3.	Acquisition of Magellan

On March 24, 2016, we acquired all of the outstanding common stock of Magellan Biosciences, Inc., and its wholly-owned subsidiary Magellan Diagnostics, Inc. (collectively, “Magellan”), for $67,874, utilizing the proceeds from a $60,000 five-year term loan and cash and equivalents on hand. An amount of the acquisition consideration totaling $2,383 remains payable to the sellers, pending the realization of tax benefits for certain net operating loss carryforwards in future tax returns. Of this amount, a payment of approximately $650 is expected to be made to the sellers during the fourth quarter of fiscal 2017. The remaining amount is expected to be paid in 2018 upon filing of our U.S. tax returns. Headquartered near Boston, Massachusetts, Magellan is a leading manufacturer of FDA-cleared products for the testing of blood to diagnose lead poisoning in children and adults. Magellan is the leading provider of point-of-care lead testing systems in the U.S.

Since the consideration paid exceeded the fair value of the net assets acquired, goodwill in the amount of $40,591 was originally recorded in connection with this acquisition, none of which is deductible for tax purposes. As of June 30, 2017, the goodwill recorded in connection with the acquisition has been written down to $33,963 (see Note 6 for a discussion of the $6,628 impairment write-down). This goodwill results largely from the addition of Magellan’s complementary customer base and distribution channels, industry reputation in the U.S. as a leader in lead testing, and management talent and workforce. Our Condensed Consolidated Statement of Operations for the nine months ended June 30, 2016 includes $1,105 of transaction costs related to the Magellan acquisition, which are reflected as Operating Expenses.

The Magellan results of operations, which are included in the accompanying Condensed Consolidated Statements of Operations and reported as part of the Diagnostics operating segment, include:

(i)

$154 of cost of sales for both the three and nine months ended June 30, 2016 related to the roll-out of fair value inventory adjustments for sales of products that were in Magellan’s inventory on the date of acquisition and, therefore, were valued at fair value, rather than manufactured cost, in the opening balance sheet ($0 in the fiscal 2017 periods); and

(ii)

$675 and $2,062 of general and administrative expenses for the three and nine months ended June 30, 2017, respectively, related to the amortization of specific identifiable intangible assets recorded on the opening balance sheet including customer relationships, technology, non-compete agreements and trade names. Such expenses totaled $746 for both the three and nine months ended June 30, 2016.

The results of Magellan included in the Company’s consolidated results for the three and nine months ended June 30, 2017 and 2016 are as follows, reflecting the items noted above, including the $6,628 goodwill impairment charge, and excluding interest expense on the debt secured by Meridian in connection with the transaction:


	Three Months Ended June 30,					Nine Months Ended June 30,
	2017			2016		2017			2016
Net Revenues	$	4,330		$	4,752	$	13,174		$	4,752
Net Earnings	$	(6,316	)	$	231	$	(6,128	)	$	231

The recognized amounts of identifiable assets acquired and liabilities assumed in the acquisition of Magellan were as follows:


	March 24, 2016 (as initially reported)		Measurement Period Adjustments			March 24, 2016 (as adjusted)
Fair value of assets acquired -
Cash and equivalents	$	3,400	$	—		$	3,400
Accounts receivable		1,700		—			1,700
Inventories		1,400		—			1,400
Other current assets		300		—			300
Property, plant and equipment		2,800		(200	)		2,600
Goodwill		42,800		(2,200	)		40,600
Other intangible assets (estimated useful life):
Customer relationships (15 years)		12,600		300			12,900
Technology (10 years)		10,600		300			10,900
Non-compete agreements (2 years)		700		—			700
Trade names (approximate 9 year weighted average)		3,700		(700	)		3,000

		80,000		(2,500	)		77,500
Fair value of liabilities assumed -
Accounts payable and accrued expenses		1,600		100			1,700
Deferred income tax liabilities		10,600		(2,700	)		7,900

Total consideration (including $2,400 accrued to be paid; see discussion above)	$	67,800	$	100		$	67,900

The consolidated pro forma results of the combined entities of Meridian and Magellan, had the acquisition date been October 1, 2015, are as follows for the periods indicated:


	Three Months				Nine Months
	Ended June 30,				Ended June 30,
	2017		2016		2017		2016
Net Revenues	$	50,140	$	50,665	$	151,074	$	156,722
Net Earnings	$	240	$	8,827	$	15,831	$	26,891

These pro forma amounts have been calculated by including the results of Magellan, and adjusting the combined results to give effect to the following, as if the acquisition had been consummated on October 1, 2015, together with the consequential tax effects thereon:

(i)

remove the effect of transaction costs incurred by the Company ($1,105 in the nine months ended June 30, 2016);

(ii)

reflect adjustments to depreciation and amortization expense to reflect the amount that would have been charged in connection with the fair value adjustments to inventory, property, plant and equipment, and identifiable intangible assets ($72 decrease in expense and $1,149 increase in expense in the three and nine months ended June 30, 2016, respectively);

(iii)

reflect adjustments to stock compensation expense related to equity-based awards granted under the Company’s 2012 Stock Incentive Plan to certain Magellan employees in accordance with executed employment agreements, and to certain Meridian employees to reward them for their efforts in connection with the transaction (increases in expense of $6 and $95 in the three and nine months ended June 30, 2016, respectively); and

(iv)

reflect adjustments to interest expense that would have been incurred on the Company’s $60,000 term note ($52 decrease in expense and $800 increase in expense in the three and nine months ended June 30, 2016, respectively).