Luminex (LMNX) 10-Q2021 Q1 Quarterly report

The accompanying unaudited condensed consolidated financial statements have been prepared by Luminex Corporation (the Company or Luminex) in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 10-K).

The Company determines the appropriate classification of any investments in debt and equity securities at the time of purchase and re-evaluates such determinations at each balance sheet date. As of March 31, 2021, the Company had no short or long-term investments, as those funds were used to pay for acquisitions.

Available-for-sale securities consisted of the following as of March 31, 2021 (in thousands):

As of March 31, 2021, the Company has an investment in Combinati, a private company, with a carrying value of $9.6 million, which exceeded the Company’s share of Combinati’s net assets by $8.0 million. This investment represents ownership of approximately 28.4% of the voting interest of Combinati. For the quarter ended March 31, 2021, the Company recorded $0.3 million for its allocable share of Combinati’s net loss in its Consolidated Statement of Comprehensive Income and as an adjustment to the invested balance. The Company accounts for its investment in Combinati under the equity method, given the Company's significant influence over the investee due to its larger ownership percentage and its participation on the Board of Directors. The Company does not have unilateral decision making power, and therefore will not consolidate the investee.

This investment does not have readily determinable fair values. Therefore, the Company has elected the measurement alternative for this minority interest and this investment is recorded at cost, less any impairment, including changes resulting from observable price changes. The Company regularly evaluates the carrying value of its investment for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is less than the investment’s carrying value, the Company will record an impairment charge in Other income, net in the Consolidated Statements of Comprehensive Income.

As the inputs utilized for the Company’s periodic impairment assessment are not based on observable market data, the determination of fair value of its investments is classified within Level 3 of the fair value hierarchy. See Note 5 - Fair Value Measurement to our Condensed Consolidated Financial Statements for further information on the fair value hierarchy and the three classification levels. To determine the fair value of these investments, the Company uses all available financial information related to the entities, including information based on recent or pending third-party equity investments in these entities. In certain instances, an investment’s fair value is not estimated as there are no identified events or changes in the circumstances. There have been no unrealized gains or losses related to these Level 3 minority interest investments.

Other long-term assets consisted of the following (in thousands):

For the three months ended March 31, 2021 and 2020, the Company recognized amortization expenses related to the amortization of purchased technology rights of approximately $138,000 and $159,000, respectively. Future amortization expenses are estimated to be $426,000 in the remaining nine months of 2021, $568,000 in 2022, $449,000 in 2023, $442,000 in 2024, $441,000 in 2025 and $3,116,000 thereafter.

Inventories are stated at the lower of cost or net realizable value, with cost determined according to the standard cost method, which approximates the first-in, first-out method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company routinely assesses its on-hand inventory for timely identification and measurement of obsolete, slow-moving or otherwise impaired inventory. Net inventories consisted of the following (in thousands):

Accounting Standards Codification (ASC) 820 “Fair Value Measurement” (ASC 820) defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. There were no transfers between Level 1, Level 2 or Level 3 measurements for the three-month period ended March 31, 2021.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 (in thousands):

Goodwill is reviewed for impairment at least annually at the beginning of the fourth quarter, or more frequently if impairment indicators arise. A portion of the Company’s goodwill is not expected to be deductible for tax purposes. The changes in the carrying amount of goodwill during the period are as follows (in thousands):

The Company’s intangible assets are reflected in the table below (in thousands, except weighted average lives):

The Company currently has two IP R&D projects. The first relates to the development of the next generation VERIGENE System, VERIGENE II. The Company is targeting the commercial launch of the VERIGENE II System during 2021. The second is a defensive IP R&D project related to the Company’s next generation xMAP System, xMAP INTELLIFLEX, which the Company currently believes will launch commercially in the second quarter of 2021.

The estimated aggregate amortization expense for the next five fiscal years and thereafter is as follows (in thousands):

Other comprehensive loss represents a measure of all changes in equity that result from recognized transactions and other economic events other than those resulting from investments by, and distributions to, shareholders. Other comprehensive loss for the Company includes foreign currency translation adjustments and net unrealized holding gains and losses on available-for-sale investments.

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax (in thousands):

There are no material tax benefits or expenses related to the other comprehensive loss for the three months ended March 31, 2021.

A reconciliation of the denominators used in computing per share net income (EPS) is as follows (in thousands, except per share amounts):

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Restricted stock awards (RSAs) and stock options to acquire 159,330 and 1,156,913 shares for the three months ended March 31, 2021 and 2020, respectively, were excluded from the computations of diluted earnings per share because the effect of including the RSAs and stock options would have been anti-dilutive.

We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested, time-based restricted stock awards with non-forfeitable dividends and for our common stock. Our non-vested, time-based restricted stock awards with non-forfeitable dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested, time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.

On February 8, 2021, the Board of Directors declared a cash dividend on the Company’s common stock of $0.10 per share. The dividend was payable to stockholders of record as of March 25, 2021 and was paid on April 15, 2021. The Company’s current intent is to pay a continuing dividend on a quarterly basis. However, future declarations of dividends are subject to the final determination of the Company’s Board of Directors.

The Company’s stock option activity for the three months ended March 31, 2021 is as follows:

The Company’s restricted share activity for the three months ended March 31, 2021 is as follows:

The following are the stock-based compensation costs recognized in the Company’s Condensed Consolidated Statements of Comprehensive Income (in thousands):

Accrued liabilities consisted of the following (in thousands):

The following table summarizes the changes in the warranty accrual (in thousands):

In May 2020, the Company issued $260.0 million principal amount of Convertible Senior Notes due in May 2025 (Notes). The interest rates for the Notes is fixed at 3.00% per annum with interest payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2020. The Notes mature on May 15, 2025, unless earlier redeemed, converted or repurchased in accordance with their terms prior to such date. Each $1,000 of principal amount of the Notes will initially be convertible into 22.8918 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $43.68 per share. The initial conversion price for each of the Notes is subject to adjustment upon the occurrence of certain specified events. Our Board has declared increased quarterly cash dividends of $0.10 per share of common stock twice since the issuance of the Notes, and this increase in the dividend adjusted the conversion price to $43.65 per share, or 22.9079 shares of the Company's common stock for each $1,000 of principal amount of the Notes.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2024 only under the following circumstances:

On or after November 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The Company currently intends to settle the principal amount of the Notes in cash, and settle any excess amount with shares of the Company’s common stock, upon conversion.

If a fundamental change (as defined in the relevant indenture governing the Notes) occurs prior to the maturity date, holders of each of the Notes may require the Company to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. As of March 31, 2021, the Notes were not yet convertible.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under U.S. GAAP. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments and how the instruments have been reported in the entity’s financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2021. Early adoption is permitted, but no earlier than January 1, 2021. The Company early adopted this guidance effective January 1, 2021 under the modified retrospective basis with the cumulative effect recognized through an adjustment to additional paid-in capital. Under this method, earnings per share amounts were not restated in prior periods presented, but current quarter and future earnings per share amounts could be impacted by the change to the if-converted method for calculating diluted earnings per share. For the quarter ended March 31, 2021, there was no effect on earnings per share amounts when the shares that would be issued if the contingently convertible securities were converted were included in the Company’s calculation of diluted earnings per share. The Company's adoption resulted in a decrease of approximately $42 million in additional paid in capital from the de-recognition of the bifurcated equity component and an increase of approximately $50 million in debt from the de-recognition of the discount associated with the bifurcated equity component. The Company wrote-off the related deferred tax liabilities to additional paid in capital.

Issuance costs totaling $7.7 million are being amortized to expense over the expected life of the Notes using the effective interest method. The Notes consist of the following:

The following table sets forth total interest expense recognized related to the Notes:

Concurrent with the offering of the Notes, the Company entered into privately negotiated convertible note hedge transactions (Convertible Note Hedge Transactions) with certain financial institutions (Option Counterparties) related to the issuance of the Notes. The Convertible Note Hedge Transactions are generally expected to reduce the potential dilution to the Company’s common stock upon any conversion of Notes or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes.

The Company also entered into separate privately negotiated Warrant Transactions with each of the Option Counterparties pursuant to which the Company issued Warrants that will be exercisable into a number of shares of the Company’s common stock at a price per share equal to $69.89, subject to certain adjustments under the terms of the Warrant Transactions. The Warrant Transactions could separately have a dilutive effect on the Company’s common stock if the market value per share of the Company’s common stock exceeds the applicable strike price of the Warrants. However, subject to certain conditions, the Company may elect to settle the Warrants in cash.

The Convertible Note Hedge Transactions and the Warrant Transactions are separate transactions, in each case, entered into by the Company with the same Option Counterparties and are not part of the terms of the Notes and will not affect any holder’s rights under the Notes. The holders of the Notes will not have any rights with respect to the Convertible Note Hedge Transactions or Warrant Transactions. The Company used approximately $34.7 million of the net proceeds of the issuance of the Notes to pay the costs of the Convertible Note Hedge Transactions, after such cost was partially offset by the proceeds to the Company from the sale of the Warrants in the Warrant Transactions. The Convertible Note Hedge Transactions and Warrant Transactions do not meet the criteria for derivative accounting as they are indexed to the Company's stock. The amounts paid for the Convertible Note Hedge Transactions and the proceeds received from the Warrant Transactions have been included as a net reduction to additional paid-in capital.

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606 “Revenue from Contracts with Customers” (the Standard), the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of the Standard, the Company assesses the goods or services promised within each contract, identifies the performance obligations and assesses whether each promised good or service is distinct. The Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised good or service underlying each performance obligation and recognizes this as revenue when such performance obligation is satisfied.

In March 2020, the Biomedical Advanced Research and Development Authority (BARDA) awarded the Company two milestone-based contracts, with a value of $642,450 each, funding approximately 36% of the overall cost of development. BARDA is part of the U.S. Department of Health and Human Services (HHS) and is tasked with protecting the U.S. against emerging infectious diseases and other threats. Through public-private partnerships, BARDA supports the development of vaccines, drugs and diagnostics. One of BARDA’s current goals is to develop medical countermeasures to enhance health security and protect against 2019 novel coronavirus disease (COVID-19) infections. The Company’s management believes these two contracts help to enable an expansion of the Company’s current portfolio of diagnostics for SARS-CoV-2 (the virus that causes COVID-19). The Company recorded government contract revenue of $642,450 in each of the quarters ended March 31, 2020 and June 30, 2020 as all of the milestones were completed for the first BARDA contract in the first quarter and for the second BARDA contract in the second quarter.

In February 2021, BARDA awarded the Company an additional $11.3 million milestone-based contract. This contract will support the rapid development and validation of a respiratory panel combining Flu A/B & respiratory syncytial virus (RSV) targets with the SARS-CoV-2 target that can be run on all ARIES Systems. The Company recorded government contract revenue of $4.6 million for the quarter ended March 31, 2021 as three of the milestones were completed for this BARDA contract.

Contract assets are included within accounts receivables, net and contract liabilities are included in deferred revenue on the Company’s Condensed Consolidated Balance Sheets. The following table presents the opening and closing balances of the Company’s contract assets and liabilities as of March 31, 2021 (in thousands):

During the three months ended March 31, 2021, the Company recognized the following revenues as a result of changes in the contract asset and contract liability balances in the period (in thousands):

At the end of each interim reporting period, an estimate is made of the effective tax rate expected to be applicable for the full year. The estimated full year’s effective tax rate is used to determine the income tax rate for each applicable interim reporting period. Tax effects of enacted legislation, including changes in the value of deferred tax assets and liabilities, is recognized in the period of the enactment date. The effective tax rate for the three months ended March 31, 2021 was 18%, including amounts recorded for discrete events. This differs from the statutory rate of 21% primarily from the effect of foreign operations and the Company’s ability to claim greater tax benefits pursuant to the provisions of the 2017 Tax Reform Act and increased earnings in certain jurisdictions. The Company’s tax expense reflects the full federal, various state, and foreign blended statutory rates. The Company currently expects a 2021 full-year annualized effective tax rate of 20% to 30%, excluding amounts recorded for discrete events. The Company will be subject to provisions regarding U.S. federal taxation of foreign intangible income and has included in its estimate of income tax the effects of this provision. The Company is utilizing its net operating losses (NOLs) and tax credits in the U.S., Canada and the Netherlands.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, Australia, Canada, China, France, Germany, Hong Kong, Japan, the Netherlands, the U.K., and various U.S. states. In the United States and Canada, the statute of limitations with respect to the federal income tax returns for tax years after 2015 are open to audit; however, since the Company has net operating losses, the taxing authority has the ability to review tax returns prior to the 2015 tax year and make adjustments to these net operating loss carryforwards. The Company does not expect any material changes to the unrecognized tax benefit liability within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes.

In the normal course of business, the Company is subject to claims, lawsuits and legal proceedings. When it appears probable in management’s judgment, and based upon consultation with outside counsel, that we will incur monetary damages or other costs in connection with any claims or proceedings, and such costs can be reasonably estimated, we record the estimated liability in the financial statements. If only a range of estimated losses can be estimated, we record an amount within the range that, in management’s judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we record the liability at the low end of the range of estimates. Any such accrual would be charged to expense in the appropriate period. We disclose significant contingencies when the loss is not probable and/or the amount of the loss is not estimable, when we believe there is at least a reasonable possibility that a loss has been incurred. We recognize costs associated with legal proceedings in the period in which the services were provided.

We have leased all of our research, manufacturing and office space and have entered into various other agreements in conducting our business. Our leases have remaining lease terms of 1 year to 10 years, and some of our leases include options to extend the leases for up to 10 years, tenant improvement allowances, rent holidays and rent escalation clauses. At inception, we determine whether an agreement represents a lease and at commencement we evaluate each lease agreement to determine whether the lease is an operating or financing lease.

All of the Company’s leases outstanding on March 31, 2021 are classified as operating leases. As the Company’s leases do not provide an implicit rate, we have used estimated incremental borrowing rates ranging from 4.00% to 5.75% based on the information available at the commencement date in determining the present value of lease payments. The components of the lease expense were as follows (in thousands):

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying condensed financial statements.

On April 11, 2021, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with DiaSorin S.p.A., a società per azioni organized under the laws of the Republic of Italy (DiaSorin), and Diagonal Subsidiary Inc., a Delaware corporation and wholly owned subsidiary of DiaSorin (Merger Subsidiary), providing for the merger of Merger Subsidiary with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of DiaSorin. At the effective time of the proposed Merger (the Effective Time), each share of common stock, par value $0.001 per share, of the Company issued and outstanding as of immediately prior to the Effective Time (other than dissenting shares or shares of the Company’s common stock held by the Company as treasury stock or owned by DiaSorin, Merger Subsidiary or any subsidiary of the Company or DiaSorin) will be cancelled and cease to exist and automatically convert into the right to receive cash in an amount equal to $37.00, without interest (the Merger Consideration).

In connection with the Merger, DiaSorin has signed a Senior Facilities Agreement with a syndicate of banks (consisting of BNP Paribas, Citi, Mediobanca and UniCredit), the aggregate proceeds of which, together with cash on hand, will be sufficient for Parent and Merger Subsidiary to pay the aggregate merger consideration and all related fees and expenses. The Senior Facilities Agreement provides for a term loan of $1.1 billion due 2026 and a bridge loan of $500 million due within 12 months, with extension options (exercisable at Parent’s option) for an additional 12 months. The transaction is not subject to a financing condition.

Consummation of the Merger is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, receipt of antitrust approval in Germany, receipt of approval from the Committee on Foreign Investment in the United States, submission of a foreign investment filing with the French Ministry of Economy, and approval by the holders of a majority of the voting power of the outstanding shares of the Company’s common stock entitled to vote on such matter.

The Merger Agreement contains certain termination rights for the Company and DiaSorin. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay DiaSorin a termination fee of approximately $59.22 million. In addition to the foregoing termination right, and subject to certain limitations, (i) the Company or DiaSorin may terminate the Merger Agreement if the Merger is not consummated by October 11, 2021 and (ii) the Company and DiaSorin may mutually agree to terminate the Merger Agreement.

The Company incurred transaction-related costs of approximately $0.4 million for the three months ended March 31, 2021 related to the Merger.

The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 10-K), as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q.

Many of these risks, uncertainties and other factors are beyond our control and are difficult to predict. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. New factors could also emerge from time to time that could adversely affect our business. The forward-looking statements herein can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions outlined above and described in the 2020 10-K (as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q). In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this Quarterly Report on Form 10-Q including in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our other annual and periodic reports.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Luminex,” the “Company,” “we,” “us” and “our” refer to Luminex Corporation and its subsidiaries.

We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences industries, including diagnostics, pharmaceuticals and research. These industries depend on a broad range of tests, called assays, to perform diagnostic testing, conduct life science research and perform pharmaceutical testing.

On April 11, 2021, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with DiaSorin S.p.A., a società per azioni organized under the laws of the Republic of Italy (DiaSorin), and Diagonal Subsidiary Inc., a Delaware corporation and wholly owned subsidiary of DiaSorin (Merger Subsidiary), providing for the merger of Merger Subsidiary with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of DiaSorin. At the effective time of the Merger (the Effective Time), each share of common stock, par value $0.001 per share, of the Company issued and outstanding as of immediately prior to the Effective Time (other than dissenting shares or shares of the Company’s common stock held by the Company as treasury stock or owned by DiaSorin, Merger Subsidiary or any subsidiary of the Company or DiaSorin) will be cancelled and cease to exist and automatically convert into the right to receive cash in an amount equal to $37.00, without interest (the Merger Consideration).

In connection with the Merger, DiaSorin has signed a Senior Facilities Agreement with a syndicate of banks (consisting of BNP Paribas, Citi, Mediobanca and UniCredit), the aggregate proceeds of which, together with cash on hand, will be sufficient for Parent and Merger Subsidiary to pay the aggregate merger consideration and all related fees and expenses. The Senior Facilities Agreement provides for a term loan of $1.1 billion due 2026 and a bridge loan of $500 million due within 12 months, with extension options (exercisable at Parent’s option) for an additional 12 months. The transaction is not subject to a financing condition.

Consummation of the Merger is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, receipt of antitrust approval in Germany, receipt of approval from the Committee on Foreign Investment in the United States, submission of a foreign investment filing with the French Ministry of Economy, and approval by the holders of a majority of the voting power of the outstanding shares of the Company’s common stock entitled to vote on such matter.

The Company made representations and warranties in the Merger Agreement and agreed to covenants regarding the operation of the business of the Company and the Company’s subsidiaries prior to the Effective Time. The Company is also subject to customary restrictions on its ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, with customary exceptions for superior proposals.

The Merger Agreement contains certain termination rights for the Company and DiaSorin. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay DiaSorin a termination fee of approximately $59.22 million. In addition to the foregoing termination right, and subject to certain limitations, (i) the Company or DiaSorin may terminate the Merger Agreement if the Merger is not consummated by October 11, 2021 and (ii) the Company and DiaSorin may mutually agree to terminate the Merger Agreement.

The Merger Agreement contains representations and warranties by each of DiaSorin, Merger Subsidiary and the Company. These representations and warranties were made solely for the benefit of the parties to the Merger Agreement and:

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which is attached as an exhibit to our Current Report on Form 8-K filed with the SEC on April 12, 2021.

Since December 2019, COVID-19 (caused by a novel strain of coronavirus) has spread rapidly, with most countries and territories worldwide with confirmed cases, and a high concentration of cases in the United States and many other countries in which we operate. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies.

Our priorities during the COVID-19 pandemic have been, among others, protecting the health and safety of our employees; providing multiple solutions to the marketplace, including our recent Emergency Use Authorized SARS-CoV-2 tests; and ramping up manufacturing to help our customers meet and overcome the current challenges.

As of March 31, 2021, the COVID-19 pandemic was the primary driver behind our 22% increase in revenue as compared to the prior year quarter. We experienced an overall 9% increase in assay revenue, with our combined ARIES and NxTAG COVID-19-related products providing the majority of the increase as a result of the use of these products for testing related to the pandemic. Initially, and prior to obtaining EUA status for these products, our customers used them to rule out respiratory illnesses other than COVID-19. However, upon receipt of EUAs for these COVID-19 molecular diagnostic tests, the volume shifted towards our COVID-19-specific products.

Given the increased demand for certain of our assay products in 2020 and 2021, the pandemic has not negatively impacted the Company’s liquidity position to date. As of March 31, 2021, we believe that we have the cash necessary to meet our short-term liquidity needs. We also have not observed any material impairments of our assets or a significant change in the fair market value of our assets due to the COVID-19 pandemic.

We believe the extent of the COVID-19 pandemic’s impact on our operating results and financial condition will be driven by many factors, most of which are beyond our control and ability to forecast. Such factors include, but are not limited to, the severity and duration of the pandemic, our ability to timely develop, commercialize and manufacture solutions related to the pandemic, the extent and the effectiveness of responsive actions taken by authorities of impacted countries, the impact of these and other factors on our employees, customers and suppliers, as well as any resulting impact of the economic uncertainty and volatility that could affect demand for our products. Because of these and other uncertainties, we cannot estimate the length or extent of the impact of the pandemic on our business. For additional information on risk factors that could impact our results, please refer to “Risk Factors” included in Part I, Item 1A of the 2020 10-K, as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q.

In March 2020, BARDA awarded the Company two milestone-based contracts, with a value of $642,450 each, funding approximately 36% of the overall cost of development, testing and submission for two EUAs to provide rapid answers to patients believed to have COVID-19. Luminex funded the remaining 64% of the total program costs, representing $1.1 million each. In March 2021, the Company received FDA EUA for its new NxTAG CoV Extended Panel, a high-throughput test for detecting SARS-CoV-2 that provides results for up to 96 samples in approximately four hours. The NxTAG CoV Extended Panel runs on Luminex’s easy-to-use, compact MAGPIX System. In April 2020, the Company received FDA EUA for its new ARIES SARS-CoV-2 Assay, which is designed to provide rapid answers to patients believed to have COVID-19, generating results in approximately two hours.

In September 2020, BARDA awarded the Company two additional milestone-based contracts valued at $5,389,813 and $683,500, respectively, related to completing a 510(k) filing for Luminex’s expanded NxTAG RPP, which includes the SARS-CoV-2 virus for COVID-19 testing, and to support the enhancement of the company’s xMAP SARS-CoV-2 Multi-Antigen IgG Assay. The Company intends to submit this enhanced serology assay for an EUA when this project is completed. The Company recorded government contract revenue of $1.2 million for the quarter ended March 31, 2021 as two of the milestones were completed for these two BARDA contracts.

In February 2021, BARDA awarded the Company an additional $11.3 million milestone-based contract. This contract will support the rapid development and validation of a respiratory panel combining Flu A/B & RSV targets with the SARS-CoV-2 target that can be run on all ARIES Systems. The Company recorded government contract revenue of $4.6 million for the quarter ended March 31, 2021 as three of the milestones were completed for this BARDA contract.

On June 26, 2020, the Company received a warning letter (the Warning Letter) from the FDA relating to the operations of the Company’s Austin, Texas and Northbrook, Illinois facilities (the Facilities) and the Company’s VERIGENE Processor SP System. The Warning Letter resulted from inspections held at the Facilities from February 10, 2020 to February 14, 2020. The company submitted a comprehensive response to each of those inspections. The subsequently issued Warning Letter primarily relates to the Company’s VERIGENE SP instrument and its hybridization heater in connection with certain FDA requirements under the Quality System Regulation (21 C.F.R. Part 820) and the regulation of Medical Device Corrections and Removals (21 C.F.R. Part 806).

The Company timely submitted a response and corrective action plan to the FDA regarding the issues raised in the Warning Letter, as requested by the FDA, and continues working diligently and expeditiously to resolve the issues raised by the FDA. The Warning Letter did not restrict the manufacture, production or shipment of any of the Company’s products, nor require the withdrawal of any product from the marketplace. The Company believes it has taken, and is continuing to take, appropriate measures to address the items identified by the FDA with respect to the VERIGENE SP instrument and its hybridization heater, and the Company included communication of these measures in its response to the Warning Letter. Specifically, we recalled affected product from the field and replaced them with new units. Additionally, we executed a field action to re-calibrate all VERIGENE SP instruments deployed in the field with in-house built and verified temperature verification fixtures. In addition, the Company continues to evaluate what further corrective or preventive action may be required.

The Company has responded to the FDA’s concerns raised in the Warning Letter but cannot give assurances that the FDA will be satisfied with its response to the Warning Letter or that such actions will sufficiently resolve the issues identified in the Warning Letter. Failure to promptly and fully address the issues raised in the Warning Letter to the FDA’s satisfaction or to comply with U.S. medical device regulatory requirements in general could result in further regulatory and enforcement actions being initiated by the FDA. These actions could result in, among other things, product recalls, product seizures, injunctions, civil monetary penalties, further delays in obtaining marketing authorization for products, an impact on federal contracts, limitations on our ability to export products, and criminal enforcement action. Any such actions could disrupt our ongoing business and operations and potentially have an adverse effect on our business, financial condition and results of operations.

The Company submitted an EUA application to the FDA for a new multi-analyte respiratory panel that combined Flu A/B & RSV targets with the SARS-CoV-2 target into one panel to be used on ARIES Systems. The submission represented completion of a key milestone in a funding award from BARDA. However, after discussions with the FDA regarding the submission, the FDA declined to review the EUA application due to its shift in EUA review priorities to a focus on home and point-of-care assays. The Company intends to re-file an application to approve this assay per a 510(k) submission.

Our inventory has increased from $78.6 million as of March 31, 2020 to $132.1 as of March 31, 2021 primarily as a result of increases in COVID-19 assay raw materials, instrument inventory to support significant increases in demand and in anticipation of new product launches. Inventory levels are expected to remain constant or decrease slightly in 2021.

We anticipate continued revenue concentration in our higher margin items (assays, consumables and royalties). Additionally, we believe that a sustained investment in research and development is necessary in order to meet the needs of our marketplace and provide a sustainable new product pipeline. We may experience volatility in research and development expenses as a percentage of revenue on a quarterly basis as a result of the timing of development expenses, clinical validation and clinical trials in advance of the commercial launch of our new products.

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles for interim financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.

Management believes there have been no significant changes during the quarter ended March 31, 2021 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 10-K.

We present certain key performance indicators (KPIs) that management uses when assessing our results. We intend for this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) to provide the reader with information that will assist in better understanding our financial condition and results of operations. Management uses these KPIs for decisions about the allocation of resources, and we believe they are useful to investors because they provide additional information about our underlying operational performance and trends. These KPIs may not be defined or calculated in the same way as similar KPIs used by other companies. Throughout this MD&A, we commonly discuss the following performance metrics: