10-Q 1 mlab20211231_10q.htm FORM 10-Q mlab20211231_10q.htm
0000724004 MESA LABORATORIES INC /CO false --03-31 Q3 2022 339 218 17,988 16,330 0 0 25,000,000 25,000,000 5,244,628 5,244,628 5,140,568 5,140,568 0.16 0.16 0.16 9,315 0.16 0.16 991 0.16 819 3,611 21,142 4 5,683 0 0 0 0 0 0 0 0 0 6,447 4 6 1.375 1.375 1.375 1.375 1 8 6 3 200 3 3 1 90 2018 2019 6,062 6,062 Customer relationships and intellectual property are currently expected to be amortized on a straight line basis over a weighted average 14.2 year period. The identified intangible assets will be amortized on a straight line basis over their useful lives, which approximates the pattern that the assets' economic benefits are expected to be consumed over time. Tradenames are considered indefinite-lived intangibles. Amortization expense for customer relationships will be amortized to general and administrative expenses; amortization expense for intellectual property will be recorded to cost of revenues. During the period from October 20, 2021 until December 31, 2021, $1,320 of amortization expense was recorded to general and administrative costs and $911 of amortization expense was recorded to cost of revenues and allocated to the Clinical Genomics Division. Once our final valuation is complete, the amount of amortization expense will be trued up and amortization will be based on our final allocation. Includes $6,062 of inventory step-up, which was amortized entirely within the third quarter of fiscal year 2022. Net revenues were adjusted to include net revenues of Agena. Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other. Trade receivables, net, which is expected to be collected. Balances for performance-based restricted stock units ("PSUs") are reflected at target. Acquired goodwill of $136,006, all of which is allocated to the Clinical Genomics reportable segment, represents the value expected to arise from the value of expanded market opportunities, expected synergies, and assembled workforce, none of which qualify as amortizable intangible assets. The goodwill acquired is not deductible for income tax purposes. Pro forma adjustments to net earnings attributable to Mesa include the following: Excludes acquisition-related transaction costs incurred in the three and nine months ended December 31, 2021. Excludes interest expense attributable to Agena external debt that was paid off as part of the acquisition. Additional amortization expense of $2,828 and $8,485 for the three and nine month periods presented, respectively, based on the increased fair value of amortizable intangible assets acquired. Additional charge to cost of revenues of $6,062 was included in the three and nine months ended December 31, 2020 based on the step up value of inventory. $6,062 was excluded from the three and nine months ended December 31, 2021 based on the step up value of inventory which would have been fully amortized within the first three months of the acquisition. Additional stock based compensation expense representing expense for performance share units awarded to certain key Agena employees. Income tax effect of applicable adjustments made at a blended federal and state statutory rate (approximately 26%). During the three months ended June 30, 2021, the fiscal year 2019 PSUs vested and were paid at 280% of target, based on actual performance results and completion of service conditions. In addition, the PSUs granted to employees of Gyros Protein Technologies Holding AB vested at 60% of target, following a modification of the performance targets by the Compensation Committee of the Board of Directors during fiscal year 2021. Accumulated Other Comprehensive Income (Loss). Revenues in the Clinical Genomics division represent transactions subsequent to the Agena Acquisition on October 20, 2021. 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Table of Contents

 

United States

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, 2021

or

 

 

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

 

For the transition period from ___ to ___

 

Commission File No: 0-11740

 


 

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Colorado

 

84-0872291

 
 

(State or other jurisdiction of

 

(I.R.S. Employer

 
 

incorporation or organization)

 

Identification number)

 
     
 

12100 West Sixth Avenue

   
 

Lakewood, Colorado

 

80228

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

Registrant’s telephone number, including area code: (303) 987-8000

 

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

 

Title of each classTrading SymbolName on each exchange on which registered
Common Stock, no par valueMLABThe Nasdaq Stock Market LLC

 

Indicate by 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 (Section 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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No ☒

 

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

 

There were 5,245,943 shares of the Issuer’s common stock, no par value, outstanding as of January 27, 2022.

 



 

 



 

Table of Contents

 

 

 

Part I. Financial Information

1
   
 

Item 1. Financial Statements

1
 

Condensed Consolidated Balance Sheets

1
 

Condensed Consolidated Statements of Operations

2
 

Condensed Consolidated Statements of Comprehensive (Loss) Income

3
 

Condensed Consolidated Statements of Cash Flows

4
 

Condensed Consolidated Statements of Stockholders’ Equity

5
 

Notes to Condensed Consolidated Financial Statements

6
 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

18
 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

25
 

Item 4.  Controls and Procedures

25
     

Part II. Other Information

26
   
 

Item 1.  Legal Proceedings

26
 

Item 1A.  Risk factors

26
 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

26
 

Item 6.  Exhibits

27
 

Signatures

28
 

Exhibit 31.1 Certifications Pursuant to Rule 13a-14(a)

 
 

Exhibit 31.2 Certifications Pursuant to Rule 13a-14(a)

 
 

Exhibit 32.1 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350

 
 

Exhibit 32.2 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350

 

 

 

 

 
 

Part I. Financial Information

 

Item 1. Financial Statements

 

Mesa Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(dollars in thousands, except share amounts)

 

  

December 31,

  

March 31,

 
  

2021

  

2021

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $51,706  $263,865 

Accounts receivable, less allowances of $339 and $218, respectively

  37,289   23,787 

Inventories, net

  23,719   11,178 

Prepaid expenses and other

  8,281   4,919 

Total current assets

  120,995   303,749 

Property, plant and equipment, net of accumulated depreciation of $17,998 and $16,330, respectively

  30,152   21,998 

Deferred tax asset

  594   616 

Other assets

  11,763   2,530 

Intangibles, net

  264,666   111,741 

Goodwill

  293,542   160,841 

Total assets

 $721,712  $601,475 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $7,827  $4,473 

Accrued payroll and benefits

  13,978   9,388 

Unearned revenues

  12,483   8,777 

Other accrued expenses

  12,487   9,945 

Total current liabilities

  46,775   32,583 

Deferred tax liability

  41,134   16,275 

Other long-term liabilities

  8,334   715 

Credit Facility

  60,000   - 

Convertible senior notes, net of discounts and debt issuance costs

  169,140   145,675 

Total liabilities

  325,383   195,248 

Stockholders’ equity:

        

Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 5,244,628 and 5,140,568 shares, respectively

  308,208   317,652 

Retained earnings

  79,302   72,459 

Accumulated other comprehensive income

  8,819   16,116 

Total stockholders’ equity

  396,329   406,227 

Total liabilities and stockholders’ equity

 $721,712  $601,475 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Revenues

 $54,696  $34,172  $125,456  $95,973 

Cost of revenues

  26,069   13,519   51,478   33,695 

Gross profit

  28,627   20,653   73,978   62,278 

Operating expenses:

                

Selling

  8,958   4,753   18,459   12,614 

General and administrative

  17,017   13,173   40,119   33,887 

Research and development

  5,164   2,705   10,588   7,715 

Total operating expenses

  31,139   20,631   69,166   54,216 

Operating (loss) income

  (2,512)  22   4,812   8,062 

Nonoperating (income) expense:

                

Interest expense and amortization of debt discount

  1,018   1,950   2,647   5,803 

Other (income) expense, net

  (1,189)  3,799   (1,455)  4,848 

Total nonoperating (income) expense

  (171)  5,749   1,192   10,651 

(Loss) earnings before income taxes

  (2,341)  (5,727)  3,620   (2,589)

Income tax (benefit)

  (281)  (1,185)  (35)  (1,943)

Net (loss) income

 $(2,060) $(4,542) $3,655  $(646)
                 

(Loss) earnings per share:

                

Basic

 $(0.39) $(0.89) $0.70  $(0.13)

Diluted

 $(0.39) $(0.89) $0.69  $(0.13)
                 

Weighted-average common shares outstanding:

                

Basic

  5,233   5,125   5,199   4,922 

Diluted

  5,233   5,125   5,333   4,922 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

(in thousands) 

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net (loss) income

 $(2,060) $(4,542) $3,655  $(646)

Other comprehensive (loss) income:

                

Foreign currency translation adjustments

  (6,165)  21,142   (7,297)  39,264 

Comprehensive (loss) income

 $(8,225) $16,600  $(3,642) $38,618 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

  

Nine Months Ended December 31,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income (loss)

 $3,655  $(646)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depreciation and amortization

  15,686   12,933 

Stock-based compensation expense

  7,939   6,887 

Non-cash interest and debt amortization

  804   4,024 

Amortization of step-up in inventory basis

  6,062   (436)

Foreign currency adjustments

  (1,375)  4,583 

Other

  67   (917)

Cash (used in) provided by changes in operating assets and liabilities:

        

Accounts receivable, net

  (2,258)  2,224 

Inventories, net

  351   (485)

Prepaid expenses and other assets

  (1,933)  (2,691)

Accounts payable

  1,270   71 

Accrued liabilities and taxes payable

  (1,403)  (2,517)

Unearned revenues

  1,056   523 

Net cash provided by operating activities

  29,921   23,553 

Cash flows from investing activities:

        

Acquisitions, net of cash acquired

  (300,793)  - 

Purchases of property, plant and equipment

  (3,650)  (954)

Net cash (used in) investing activities

  (304,443)  (954)

Cash flows from financing activities:

        

Proceeds from the issuance of debt

  70,000   - 

Payments of debt

  (10,000)  - 

Dividends

  (2,495)  (2,341)

Proceeds from the exercise of stock options

  5,352   3,692 

Payments of contingent consideration

  (234)  (11)

Proceeds from the issuance of common stock, net

  -   145,935 

Net cash provided by financing activities

  62,623   147,275 

Effect of exchange rate changes on cash and cash equivalents

  (260)  2,477 

Net (decrease) increase in cash and cash equivalents

  (212,159)  172,351 

Cash and cash equivalents at beginning of period

  263,865   81,380 

Cash and cash equivalents at end of period

 $51,706  $253,731 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands, except per share data)

 

 

 

  

Common Stock

             
  

Number of Shares

  

Amount

  

Retained Earnings

  

AOCI*

  

Total

 

March 31, 2021

  5,140,568  $317,652  $72,459  $16,116  $406,227 

Exercise of stock options and vesting of restricted stock units

  58,324   1,089   -   -   1,089 

Dividends paid, $0.16 per share

  -   -   (824)  -   (824)

Stock-based compensation expense

  -   2,197   -   -   2,197 

Foreign currency translation

  -   -   -   5,371   5,371 

Cumulative adjustment due to adoption of ASU 2020-06

  -   (22,735)  5,683   -   (17,052)

Net income

  -   -   1,995   -   1,995 

June 30, 2021

  5,198,892  $298,203  $79,313  $21,487  $399,003 

Exercise of stock options and vesting of restricted stock units

  24,340   1,992   -   -   1,992 

Dividends paid, $0.16 per share

  -   -   (834)  -   (834)

Stock-based compensation expense

  -   2,039   -   -   2,039 

Foreign currency translation

  -   -   -   (6,503)  (6,503)

Net income

  -   -   3,720   -   3,720 

September 30, 2021

  5,223,232  $302,234  $82,199  $14,984  $399,417 

Exercise of stock options and vesting of restricted stock units

  21,396   2,271   -   -   2,271 

Dividends paid, $0.16 per share

  -   -   (837)  -   (837)

Stock-based compensation expense

  -   3,703   -   -   3,703 

Foreign currency translation

  -   -   -   (6,165)  (6,165)

Net (loss)

  -   -   (2,060)  -   (2,060)

December 31, 2021

  5,244,628  $308,208  $79,302  $8,819  $396,329 

 

 

  

Common Stock

             
  

Number of Shares

  

Amount

  

Retained Earnings

  

AOCI*

  

Total

 

March 31, 2020

  4,387,140  $158,023  $72,359  $(10,369) $220,013 

Proceeds from the issuance of common stock, net of issuance costs of $9,315

  690,000   145,935   -   -   145,935 

Exercise of stock options and vesting of restricted stock units

  25,799   1,654   -   -   1,654 

Dividends paid, $0.16 per share

  -   -   (704)  -   (704)

Stock-based compensation expense

  -   1,268   -   -   1,268 

Foreign currency translation

  -   -   -   12,860   12,860 

Adoption of accounting standards, net

  -   -   (9)  -   (9)

Net income

  -   -   1,217   -   1,217 

June 30, 2020

  5,102,939  $306,880  $72,863  $2,491  $382,234 

Exercise of stock options and vesting of restricted stock units

  14,502   1,047   -   -   1,047 

Dividends paid, $0.16 per share

  -   -   (818)  -   (818)

Stock-based compensation expense

  -   2,008   -   -   2,008 

Foreign currency translation

  -   -   -   5,262   5,262 

Net income

  -   -   2,679   -   2,679 

September 30, 2020

  5,117,441  $309,935  $74,724  $7,753  $392,412 

Exercise of stock options and vesting of restricted stock units

  13,590   991   -   -   991 

Dividends paid, $0.16 per share

  -   -   (819)  -   (819)

Stock-based compensation expense

  -   3,611   -   -   3,611 

Foreign currency translation

  -   -   -   21,142   21,142 

Net (loss)

  -   -   (4,542)  -   (4,542)

December 31, 2020

  5,131,031  $314,537  $69,363  $28,895  $412,795 

 

*Accumulated Other Comprehensive Income (Loss).

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

Mesa Laboratories, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(dollar and share amounts in thousands, unless otherwise specified)

 

 

 

Note 1. Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

In this quarterly report on Form 10-Q, Mesa Laboratories, Inc., a Colorado corporation, together with its subsidiaries is collectively referred to as “we,” “us,” “our,” the “Company” or “Mesa.”

 

We are a multinational manufacturer, developer, and seller of life science tools and critical quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia Pacific, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross margins.

 

As described in Note 12. "Segment Information," following the acquisition (the "Agena Acquisition") of Agena Bioscience, Inc. ("Agena") on October 20, 2021, we changed our financial reporting segments to align with strategic changes in the way we manage our business units. These changes impacted our reportable segments but did not impact our consolidated financial statements. Segment information presented herein reflects the impact of these changes for all periods presented. As of December 31, 2021, we managed our operations in four reportable segments, or divisions:

 

 

Sterilization and Disinfection Control - manufactures and sells biological, cleaning, and chemical indicators which are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry.

 

Biopharmaceutical Development - develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacture of biotherapeutic drugs. Customers include biopharmaceutical research, development, and manufacturing teams at biopharmaceutical companies and academic research and development laboratories. 

 

Calibration Solutions - develops, manufactures, and sells quality control and calibration products used to measure or calibrate temperature, pressure, pH, humidity, and other such parameters for health and safety purposes, primarily in hospital, medical device manufacturing, pharmaceutical manufacturing, and various laboratory environments. This division represents a combination of the historical Instruments and Continuous Monitoring reportable segments.

 

Clinical Genomics - develops, manufactures, and sells highly sensitive, low-cost, high-throughput, genetic analysis tools used by labs to perform clinical genomic testing in several therapeutic areas, such as newborn screenings, pharmacogenetics, and oncology. This division is a new reportable segment comprised entirely of Agena's operations. For more information on Mesa's acquisition of Agena, see Note 11. "Significant Transactions." 

 

Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for the fair statement of our financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of results that may be achieved for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended  March 31, 2021.

 

Certain prior year amounts have been reclassified in order to conform to the current year presentation.

 

Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year, references to the first quarter of fiscal year 2022 refer to the period from April 1, 2021 through June 30, 2021, references to the second quarter of fiscal year 2022 refer to the period from July 1, 2021 through September 30, 2021, and references to the third quarter of fiscal year 2022 refer to the period from October 1, 2021 through December 31, 2021. References to “fiscal year 2021” refer to the fiscal year ended March 31, 2021, and to “fiscal year 2022” refer to the fiscal year ending March 31, 2022.

 

Risks and Uncertainties

 

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and revenues and expenses during the reporting periods. These estimates represent management's judgement about the outcome of future events. The current global business environment continues to be impacted directly and indirectly by the effects of the novel coronavirus ("COVID-19") and its variants, and it is not possible to accurately predict the future impact of COVID-19. However, we have reviewed the estimates used in preparing the financial statements and have identified the following factors that have a reasonable possibility of being materially affected by the impacts of COVID-19 during the near term: 

 

 

Estimates regarding the future financial performance of the business used in the impairment tests for goodwill and long-lived assets acquired in a business combination; however, we have identified no COVID-19-related triggering events since our impairment analysis was completed during the quarter ended March 31, 2021; 
 

Estimates regarding the recoverability of deferred tax assets and estimates regarding cash needs and associated indefinite reinvestment assertions;
 

Estimates regarding recoverability of customer receivables;
 

Estimates of the net realizable value of inventory.

 

Page 6

 

Recently Issued Accounting Pronouncements

 

We have reviewed all recently issued accounting pronouncements and have concluded that they are either not applicable to us or are not expected to have a significant impact on our consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of both liabilities and equity, such as our convertible senior notes due 2025 (the "Notes"). ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted at the beginning of any fiscal year after December 15, 2020. The update permits the use of either the modified retrospective or full retrospective method of transition.

 

We early adopted ASU 2020-06 effective April 1, 2021 on a modified retrospective basis, and our adoption of this standard had a material effect on our consolidated financial statements. Upon adoption, we derecognized the $22,735 equity conversion feature, net of taxes, that was recorded to common stock, and we derecognized the deferred tax liability of $5,747. We recorded an increase of $22,799 in aggregate to the Note balance as a result of the reversal of the separation of the debt and equity components of the convertible debt. The net effect of these adjustments, which represents $5,683 of historical non-cash interest expense, net of taxes, was recorded as an increase in the balance of beginning retained earnings as of April 1, 2021. The adoption of this standard has significantly decreased the amount of non-cash interest expense recognized in our Condensed Statement of Operations as a result of eliminating the discount associated with the equity component. Our statements of cash flows reflect the lower non-cash interest expense in effect after the adoption of ASU 2020-06.

 

In each period in which the Notes have been outstanding, we have always intended to settle the Notes in shares of common stock rather than in cash, and therefore, we have applied the if-converted method to calculate the potentially dilutive impact of the Notes on earnings per share. In each reporting period, we have determined that the Notes were antidilutive. Due to decreases in non-cash interest expense that will result from the adoption of ASU 2020-06, it is likely the Notes will have a dilutive effect in future periods, which would decrease our diluted earnings per share. 

 

On October 28, 2021, the FASB issued Accounting Standard Update No. 2021-08 ("ASU 2021-08"), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends Accounting Standards Codification ("ASC") 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in a business combination. Prior to adoption, an acquirer generally recognized such items at fair value on acquisition date. 

 

We early adopted ASU 2021-08 upon its issuance effective October 28, 2021 and applied the amendments retrospectively to the Agena Acquisition, which occurred during fiscal year 2022, the year in which we adopted the amendment. As a result of adopting ASU 2021-08, we recognized Agena's deferred revenue at its recorded book value of $3,168 rather than at fair value, after determining that Agena's application of ASC 606 was appropriate and the underlying accounting for deferred revenue included no material errors. 

 

 

Note 2. Revenue Recognition

 

We develop, manufacture, market, sell, and maintain life sciences tools and quality control instruments and software, consumables, and services. Sales of hardware and software, such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, and data loggers, are generally driven by our acquisition of new customers, growth of existing customers, or customers replacing existing equipment. Hardware sales  may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function. We also offer on-demand and time-based service and maintenance contracts on our instruments. Our consumables such as biological indicator test strips are used on a standalone basis; however, some of our consumables, such as reagents used for molecular and genetic analysis, protein synthesis, and calibration solutions, are critical to the ongoing use of our instruments. Consumables are typically used on a one-time basis and require frequent replacement in our customers' operating cycles. Revenues from our new Clinical Genomics segment are derived from our recently acquired Agena business (See Note 11. "Significant Transactions"). These revenues consist of sales of consumables and instruments used in molecular and genetic analysis, as well as sales of discrete and contracted instrument maintenance agreements.

 

We evaluate our revenues internally based on operating segment, the timing of revenue generation, and the nature of goods and services provided. Typically, discrete revenue is recognized at the shipping point or upon completion of the service, while contracted revenue is recognized over a period of time reflective of the performance obligation period in the applicable contract. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

 

Page 7

 

 

The following tables present disaggregated revenues for the three and nine months ended December 31, 2021 and 2020, respectively:

 

  

Three Months Ended December 31, 2021

 
  

Sterilization and Disinfection Control

  

Biopharmaceutical Development

  

Calibration Solutions

  

Clinical Genomics*

  

Total

 

Discrete Revenues

                    

Consumables

 $11,718  $5,503  $889  $10,221  $28,331 

Hardware and Software

  250   4,907   6,978   4,407   16,542 

Services

  392   1,297   2,826   931   5,446 

Contracted Revenues

                    

Services and Software

  1,471   1,049   931   926   4,377 

Total Revenues

 $13,831  $12,756  $11,624  $16,485  $54,696 

 

  

Three Months Ended December 31, 2020

 
  

Sterilization and Disinfection Control

  

Biopharmaceutical Development

  

Calibration Solutions

  

Clinical Genomics*

  

Total

 

Discrete Revenues

                    

Consumables

 $11,250  $3,406  $726  $-  $15,382 

Hardware and Software

  151   3,771   8,130   -   12,052 

Services

  433   506   2,841   -   3,780 

Contracted Revenues

                    

Services and Software

  1,243   1,028   687   -   2,958 

Total Revenues

 $13,077  $8,711  $12,384  $-  $34,172 

 

  

Nine Months Ended December 31, 2021

 
  

Sterilization and Disinfection Control

  

Biopharmaceutical Development

  

Calibration Solutions

  

Clinical Genomics*

  

Total

 

Discrete Revenues

                    

Consumables

 $36,579  $14,329  $2,701  $10,221  $63,830 

Hardware and Software

  495   11,936   20,608   4,407   37,446 

Services

  1,586   2,729   8,042   931   13,288 

Contracted Revenues

                    

Services and Software

  4,354   3,194   2,418   926   10,892 

Total Revenues

 $43,014  $32,188  $33,769  $16,485  $125,456 

 

  

Nine Months Ended December 31, 2020

 
  

Sterilization and Disinfection Control

  

Biopharmaceutical Development

  

Calibration Solutions

  

Clinical Genomics*

  

Total

 

Discrete Revenues

                    

Consumables

 $32,252  $8,583  $2,294  $-  $43,129 

Hardware and Software

  388   10,518   22,127   -   33,033 

Services

  1,389   2,293   7,866   -   11,548 

Contracted Revenues

                    

Services and Software

  3,667   2,397   2,199   -   8,263 

Total Revenues

 $37,696  $23,791  $34,486  $-  $95,973 

 

*Revenues in the Clinical Genomics division represent transactions subsequent to the Agena Acquisition on October 20, 2021. 

 

Revenues from external customers are attributed to individual countries based upon the locations to which the products are shipped or exported, or the location of service performed, as follows:

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2021

  

2020

  

2021

  

2020

 

United States

 $30,414  $18,480  $68,253  $52,246 

Foreign

  24,282   15,692   57,203   43,727 

Total revenues

 $54,696  $34,172  $125,456  $95,973 

 

No foreign country exceeds 10% of total revenues.

 

Page 8

 

Contract Balances

Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within other accrued expenses and unearned revenues in the accompanying Condensed Consolidated Balance Sheets, and long-term contract liabilities are included within other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. We did not have any contract assets as of  December 31, 2021 or March 31, 2021. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.

 

A summary of contract liabilities is as follows:

 

Contract liabilities as of March 31, 2021

 $8,994 

Prior year liabilities recognized in revenues during the nine months ended December 31, 2021

  (5,387)

Contract liabilities added during the nine months ended December 31, 2021, net of revenues recognized

  10,201 

Contract liabilities balance as of December 31, 2021

 $13,808 

 

Contract liabilities of $3,538 added during the nine months ended December 31, 2021 are attributable to the Agena Acquisition (See Note 11. "Significant Transactions").

 

 

Note 3. Fair Value Measurements

 

Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable, and trade accounts payable approximate fair value. We measure our cash equivalents at fair value using quoted market prices in an active market, and we classify them within Level 1 of the fair value hierarchy. Cash and cash equivalents on our Condensed Consolidated Balance Sheets included $0 held in a money market account as of December 31, 2021, compared to $230,822 held in a money market account as of March 31, 2021. We used the money market funds for the Agena Acquisition, see Note 11. "Significant Transactions."

 

During fiscal year 2020, we issued $172,500 aggregate principal of 1.375% convertible senior notes due August 15, 2025. We estimate the fair value of the Notes based on Level 2 inputs of the last actively traded price or market observable input before the end of the reporting period. The estimated fair value and carrying value of the Notes are as follows:

 

  

December 31, 2021

  

March 31, 2021

 
  

Carrying Value

  

Fair Value (Level 2)

  

Carrying Value

  

Fair Value (Level 2)

 

Notes

 $169,140  $220,477  $145,675  $188,780 

 

The carrying value of the Notes increased as a result of the adoption of ASU 2020-06, discussed further in Note 1. "Description of Business and Summary of Significant Accounting Policies" and Note 6. "Indebtedness." 

 

Assets recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill, and other intangible assets, including those that were part of the Agena Acquisition. These assets are measured at fair value if determined to be impaired. Preliminary fair values assigned to assets acquired and liabilities assumed in the Agena Acquisition, except deferred revenues, were measured using Level 3 inputs, as discussed further in Note 11. "Significant Transactions." There were no transfers between the levels of the fair value hierarchy during the three and nine months ended December 31, 2021 or the three and nine months ended December 31, 2020.

 

Cash and cash equivalents and accounts receivable are the financial instruments that subject us to the highest concentration of credit risk. It is our policy to invest in highly liquid cash equivalent financial instruments with high credit ratings, and to maintain low single issuer exposure (except U.S. treasuries). Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. We reserve an allowance for potential write-offs of accounts receivable using historical collection experience and current and expected future economic and market conditions, but we have not written off any significant accounts to date. To manage credit risk, we consider the creditworthiness of new and existing customers, and we regularly review outstanding balances and payment histories. We  may require pre-payments from customers under certain circumstances and  may limit future purchases until payments are made on past due amounts.

 

 

Page 9

 
 

Note 4. Supplemental Balance Sheets Information

 

Inventories consist of the following:

 

  

December 31, 2021

  

March 31, 2021

 

Raw materials

 $13,962  $5,755 

Work in process

  1,956   426 

Finished goods

  7,801   4,997 

Inventories, net

 $23,719  $11,178 

 

As of December 31, 2021, $11,560 of the total inventory on hand was acquired as part of the Agena Acquisition and is attributable to the Clinical Genomics division. Finished goods inventory of Agena included $6,062 of inventory step-up as of October 20, 2021, which was required to report inventory at fair value at the time of acquisition. The inventory step-up was amortized to cost of revenues over approximately two months following the acquisition date, which resulted in a temporary reduction in gross profit for the Clinical Genomics division and the consolidated financial results. We fully amortized the $6,062 inventory step-up to costs of revenues on the Consolidated Statement of Operations during the period from October 20, 2021 to December 31, 2021.

 

Other accrued expenses consist of the following:

 

  

December 31, 2021

  

March 31, 2021

 

Accrued business taxes

 $6,289  $6,397 

Current operating lease liabilities

  2,733   1,023 

Interest payable

  918   303 

Warranty

  606   253 

Accrued professional services

  547   473 

Other

  1,394   1,496 

Total other accrued expenses

 $12,487  $9,945 

 

As of December 31, 2021 and March 31, 2021, operating lease right-of-use assets where we are the lessee were $10,785 and $1,930, respectively, and are included within other assets in the accompanying Condensed Consolidated Balance Sheets.  The associated operating lease liabilities were $10,604 and $1,700 as of December 31, 2021 and March 31, 2021, respectively, and are included in other accrued expenses and other long-term liabilities. The increased balances are due to the acquisition of Agena. 

 

Page 10

 

 

 

Note 5. Goodwill and Intangible Assets, Net

 

Finite-lived intangible assets consist of the following:

 

  

December 31, 2021

  

March 31, 2021

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

 

Intellectual property

 $66,984  $(10,662) $56,322  $21,201  $(8,595) $12,606 

Trade names

  24,360   (3,333)  21,027   8,612   (3,129)  5,483 

Customer relationships

  249,612   (62,369)  187,243   145,754   (52,206)  93,548 

Non-compete agreements

  1,299   (1,225)  74   1,299   (1,195)  104 

Total

 $342,255  $(77,589) $264,666  $176,866  $(65,125) $111,741 

 

The increase in the intangible assets balance from March 31, 2021 to December 31, 2021 is primarily related to the Agena Acquisition. See Note 11. "Significant Transactions" for more information. 

 

Amortization expense for finite-lived intangible assets acquired in a business combination was $5,922 and $13,495 for the three and nine months ended December 31, 2021, respectively, and $3,828 and $10,694 for the three and nine months ended December 31, 2020, respectively. The increase in intangibles amortization was primarily attributable to amortizing intangible assets acquired in the Agena Acquisition.

 

For the following fiscal years ending March 31, amortization expense is estimated as follows:

 

 

Remainder of 2022

      

$ 6,447

2023

      

25,670

2024

      

25,154

2025

      

23,566

2026

      

22,789

 

The change in the carrying amount of goodwill was as follows:

 

  

Sterilization and Disinfection Control

  

Biopharmaceutical Development

  

Calibration Solutions

  

Clinical Genomics

  

Total

 

March 31, 2021

 $30,153  $93,399  $37,289  $-  $160,841 

Effect of foreign currency translation

  (275)  (2,995)  (35)  -   (3,305)

Goodwill acquired in Agena Acquisition

  -   -   -   136,006   136,006 

December 31, 2021

 $29,878  $90,404  $37,254  $136,006  $293,542 

 

The Agena Acquisition created an impetus for us to realign our financial reporting segments (See Note 12. “Segment Information”) and reevaluate the underlying reporting units that form the basis of our goodwill impairment testing. As a result of adjustments to our reporting units, we performed goodwill impairment assessments during the quarter ended December 31, 2021. Based on those assessments, we determined that the fair value of each reporting unit exceeded its carrying value, and no impairment existed as of the date of the Agena Acquisition or as of December 31, 2021.

 

 

Note 6. Indebtedness

 

Credit Facility

On  March 5, 2021, we entered into a four-year senior secured credit agreement that includes 1) a revolving credit facility in an aggregate principal amount of up to $75,0002) a swingline loan in an aggregate principal amount not exceeding $5,000, and 3) letters of credit in an aggregate stated amount not exceeding $2,500 at any time. The Credit Facility also provides for an incremental term loan or an increase in revolving commitments in an aggregate principal amount of at a minimum $25,000 and at a maximum $75,000, subject to the satisfaction of certain conditions and lender considerations (together, the available facilities are referred to as the "Credit Facility").

 

Amounts borrowed under the Credit Facility bear interest at either a base rate or a Eurodollar rate, plus an applicable spread. The weighted average interest rate on borrowing under our line of credit during the third quarter of fiscal year 2022 was 1.5%. We are obligated to pay quarterly unused commitment fees of between 0.15% and 0.35% of the Credit Facility’s aggregate principal amount, based on our leverage ratio. Since the Credit Facility's inception, the rate applied to our unused commitment fees has been 0.15%. We incurred unused commitment fees of $13 and $70 during the three and nine months ended December 31, 2021, respectively, and the balance of unamortized customary lender fees was $526 and $650 as of December 31, 2021 and  March 31, 2021, respectively. On our Consolidated Balance Sheets, the short term portion of unamortized fees is recorded within prepaid expenses and other, and the long term portion is recorded in other assets. The fees are being expensed on a straight line basis over the life of the agreement. 

 

The financial covenants in the Credit Facility include a maximum leverage ratio of 5.50 to 1.00 for the first four testing dates on which the line of credit is outstanding; 5.0 to 1.0 on each of the fifth, sixth, seventh, and eighth testing dates; and 4.5 to 1.0 on each testing date following the eighth testing date, except that we  may have a leverage ratio of 5.75 to 1.0 for a period of four consecutive quarters following a permitted acquisition. The Credit Facility also stipulates a minimum fixed charge coverage ratio of 1.25 to 1.0. Other covenants include restrictions on our ability to incur debt, grant liens, make fundamental changes, engage in certain transactions with affiliates, or conduct asset sales. As of  December 31, 2021, we were in compliance with all required covenants.

 

On October 18, 2021, we borrowed $70,000 under the Credit Facility to provide a portion of the cash needed to complete the Agena Acquisition as further discussed in Note 11. "Significant Transactions." Subsequent to the Agena Acquisition, we repaid $10,000 against our outstanding balance during the third quarter of fiscal year 2022. As of December 31, 2021, the outstanding balance under our Credit Facility was $60,000. In January 2022, we repaid $4,000 of the outstanding balance on our Credit Facility. 

 

Page 11

 

Convertible Notes 

On August 12, 2019, we issued an aggregate principal amount of $172,500 of convertible senior notes. The Notes mature on August 15, 2025, unless earlier repurchased or converted, and bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 each year beginning on February 15, 2020. The Notes are initially convertible at a conversion rate of 3.5273 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $283.50 per share of common stock. Noteholders may convert their Notes at their option only in the following circumstances:

 

(i)  during any calendar quarter commencing after the calendar quarter ended on December 31, 2019 (and only during such calendar quarter), if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(ii)  during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
(iii)  upon the occurrence of certain corporate events or distributions on our common stock, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the Notes) or a transaction resulting in the Company’s common stock converting into other securities or property or assets; and
(iv)  at any time from, and including, April 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date. 

 

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. Our current intent is to settle conversions entirely in shares of common stock. We will reevaluate this policy from time to time as we receive conversion notices from note holders. The circumstances necessary for conversion were not met during the three or nine months ended December 31, 2021. As of December 31, 2021, the Notes are classified as a long-term liability on our Condensed Consolidated Balance Sheets as the circumstances necessary for conversion were not satisfied as of the end of the period. The if-converted value of the Notes did not exceed the principal balance as of  December 31, 2021.

 

Debt issuance costs related to the Notes are comprised of discounts and commissions payable to the initial purchasers of $5,175 and third party offering costs of $255. The debt issuance costs are being amortized to interest expense using the effective interest method over the six-year contractual term of the Notes.

 

Due to our adoption of ASU 2020-06 on April 1, 2021, we no longer bifurcate the Notes into a liability and an equity component in our Condensed Consolidated Balance Sheets (see Note 1. "Description of Business and Summary of Significant Accounting Policies"). The Notes are accounted for entirely as a liability, and the issuance costs of the Notes are accounted for wholly as debt issuance costs. The equity conversion feature that was recorded to common stock, as well as the unamortized debt discount and amortization expense attributable to equity, have been derecognized.

 

The net carrying amount of the Notes was as follows:

 

  

December 31, 2021

  

March 31, 2021

 

Principal outstanding

 $172,500  $172,500 

Unamortized debt discount attributable to equity

  -   (23,497)

Unamortized debt issuance costs

  (3,360)  (3,328)

Net carrying value

 $169,140  $145,675 

 

We recognized interest expense on the Notes as follows:

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2021

  

2020

  

2021

  

2020

 

Coupon interest expense at 1.375%

 $593  $593  $1,779  $1,779 

Amortization of debt discounts and issuance costs

  223   1,357   666   4,024 

Total

 $816  $1,950  $2,445  $5,803 

 

The effective interest rate on the notes is approximately 1.9%. Prior to the adoption of ASU 2020-06, the effective interest rate was approximately 5.5%. 

 

 

Note 7. Stockholders' Equity

 

Stock-Based Compensation

During the second quarter of fiscal year 2022, our shareholders approved the Mesa Laboratories, Inc. 2021 Equity Incentive Plan (the "2021 Equity Plan"), which authorizes the issuance of 330 shares of common stock to eligible participants. For the purpose of counting the shares remaining under the 2021 Equity Plan, each share underlying a stock option or a full value award (such as restricted stock units and performance shares) counts as one share used. The 2021 Equity Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to grant equity awards, or to delegate its authority under the plan to make grants (subject to certain legal and regulatory restrictions), including the authority to determine the individuals to whom awards will be granted, the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule, and all other terms and conditions of the awards.

 

Our 2021 Equity Plan includes retiree provisions, which result in the acceleration of stock-based compensation expense for retiree-eligible participants. 

 

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The exercise price of stock awards granted under the 2021 Equity Plan cannot be less than the fair market value at the date of grant. Shares issued during the nine months ended December 31, 2021 were issued in connection with the 2021 Equity Plan.

 

Amounts recognized related to stock-based compensation are as follows: 

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2022

  

2021

  

2021

  

2020

 

Stock-based compensation expense

 $3,703  $3,611  $7,939  $6,887 

Amount of income tax (benefit) expense recognized in earnings

  (743)  320   (4,247)  (1,127)

Stock-based compensation expense, net of tax

 $2,960  $3,931  $3,692  $5,760 

 

Stock-based compensation expense is included in cost of revenues, selling, general and administrative, and research and development expense in the accompanying unaudited Condensed Consolidated Statements of Operations.

 

The following is a summary of stock option award activity for the nine months ended December 31, 2021:

 

  

Stock Options

 
  

Shares Subject to Options

  

Weighted- Average Exercise Price per Share

  

Weighted-Average Remaining Contractual Life (Years)

  

Aggregate Intrinsic Value

 

Outstanding as of March 31, 2021

  253  $129.55   2.7  $28,856 

Awards granted

  37   268.85         

Awards forfeited or expired

  (4)  191.52         

Awards exercised

  (62)  98.99         

Outstanding as of December 31, 2021

  224  $159.79   2.8  $37,597 

 

The stock options granted during the nine months ended December 31, 2021 vest in equal installments on September 1, 2022, June 15, 2023 and June 15, 2024.

 

The following is a summary of restricted stock unit ("RSU") award activity for the nine months ended December 31, 2021:

 

  

Time-Based Restricted Stock Units

  

Performance-Based Restricted Stock Units

 
  

Number of Shares

  

Weighted- Average Grant Date Fair Value per Share

  

Number of Shares

  

Weighted- Average Grant Date Fair Value per Share

 

Outstanding as of March 31, 2021(1)

  37  $206.56   20  $207.88 

Awards granted (1)

  37   274.83   47   302.15 

Performance adjustment(2)

  -   -   16   190.07 

Awards forfeited

  (2)  224.66   -   - 

Awards distributed

  (20)  207.98   (28)  197.81 

Outstanding as of December 31, 2021(1)

  52  $253.59   55  $288.45 

 

(1)

Balances for performance-based restricted stock units ("PSUs") are reflected at target.

(2)

During the three months ended June 30, 2021, the fiscal year 2019 PSUs vested and were paid at 280% of target, based on actual performance results and completion of service conditions. In addition, the PSUs granted to employees of Gyros Protein Technologies Holding AB vested at 60% of target, following a modification of the performance targets by the Compensation Committee of the Board of Directors during fiscal year 2021.

 

The outstanding time-based RSUs vest and settle in shares of our common stock on a one-for-one basis. Of the RSUs granted during the nine months ended December 31, 2021, approximately 28 vest in equal installments on September 1, 2022, June 15, 2023 and June 15, 2024; approximately 8 vest in equal installments on November 15, 2022, November 15, 2023, and November 15, 2024; and the remainder represent time-based RSUs issued to non-employee directors, which vest one year from the grant date. We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.

 

Performance-based RSUs vest upon completion of the service period described in the award agreement and based on achievement of the financial targets described in the award agreements. We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the financial targets on a straight-line basis over the service period. During fiscal year 2020, we awarded 8 PSUs (the "FY 20 PSUs") that are subject to both service and performance conditions to eligible employees. The FY 20 PSUs had a grant date fair value of $202.00 per share and vest based on our achievement of specific performance criteria for the three-year period from  April 1, 2019 through  March 31, 2022 and on a pro-rata basis after 12 months of continued service through  June 15, 2022. The quantity of shares that will be issued upon vesting will range from 0% to 200% of the targeted number of shares; if the defined minimum targets are not met, then no shares will vest. Based on actual and projected performance through the quarter ended December 31, 2021, we increased our estimate of FY 20 PSUs expected to vest from 6 to 9 shares, resulting in a cumulative effect true up of $584 recorded during the third quarter of fiscal year 2022. We expect to record $151 of expense related to the FY 20 PSUs in the fourth quarter o