MERIDIAN BIOSCIENCE INC - Quarter Report: 2022 December (Form 10-Q)

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q

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

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.

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

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

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:

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:

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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.

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