MLAB Mesa Laboratories Inc

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

Note 2. Significant Transactions

GKE - Fiscal Year 2024 Acquisition 

We acquired 100% of the outstanding shares of GKE GmbH and SAL GmbH effective  October 16, 2023, and upon approval by applicable Chinese regulators, effective December 31, 2023, we acquired 100% of the outstanding shares of Beijing GKE Science & Technology Co. Ltd. (“GKE China.” Together with GKE GmbH and SAL GmbH, “GKE” or the "GKE acquisition").

GKE develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets. GKE is included in our Sterilization and Disinfection Control ("SDC") division, and GKE's strengths in chemical indictors are complementary to SDC's strengths in biologic indicators, as chemical and biologic indicators are used in the same sterility validation workflows. Additionally, GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain regulatory 510(k) clearance on certain GKE products for sale in the United States, which would further expand organic revenues growth opportunities from the GKE business.

We finalized our purchase price accounting of GKE during fiscal year 2024. Total cash consideration for the GKE acquisition was $87,187, net of cash and financial liabilities and inclusive of working capital adjustments. Of the total acquisition price, approximately $9,200 (at June 30, 2024 exchange rates) is being held back for a period of 18 months from the acquisition closing as security against potential indemnification losses. We funded the acquisition through a combination of cash on-hand and a total of $71,000 borrowed under our line of credit. 

During the three months ended June 30, 2024, GKE's operations contributed $6,254 to our consolidated revenues and $3,820 to our gross profit, including $778 of inventory step-up amortization recorded to cost of revenues. Additionally, amortization expense of $532 was recorded to general and administrative expense and $110 was recorded to cost of revenues related to intangibles acquired as part of the GKE acquisition during the three months ended June 30, 2024. 

Note 3. Revenue

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related consumables.

Hardware sales include physical products such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, data loggers, and process challenge devices. Hardware sales  may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function.

Consumables are typically used on a one-time basis and require frequent replacement in our customers' operating cycles. Consumables sold by our Clinical Genomics and Biopharmaceutical Development divisions, such as reagents used for molecular and genetic analysis or solutions used for protein synthesis, are critical to the ongoing use of our instruments. Consumables such as biological indicator test strips sold by our Sterilization and Disinfection Control division are used on a standalone basis.

Revenues from hardware and consumables are recognized upon transfer to the customer, typically at the point of shipment. 

We also offer maintenance, calibration, and testing service contracts. These contracts result in revenues recognized over time, for example, when we are obligated to perform labor and replace parts on an as-needed basis over a contractually specified period, or at a point in time, upon completion of a specific, discrete service. In many cases, our contracts contain both revenues recognized over time and revenues recognized at a point in time. 

We evaluate our revenues internally based on business division and the nature of goods and services provided.

The following tables present disaggregated revenues for the three months ended June 30, 2024 and 2023, respectively:

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

Other than China, no foreign country exceeded 10% of total revenues for the three months ended June 30, 2024 and 2023.

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 unearned revenues in the accompanying unaudited Condensed Consolidated Balance Sheets, and long-term contract liabilities are included within other noncurrent liabilities in the accompanying unaudited Condensed Consolidated Balance Sheets. The significant majority of our revenues and related receivables and contract liabilities are generated from contracts with customers with original durations of 12 months or less. Contract liabilities will be recognized to revenue as we satisfy our obligations under the terms of the contracts. 

A summary of contract liabilities is as follows:

Note 4. 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; they are classified within Level 1 of the fair value hierarchy. 

The financial instruments that subject us to the highest concentration of credit risk are cash and accounts receivable. We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss. Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. No customers accounted for more than 10% of total trade receivables as of June 30, 2024.

On April 5, 2024, we entered into separate, privately negotiated purchase agreements with a limited number of holders of our 1.375% convertible senior notes due  August 15, 2025 (the "Notes"), through which we repurchased $75,000 in aggregate principal amount of the Notes. See Note 7. "Indebtedness" for further information. As of June 30, 2024, we had remaining outstanding $97,500 aggregate principal amount of the Notes. We estimate the fair value of the Notes using Level 2 inputs based on the last actively traded price or observable market input preceding the end of the reporting period. The fair value of the Notes is approximately correlated to our stock price.

The estimated fair value and carrying value of the Notes were as follows:

The carrying amount of the term loan and revolving line of credit (together, the "Credit Facility") on the Condensed Consolidated Balance Sheets approximates fair value due to the variable interest rate pricing on the debt with the balance bearing an interest rate approximating current market rates.

For the GKE acquisition, we held back approximately $9,200 (at June 30, 2024 exchange rates) for a period of 18 months from the acquisition closing as security against potential indemnification losses. We estimate the fair value of consideration held back to be $8,900, using Level 3 inputs, and we adjust the estimated fair value at each reporting period through earnings.

During fiscal year 2023, we acquired substantially all of the assets and certain liabilities of Belyntic GmbH’s peptide purification business (“the Belyntic acquisition”). The Belyntic acquisition obligates us to pay contingent consideration of up to $1,500 cash upon regulatory approval of certain patent applications (see Note 11. "Commitments and Contingencies"), of which $750 has not yet been paid. We estimate the fair value of the remaining contingent consideration is $650, using Level 3 inputs and a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input, and we adjust the estimated fair value at each reporting period through earnings. 

Amounts recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include the initial recognition and disclosure of most assets and liabilities purchased in business acquisitions and any related measurement period adjustments. Additionally, assets such as property and equipment, operating lease assets, goodwill and other intangible assets are adjusted to fair value if determined to be impaired. We recorded no impairments during the three months ended June 30, 2024 or June 30, 2023. Fair values of such assets and liabilities require measurement using Level 3 inputs.

There were no transfers between the levels of the fair value hierarchy during the three months ended June 30, 2024 or June 30, 2023.

Note 5. Supplemental Information

Inventories consisted of the following:

Prepaid expenses and other current assets consisted of the following: 

Accrued payroll and benefits consisted of the following:

Other accrued expenses consisted of the following: 

The increase in other accrued expenses is primarily due to the reclassification of the GKE acquisition consideration held back to current from long term as of June 30, 2024.

Other noncurrent liabilities consisted of the following: 

The decrease in other noncurrent liabilities is primarily due to the reclassification of the GKE acquisition consideration held back to current from long term as of June 30, 2024.

$304 of the increase in depreciation expense is attributable to GKE.

Note 6. Goodwill and Intangible Assets, Net

Finite-lived intangible assets consisted of the following:

Amortization expense for finite-lived intangible assets was as follows:

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

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

Note 7. Indebtedness

Credit Facility

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

On  October 5, 2023, we amended the terms of the Credit Facility to increase the maximum principal amount available to us under the Revolver from $75,000 to $125,000. 

On  April 5, 2024, we further amended and restated the terms of the Credit Facility to:

In conjunction with the amendment and restatement of the Credit Facility during the three months ended June 30, 2024, we incurred $1,987 of customary lender fees and debt issuance costs paid to third parties, of which $1,242 is related to the Revolver and $745 is related to the Term Loan. The fees are being amortized to interest expense through maturity. 

Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate plus an applicable spread ranging from 1.5% to 3.5%, depending on our total net leverage ratio. The interest rate on borrowings under our line of credit as of  June 30, 2024 was 8.4%.

The financial covenants in the Credit Facility as amended include a maximum leverage ratio of 4.50 to 1.00 for the first five testing dates on which amounts under the Revolver are outstanding; 4.0 to 1.0 on each of the sixth, seventh, eighth, and ninth testing dates; and 3.5 to 1.0 on each testing date following the ninth testing date. The Credit Facility also stipulates a minimum fixed charge coverage ratio of 1.25 to 1.0 and a minimum senior net leverage ratio of 3.5 to 1. 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  June 30, 2024, we were in compliance with all covenants under the Credit Facility.

Term Loan

We borrowed $75,000 under the Term Loan on  April 5, 2024, to fund the repurchase of a portion of the Notes (see “Convertible Notes” below). During the three months ended June 30, 2024, we made a required quarterly principal payment on the Term Loan of $937. 

We are required to make quarterly principal payments on the Term Loan. For the following fiscal years ending March 31, debt payments on the Term Loan are required as follows:

The net carrying amount of the Term Loan was as follows:

The effective interest rate on the Term Loan at the time of borrowing was 8.13%.

Revolver

As of  June 30, 2024, the outstanding balance under the Revolver was $42,000 and $83,000 was available for borrowing. Subsequent to  June 30, 2024, we repaid an additional $3,500 on the Revolver. 

We are obligated to pay quarterly unused commitment fees of between 0.20% and 0.35% of the Revolver’s aggregate principal amount, based on our leverage ratio.

The balance of unamortized customary lender fees, including fees related to the April 5, 2024 amendment and restatement, was $1,428 and $321 as of  June 30, 2024 and  March 31, 2024, respectively.

Convertible Notes 

On August 12, 2019, we issued an aggregate principal amount of $172,500 of Notes. The net proceeds from the Notes, after deducting underwriting discounts and commissions and other related offering expenses payable by us, were approximately $167,056. 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. The Notes are initially convertible, subject to certain conditions, 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. 

On April 5, 2024, we entered into separate, privately negotiated transactions with certain holders of the Notes to repurchase $75,000 aggregate principal amount of the Notes for an aggregate repurchase price of $71,250 in cash, plus accrued and unpaid interest of $160. We accounted for the partial repurchase of the Notes as a debt extinguishment, which resulted in the recognition of a gain on extinguishment of $3,197 in other income on the statements of operations during the three months ended June 30, 2024. As of June 30, 2024, $97,500 in aggregate principal amount of the Notes remained outstanding.

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. The circumstances necessary for conversion were not met during the three months ended June 30, 2024. As of June 30, 2024, the Notes were classified as a noncurrent liability on our Condensed Consolidated Balance Sheets. The if-converted value of the Notes did not exceed the principal balance as of  June 30, 2024.

The net carrying amount of the Notes was as follows:

We recognized interest expense on the Notes as follows:

The effective interest rate on the Notes is approximately 1.9%.

Note 8. Stockholders' Equity

Stock-Based Compensation

During the three months ended June 30, 2024, we issued time-based restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") pursuant to the Mesa Laboratories, Inc. Amended and Restated 2021 Equity Incentive Plan, which authorizes the issuance of 660 shares of common stock to eligible participants.

Expense recognized related to stock-based compensation is as follows: 

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 three months ended June 30, 2024:

The following is a summary of RSU and PSU award activity for the three months ended June 30, 2024:

Outstanding time-based RSUs vest and settle in shares of our common stock on a one-for-one basis. The RSUs granted to employees during the three months ended June 30, 2024 vest in equal installments on the first, second, and third anniversary of the grant date. We generally recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.

We grant PSUs to certain key employees. The number of shares earned is determined at the end of each performance period based on Mesa's achievement of certain pre-defined targets per the related award agreement. The outstanding PSUs vest upon completion of the service period described in the award agreement. We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the performance targets on a straight-line basis over the service period. 

During the three months ended June 30, 2024, the Compensation Committee of the Board of Directors created a plan to award 41 PSUs at target (“the FY25 PSUs”) to eligible employees. Of the 41 PSUs granted, 23 PSUs have a grant date fair value of $89.82 and are subject to service and company financial performance conditions. The financial performance measurement period is from April 1, 2024 through March 31, 2027. The remaining 18 PSUs have a grant date fair value of $119.54 and are subject to service and market conditions, with the market performance period measured from June 18, 2024 through June 18, 2027. The service period for all of the FY25 PSUs is from June 18, 2024 through June 18, 2027. The quantity of shares that will be earned based upon either company financial performance or market performance 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.

Note 9. Earnings (Loss) Per Share

The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings (loss) per share:

Potentially dilutive securities include stock options and both time and performance based RSUs (collectively "stock awards"), as well as common shares underlying our Notes. Stock awards are excluded from the calculation of diluted EPS if they are subject to performance conditions that have not yet been achieved or if they are antidilutive. Diluted EPS does not consider the impact of potentially dilutive securities in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect in such cases.

The following stock awards were excluded from the calculation of diluted EPS:

Shares underlying the Notes were excluded from the diluted EPS calculation for the three months ended June 30, 2024 and 2023 as the impact of the assumed conversion of the Notes calculated under the if-converted method was antidilutive. The decrease in assumed conversion of the Notes is related to the partial repayment of the Notes that occurred in the three months ended June 30, 2024 (see Note 7. "Indebtedness").

Note 10. Income Taxes

We reported an income tax provision as follows:

For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax income. Each quarter, our estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. There is a potential for volatility in the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which they relate, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.

Our effective income tax rate was 13% for the three months ended June 30, 2024 compared to 41% for the three months ended June 30, 2023. The effective tax rate for the three months ended June 30, 2024 differed from the statutory federal rate of 21% primarily due to the valuation allowance established related to subsidiaries based in the United States during the fiscal year ended March 31, 2024. 

Note 11. Commitments and Contingencies

We are party to various legal proceedings arising in the ordinary course of business. As of  June 30, 2024, we are not party to any legal proceeding that management believes could have a material adverse effect on our unaudited consolidated financial position, results of operations, or cash flows. 

As part of the GKE acquisition, we agreed to pay the GKE sellers approximately $9,200 (at  June 30, 2024 exchange rates) 18 months following the acquisition date, pending adjustments for potential indemnification losses that  may arise. The liability is recorded at its fair value of $8,900 in other accrued expenses on our unaudited Condensed Consolidated Balance Sheets as of June 30, 2024. 

As part of the Belyntic acquisition, we agreed to pay the sellers a contingency based upon approval of contractually specified patents. The estimated fair value of the probable remaining contingent consideration was $650 as of  June 30, 2024.
 

Note 12. Segment Information

The following tables set forth our segment information:

The following table sets forth inventories by reportable segment. Our chief operating decision maker is not provided with any other segment asset information.