility of the previously discussed LeadCare legal matter (see “Lead Testing Matters” above).

Impact of Inflation

To the extent feasible, we have consistently followed the practice of reviewing our prices to consider the impacts of inflation on salaries and fringe benefits for employees, the cost of purchased materials and services, and transportation costs. Inflation and changing prices did not have a material adverse impact on our gross margin, revenues or operating income (loss) in the first quarter of fiscal 2023 or fiscal 2022.

 

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Liquidity and Capital Resources

Liquidity

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, and such sources are anticipated to be adequate to fund working capital requirements, capital expenditures and debt service during the next twelve months. However, if needed, we also have an additional source of liquidity through the amount remaining available on our $200,000 bank revolving credit facility, which totaled $175,000 as of December 31, 2022 (see Note 18, “Subsequent Events” of the Condensed Consolidated Financial Statements for a discussion of activities related to the Company’s bank credit arrangements occurring subsequent to the December 31, 2022 Condensed Consolidated Balance Sheet date). Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period, 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.

As of December 31, 2022, our cash and cash equivalents balance was $74,098 or $7,355 lower than at September 30, 2022. This decrease primarily results primarily from the combined effects of: (i) $2,349 of cash used in operations; and (ii) using cash to acquire property, plant and equipment ($2,654) and the assets of Estel Biosciences, Inc. ($2,000) (see Note 6, “Business Combinations” of the Condensed Consolidated Financial Statements).

Considering these factors, our balance of cash and cash equivalents on hand exceeded our total debt (defined as bank debt, government grant obligations and obligations related to acquisitions) by approximately $41,800 at December 31, 2022.

Capital Resources

As described in Note 12, “Bank Credit Arrangements” of the Condensed Consolidated Financial Statements, the Company maintains a $200,000 revolving credit facility, which is secured by substantially all of our U.S. assets and includes certain restrictive financial covenants. As of December 31, 2022, the Company was in compliance with all covenants. In addition, as of December 31, 2022, Meridian maintains a shelf registration statement on file with the SEC. See Note 18, “Subsequent Events” of the Condensed Consolidated Financial Statements for a discussion of activities related to the Company’s bank credit arrangements and public company status occurring subsequent to the December 31, 2022 Condensed Consolidated Balance Sheet date.

During fiscal 2023 our capital expenditures are estimated to total approximately $10,000, comprised of approximately $6,500 and $3,500 in the Diagnostics and Life Science segments, respectively. Such expenditures may be funded with cash and cash equivalents on hand, operating cash flows, and/or availability under the $200,000 revolving credit facility discussed above.

License Agreements

The Company has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products. During the first quarter of fiscal 2023, royalty expense totaled approximately $150, with 70% and 30% of such expense relating to our Diagnostics and Life Science segments, respectively. This compares to a total of approximately $800 of royalty expense in the first quarter of fiscal 2022, with 35% and 65% relating to our Diagnostics and Life Science segments, respectively. The Company expects that payments under these agreements will amount to approximately $700 in fiscal 2023, a decrease from the $2,300 in fiscal 2022, with the anticipated decrease largely resulting from the last of the licensed patents applicable to the Alethia product line having expired during fiscal 2022.

 

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Off-Balance Sheet Arrangements

We utilize foreign currency exchange forward contracts to limit exposure to volatility in foreign currency gains and losses related to financial assets denominated in other than the holding subsidiary’s functional currency. These contracts are generally settled within a 30-day time frame and are not formally designated or accounted for as accounting hedges. We also utilize interest rate swap agreements to limit exposure to volatility in the LIBOR interest rate in connection with the revolving credit facility. The interest rate swap agreements are designated and accounted for as accounting hedges (see Note 5, “Fair Value Measurements” of the Condensed Consolidated Financial Statements). Aside from these instruments, we do not utilize special-purpose financing vehicles or have any material undisclosed off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2022, there were no material changes to the information provided under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended September 30, 2022, filed with the SEC on November 22, 2022.

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 December 31, 2022. 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 the period covered by this report.

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. 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 December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information with respect to legal proceedings can be found in Note 7, “Lead Testing Matters” of the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the SEC on November 22, 2022, as may be supplemented by our Quarterly Reports on Form 10-Q, any or all of which could materially affect our business, financial condition or future results. The risks described therein are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the SEC on November 22, 2022, as may be supplemented by our Quarterly Reports on Form 10-Q.

ITEM 6. EXHIBITS

The following exhibits are being filed or furnished as a part of this Quarterly Report on Form 10-Q:

 

31.1    Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2    Certification of Principal Accounting Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32    Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    Inline XBRL Instance Document
101.SCH    Inline XBRL Instance Extension Schema
101.CAL    Inline XBRL Instance Extension Calculation Linkbase
101.DEF    Inline XBRL Instance Extension Definition Linkbase
101.LAB    Inline XBRL Instance Extension Label Linkbase
101.PRE    Inline XBRL Instance Extension Presentation Linkbase
104    Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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SIGNATURES

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.

Date: February 9, 2023

     By:  

/s/ Andrew S. Kitzmiller

      Andrew S. Kitzmiller
     

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: February 9, 2023

     By:  

/s/ Julie Smith

      Julie Smith
     

Senior Vice President and Controller

(Principal Accounting Officer)

 

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