Mesa Laboratories Inc 10-Q for FY2021 Q2
Mesa Laboratories Inc /Co/ (MLAB)
About this 10-Q
Mesa Laboratories Inc filed this 10-Q on November 5, 2020, covering the quarter ended September 30, 2020 (FY2021 Q2).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $31.86M
- up 24.8% from $25.54M a year earlier
- Diluted EPS
- $0.51
- down 30.1% from $0.73 a year earlier
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
MESA LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of | (I.R.S. Employer | |||
| incorporation or organization) | Identification number) | |||
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name on each exchange on which registered |
| The |
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.
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).
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.
| | 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
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:
There were
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| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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| Exhibit 31.1 Certifications Pursuant to Rule 13a-14(a) |
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| Exhibit 31.2 Certifications Pursuant to Rule 13a-14(a) |
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| Exhibit 32.1 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350 |
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| Exhibit 32.2 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350 |
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Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share amounts)
| September 30, | March 31, | |||||||
| 2020 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, less allowances of $ and $, respectively | ||||||||
| Inventories, net | ||||||||
| Prepaid income taxes | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net of accumulated depreciation of $ and $, respectively | ||||||||
| Deferred tax asset | ||||||||
| Other assets | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and benefits | ||||||||
| Unearned revenues | ||||||||
| Contingent consideration | ||||||||
| Other accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liability | ||||||||
| Convertible senior notes, net of discounts and debt issuance costs | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, par value; authorized shares; issued and outstanding, and shares, respectively | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Nonoperating expense: | ||||||||||||||||
| Interest expense and amortization of debt discount | ||||||||||||||||
| Other expense (income), net | ( | ) | ( | ) | ||||||||||||
| Total nonoperating expense | ||||||||||||||||
| Earnings before income taxes | ||||||||||||||||
| Income tax (benefit) expense | ( | ) | ( | ) | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | ||||||||||||||||
| Weighted-average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| Six Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Non-cash interest and debt amortization | ||||||||
| Amortization of step-up in inventory basis | ( | ) | ||||||
| Change in inventory reserve | ||||||||
| Other | ||||||||
| Cash provided by changes in operating assets and liabilities | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities and taxes payable | ( | ) | ( | ) | ||||
| Unearned revenues | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Acquisitions | $ | $ | ( | ) | ||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of convertible senior notes, net | ||||||||
| Proceeds from the issuance of common stock, net | ||||||||
| Payments of debt | ( | ) | ||||||
| Dividends | ( | ) | ( | ) | ||||
| Payments of Contingent Consideration | ( | ) | ( | ) | ||||
| Proceeds from the exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands, except per share data)
| Common Stock | ||||||||||||||||||||
| Number of Shares | Amount | Retained Earnings | AOCI* | Total | ||||||||||||||||
| March 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Proceeds from the issuance of common stock, net of issuance costs of $ | - | - | ||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | - | - | ||||||||||||||||||
| Dividends paid, $ per share | - | - | ( | ) | - | ( | ) | |||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||
| Foreign currency translation | - | - | - | |||||||||||||||||
| Adoption of accounting standards, net | - | - | ( | ) | - | ( | ) | |||||||||||||
| Net income | - | - | - | |||||||||||||||||
| June 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | - | - | ||||||||||||||||||
| Dividends paid, $ per share | - | - | ( | ) | - | ( | ) | |||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||
| Foreign currency translation | - | - | - | |||||||||||||||||
| Net income | - | - | - | |||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Common Stock | ||||||||||||||||||||
| Number of Shares | Amount | Retained Earnings | AOCI* | Total | ||||||||||||||||
| March 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercise of stock options and vesting of restricted stock units | - | - | ||||||||||||||||||
| Dividends paid, $ per share | - | - | ( | ) | - | ( | ) | |||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||
| Foreign currency translation | - | - | - | |||||||||||||||||
| Net income | - | - | - | |||||||||||||||||
| June 30, 2019 | ( | ) | ||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | - | - | ||||||||||||||||||
| Proceeds from issuance of common stock, net of issuance costs of $ | ||||||||||||||||||||
| Proceeds from conversion feature of convertible senior notes, due 2025, net of allocated costs and taxes of $ | - | |||||||||||||||||||
| Dividends paid, $ per share | - | - | ( | ) | - | ( | ) | |||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||
| Foreign currency translation | - | - | - | ( | ) | ( | ) | |||||||||||||
| Net Income | - | |||||||||||||||||||
| September 30, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
*Accumulated Other Comprehensive Income (Loss).
See accompanying notes to Condensed Consolidated Financial Statements.
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 Labs.”
We are a multinational manufacturer, developer, and seller of quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in North America and Europe and our products are marketed by our sales personnel in North America, Europe, China, Japan, and by 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 of September 30, 2020, we managed our operations in
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 a fair presentation 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, 2020.
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 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 identified no triggering events since our impairment analysis was completed during the three months ended March 31, 2020; |
| ● | Estimates regarding the recoverability of deferred tax assets and estimates regarding cash needs and associated indefinite reinvestment assertions; |
| ● | Estimates regarding recoverability for customer receivables; |
| ● | Estimates of the net realizable value for inventory. |
Immaterial Error Correction
During the three months ended September 30, 2020, we identified an immaterial error in the design of our Enterprise Resource Planning tool that resulted in a system failure to eliminate intercompany cost of revenues for certain types of transactions. The error resulted in an overstatement of cost of goods sold and an understatement in gross profit for the Continuous Monitoring, Instruments, and Sterilization and Disinfection Control divisions. The issue began during the three months ended June 30, 2019; we have determined that no financial statement prior to April 1, 2019 was misstated as a result of the previously uneliminated balances in cost of revenues.
In accordance with Staff Accounting Bulletin ("SAB") No. 99 Materiality, and SAB No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, we evaluated the error quantitatively and qualitatively and determined that the related impact was not material to our financial statements for any prior annual or interim period, but that correcting the cumulative impact of the error would be significant to our results of operations for the three months ended September 30, 2020. In considering the materiality, we concluded that the impact of the error correction is not material in absolute dollar amount especially since our most recent fiscal year results included various new non cash charges that reduced net income below historical levels, [nor is it qualitatively material]. Accordingly, we have revised previously reported financial information for the immaterial error.
We performed manual intercompany elimination calculations and determined that cost of revenues and accumulated other comprehensive income were overstated by $
Recently Issued Accounting Pronouncements
In August, 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 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, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, such as our convertible senior notes, due 2025. 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, but no earlier than fiscal years beginning after December 15, 2020. The update permits the use of either the modified retrospective or fully retrospective method of transition. We are currently evaluating the timing, method of adoption, and financial impact of the adoption of ASU 2020-06 on our financial statements but anticipate that subsequent to adoption, the equity conversion feature will be categorized as a liability and there will be a reduction in non-cash interest expense related to the
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as modified by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The ASU was effective for public business entities for fiscal years beginning after December 15, 2019, with early adoption permitted. On April 1, 2020, we adopted the ASU using the modified retrospective transition method. We recorded a net decrease to beginning retained earnings of $
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable was developed using historical collection experience, current and expected future economic and market conditions and a review of the current status of customers’ trade accounts receivables. Customers are pooled based on sharing specific risk factors. Due to the short-term nature of trade receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances.
Customers are assessed for credit worthiness upfront through a credit review. We evaluate contract terms and conditions, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. We monitor changes to the receivables balance on timely basis, and balances are written off as they are determined to be uncollectable after all collection efforts have been exhausted. Estimates of potential credit losses are used to determine the allowance. It is based on assessment of anticipated payment and all other historical, current and future information that is reasonably available.
Note 2. Revenue Recognition
We design, manufacture, market, sell, and maintain quality control instruments and software, consumables, and services driven primarily by the regulatory requirements of niche markets. Our consumables, such as biological indicator test strips are typically used on a standalone basis; however, some that are used in protein synthesis and calibration solutions are also critical to the ongoing use of our instruments. Hardware and software sales, such as medical meters, protein synthesizers, wireless sensor systems, and data loggers are generally driven by our acquisition of new customers, growth of existing customers, or customers' replacement of existing equipment. Hardware sales may be offered with perpetual or annual software licenses, which in some cases are required for the hardware to function. Our Biopharmaceutical Development Division designs, manufactures, markets, and sells instruments, such as protein synthesizers that are used to process immunoassay samples and related software designed to enhance productivity; consumable chemical solutions designed for use in testing; and on-demand and long-term service contracts to support customers' use of the equipment. The division generates revenue from the same general categories as those we have identified for the rest of our business and recognizes revenue consistently with our policies. We evaluate our revenues internally by product line, 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. Consumables are typically used on a one-time basis requiring frequent replacement in our customer's operating cycle. Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.
The following tables present disaggregated revenues for the three and six months ended September 30, 2020 and three and six months ended September 30, 2019, respectively:
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Discrete Revenues | ||||||||||||||||||||||||
| Consumables | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Hardware and Software | ||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||
| Contracted Revenues | ||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Discrete Revenues | ||||||||||||||||||||||||
| Consumables | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Hardware and Software | ||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||
| Contracted Revenues | ||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Six Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Discrete Revenues | ||||||||||||||||||||||||
| Consumables | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
| Hardware and Software | - | |||||||||||||||||||||||
| Services | - | |||||||||||||||||||||||
| Contracted Revenues | ||||||||||||||||||||||||
| Services | - | - | ||||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
| Six Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Discrete Revenues | ||||||||||||||||||||||||
| Consumables | $ | $ | $ | - | $ | $ | $ | |||||||||||||||||
| Hardware and Software | - | - | ||||||||||||||||||||||
| Services | - | |||||||||||||||||||||||
| Contracted Revenues | ||||||||||||||||||||||||
| Services | - | - | - | |||||||||||||||||||||
| Total Revenues | $ | $ | $ | - | $ | $ | $ | |||||||||||||||||
Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Foreign | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
No foreign country exceeds 10% of total revenues.
Contract Balances
Our contracts have varying payment terms and conditions. Some customers prepay for services, resulting in unearned revenues or customer deposits, called contract liabilities, which are included within other accrued expenses and unearned revenues in the accompanying Condensed Consolidated Balance Sheets. Contract assets would exist when sales are recorded (i.e. the control of the goods or services has been transferred to the customer), but customer payment is contingent on a future event besides the passage of time (such as satisfaction of additional performance obligations). We do have any contract assets. Unbilled receivables, which are 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 balance as of March 31, 2020 | $ | |||
| Prior year liabilities recognized in revenues during the six months ended September 30, 2020 | ( | ) | ||
| Contract liabilities added during the six months ended September 30, 2020, net of revenues recognized | ||||
| Contract liabilities balance as of September 30, 2020 | $ |
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, and classify them within Level 1 of the fair value hierarchy and we value them using quoted market prices in an active market. As of September 30, 2020 and March 31, 2020, cash and cash equivalents on our Condensed Consolidated Balance Sheets included $
During our year ended March 31, 2020, we issued $
| September 30, 2020 | March 31, 2020 | |||||||||||||||
| Carrying Value | Fair Value (Level 2) | Carrying Value | Fair Value (Level 2) | |||||||||||||
| Notes | $ | $ | $ | $ | ||||||||||||
The Notes are discussed in more detail in Note 7. "Indebtedness."
Assets recognized or disclosed at fair value on 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 a part of the GPT Acquisition. These assets are measured at fair value if determined to be impaired. Preliminary fair values assigned to the assets and liabilities acquired in the GPT Acquisition were measured using Level 3 inputs, as discussed further in Note 12. "Significant Transactions." There were no transfers between the levels of the fair value hierarchy during the six months ended September 30, 2020 or six months ended September 30, 2019.
Cash and cash equivalents and accounts receivables are the financial instruments that subject us to the highest concentration of credit risk. It is our policy to invest cash equivalents in highly liquid financial instruments with high credit ratings, and low exposure to a single issuer (except U.S. treasuries). Concentration of credit risk with respect to accounts receivable is limited to customers to which we make significant sales. We reserve an allowance for potential write-offs of accounts receivable, but we have not written off any significant accounts to date. To control credit risk, we perform regular credit evaluations of our customers’ financial condition.
Note 4. Inventories, Net
Inventories consist of the following:
| September 30, 2020 | March 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Less: reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
As of September 30, 2020 and March 31, 2020, finished goods inventory included $
Note 5. Goodwill and Intangible Assets, Net
Finite-lived intangible assets consist of the following:
| September 30, 2020 | March 31, 2020 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Intellectual property | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Trade names | ( | ) | ( | ) | ||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||||||||||||||
| Non-compete agreements | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Amortization expense for finite-lived intangible assets acquired in a business combination was $
The following is estimated amortization expense for the years ending March 31:
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 |
The change in the carrying amount of goodwill was as follows:
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| March 31, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Effect of foreign currency translation | ||||||||||||||||||||||||
| Goodwill adjustment related to GPT acquisition | ||||||||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note 6. Supplemental Balance Sheets Information
Accrued payroll and benefits consist of the following:
| September 30, 2020 | March 31, 2020 | |||||||
| Bonus payable | $ | $ | ||||||
| Wages payable | ||||||||
| Payroll related taxes | ||||||||
| Other benefits payable | ||||||||
| Total accrued payroll and benefits | $ | $ | ||||||
Other accrued expenses consist of the following:
| September 30, 2020 | March 31, 2020 | |||||||
| Accrued business taxes | $ | $ | ||||||
| Current operating lease liabilities | ||||||||
| Interest payable | ||||||||
| Professional services fees | ||||||||
| Other | ||||||||
| Total other accrued expenses | $ | $ | ||||||
Note 7. Indebtedness
On August 12, 2019, we issued an aggregate principal amount of $
We accounted for the transaction by bifurcating the Notes into liability and equity components. The carrying amount of the liability component was $
Debt issuance costs related to the Notes comprised of discounts and commissions payable to the initial purchasers of $
The net carrying amount of the Notes were as follows:
| September 30, 2020 | March 31, 2020 | |||||||
| Principal outstanding | $ | $ | ||||||
| Unamortized debt discount | ( | ) | ( | ) | ||||
| Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Net carrying value | $ | $ | ||||||
The net carrying amount of the equity component of the Notes were as follows:
| September 30, 2020 | March 31, 2020 | |||||||
| Amount allocated to conversion option | $ | $ | ||||||
| Less: allocated issuance costs and deferred taxes | ( | ) | ( | ) | ||||
| Equity component, net | $ | $ | ||||||
We recognized interest expense on the Notes as follows:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Coupon interest expense at % | $ | $ | $ | $ | ||||||||||||
| Amortization of debt discounts and issuance costs | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The effective interest rate of the liability component of the note is approximately
Note 8. Stockholders' Equity
Public Offerings of Common Stock
On June 12, 2020, we completed the sale and issuance of
Stock-Based Compensation
Amounts recognized related to stock-based compensation are as follows:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| Amount of income tax (benefit) recognized in earnings | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Stock-based compensation expense, net of tax | $ | $ | $ | $ | ||||||||||||
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 Income.
The following is a summary of stock option award activity for the six months ended September 30, 2020 (shares in thousands):
| Stock Options | ||||||||
| Shares Subject to Options | Weighted- Average Exercise Price per Share | |||||||
| Outstanding at March 31, 2020 | $ | |||||||
| Awards granted | ||||||||
| Awards forfeited or expired | ( | ) | ||||||
| Awards exercised | ( | ) | ||||||
| Outstanding as of September 30, 2020 | $ | |||||||
The stock options granted during the six months ended September 30, 2020 vest in equal installments on each of the first three anniversaries of the grant date.
The following is a summary of restricted stock unit ("RSU") award activity for the six months ended September 30, 2020 (shares in thousands):
| 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 | |||||||||||||
| Nonvested at March 31, 2020 | $ | $ | ||||||||||||||
| Awards granted | ||||||||||||||||
| Awards forfeited or expired | ( | ) | ( | ) | ||||||||||||
| Awards distributed | ( | ) | ||||||||||||||
| Nonvested as of September 30, 2020 | $ | $ | ||||||||||||||
The majority of the time-based RSUs granted during the six months ended September 30, 2020 vest and settle in shares of our common stock, on a one-for-one basis, in equal installments on each of the first three anniversaries of the grant date. Time-based RSUs issued to non-employee directors and a portion of the awards granted to executives of the company vest after a one-year period from the grant date. We recognize the expense relating to these units, 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 achievements 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.
Note 9. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share (“diluted EPS”) is computed similarly to basic earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include common shares related to stock options and RSUs (collectively “stock awards”). Stock awards are excluded from the calculation of diluted EPS in the event that they are subject to performance conditions that have not yet been achieved or are antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect.
The impact of the assumed conversion of the Notes calculated under the if-converted method was anti-dilutive, and as such, shares underlying the Notes were excluded from the diluted EPS calculation for the three and six months ended September 30, 2020.
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share (shares in thousands):
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income available for shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average outstanding shares of common stock | ||||||||||||||||
| Dilutive effect of stock options | ||||||||||||||||
| Dilutive effect of non-vested shares | ||||||||||||||||
| Fully diluted shares | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
The following stock awards were excluded from the calculation of diluted EPS:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Assumed conversion of convertible debt | ||||||||||||||||
| Stock awards that were anti-dilutive | ||||||||||||||||
| Stock awards subject to performance conditions | ||||||||||||||||
| Total stock awards excluded from diluted EPS | ||||||||||||||||
Note 10. Income Taxes
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. The impact of changes in tax laws or rates on deferred tax amounts, impairments of non-deductible goodwill, excess benefits from stock-based compensation, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.
Our effective income tax rate was (
As part of our adoption of the Tax Cuts and Jobs Act, we recorded an uncertain tax position in the amount of $
Since we are subject to audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect the change, if any, to have a material effect on our financial condition or results of operations within the next 12 months.
Note 11. Commitments and Contingencies
We review the adequacy of our legal reserves on a quarterly basis and establish reserves for loss contingencies that are both probable and reasonably estimable. As of September 30, 2020, there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets.
Under the terms of the revised IBP agreement, we are required to pay contingent consideration if the company is able to achieve certain operational and regulatory milestones. The potential undiscounted consideration payable ranges from to depending on whether units being developed are certified for sale by U.S. and foreign regulatory bodies. We currently believe that it is more likely than not that all aspects of the contingency will be achieved and we expect to pay $
Note 12. Significant Transactions
GPT Acquisition
On October 31, 2019, we completed the acquisition of
Preliminary Allocation of Purchase Price
We accounted for the GPT Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of GPT were recorded as of the acquisition date, at their respective estimated fair values, and consolidated with those of Mesa Labs. During the three months ended September 30, 2020, we finalized the valuation of net assets acquired. We obtained the information used to prepare the preliminary valuation during due diligence and from other sources. In the months after closing, we obtained additional information about these assets and liabilities as we learned more about GPT. We refined the estimates of fair value to more accurately allocate the purchase price. Only items identified as of the acquisition date were considered for subsequent adjustment.
The preparation of the valuation required the use of Level 3 inputs, which are subject to significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates.
During the six months ended September 30, 2020, we finalized the valuation of the inventory step-up, intangible assets acquired, and property, plant, and equipment; however we have not finalized the valuation of certain tax related items, including deferred taxes. The final purchase price allocation will be completed within one year of the closing of the transaction, and may be refined further in the coming months as we learn more about GPT and therefore we can more accurately allocate the purchase price. The measurement period adjustments to the acquisition fair values of the assets were due to the refinement of our valuation models, assumptions and inputs. The updated assumptions and inputs incorporated additional information obtained subsequent to the closing of the transaction related to facts and circumstances that existed as of the acquisition date.
The significant purchase price allocation changes during the six months ended September 30, 2020 included a net decrease of $
The cumulative impacts of all adjustments to date have been reflected in the Unaudited Condensed Consolidated Financial Statements as of and for the six months ended September 30, 2020. The components and allocation of the purchase price consist of the following amounts:
| Note | Fair Value | ||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable, net | (a) | ||||
| Inventories, net | (b) | ||||
| Prepaid income taxes | |||||
| Prepaid expenses and other | |||||
| Property, plant and equipment, net | |||||
| Other assets | |||||
| Deferred taxes | |||||
| Intangible assets: | |||||
| Customer relationships | (c) | ||||
| Trade name | (c) | ||||
| Non-compete agreements | (c) | ||||
| Acquired technology | (c) | ||||
| Goodwill | (d) | ||||
| Total Assets acquired | $ | ||||
| Accounts payable | |||||
| Accrued salaries and payroll taxes | |||||
| Other short-term liabilities | |||||
| Unearned revenues | |||||
| Other accrued expenses | |||||
| Deferred taxes | |||||
| Other long-term liabilities | |||||
| Total liabilities assumed | $ | ||||
| Total closing amount, net of cash acquired | $ | ||||
| (a) | Accounts receivable is composed of trade accounts receivable, net which is expected to be collected. |
| (b) | Finished goods inventory of GPT includes $ |
| (c) | Customer relationships and acquired technology are being amortized on a straight-line basis over a |
| (d) | Acquired goodwill of $ |
Unaudited Pro Forma Information
GPT's operations contributed $
| Six Months Ended September 30, | ||||
| 2019 | ||||
| Pro forma total revenues (1) | $ | |||
| Pro forma net income (2) | ||||
(1) Net revenues were adjusted to include net revenues of GPT.
(2) Pro forma adjustments to net earnings attributable to Mesa Labs include the following:
| ● | Excludes interest expense attributable to GPT's external debt that was paid off as part of the acquisition. |
| ● | Additional amortization expense of $ |
| ● | For the six months ended September 30, 2019, $ |
| ● | Income tax effect of the adjustments made at a blended federal and state statutory rate (approximately |
Note 13. Segment Information
As of September 30, 2020, we had reportable segments, Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring. Results for the Cold Chain Packaging division, which we exited during the year ended March 31, 2020, are now presented within Corporate and Other. The following tables set forth our segment information:
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| Earnings before income taxes | $ | |||||||||||||||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | - | $ | $ | $ | |||||||||||||||||
| Gross profit | $ | $ | $ | - | $ | $ | $ | |||||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| Earnings before income taxes | $ | |||||||||||||||||||||||
| Six Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| Earnings before income taxes | $ | |||||||||||||||||||||||
| Six Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | - | $ | $ | $ | |||||||||||||||||
| Gross profit | $ | $ | $ | - | $ | $ | $ | |||||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| Earnings before income taxes | $ | |||||||||||||||||||||||
| (1) | Intersegment revenues are not significant and are eliminated to arrive at consolidated totals. |
| (2) | Reconciling items include selling, general and administrative, research and development, interest expense and amortization of debt discount, and other (income) expenses. |
The following table sets forth assets by reportable segment:
| September 30, 2020 | March 31, 2020 | |||||||
| Sterilization and Disinfection Control | $ | $ | ||||||
| Instruments | ||||||||
| Biopharmaceutical Development | ||||||||
| Continuous Monitoring | ||||||||
| Corporate and administrative | ||||||||
| Total | $ | $ | ||||||
Note 14. Subsequent Event
In October 2020, we announced that our Board of Directors declared a quarterly cash dividend of $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position, potential impairment of future earnings, anticipated effects of, and future actions to be taken in response to, the COVID-19 pandemic, management’s strategy, plans and objectives for future operations or acquisitions, product development and sales, product candidate research, development and regulatory approval, selling, general and administrative expenditures, intellectual property, development and manufacturing plans, availability of materials and product and adequacy of capital resources and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management’s beliefs and assumptions. The Company undertakes no obligation to publicly update or revise the statements in light of future developments. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company’s behalf. Words such as “expect,” “seek,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including risks associated with: the duration and impact of the COVID-19 pandemic and the myriad of its effects on our business including related decreases in customer demand and spending; our ability to successfully grow our business, including as a result of acquisitions; the market acceptance of our products; reduced demand for our products that adversely impacts our future revenues, cash flows, results of operations and financial condition; inability to consummate acquisitions at our historical rate and at appropriate prices, and to effectively integrate acquired businesses; conditions in the global economy and the particular markets we serve; significant developments or uncertainties stemming from the U.S. government, including changes in U.S. trade policies and medical device regulations; the timely development and commercialization, and customer acceptance, of enhanced and new products and services based on technological innovation; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; and foreign currency exchange rates and fluctuations in those rates. Further information on potential risk factors that could affect our financial results are included in the filings made by us from time to time with the Securities and Exchange Commission including under the section entitled “Risk Factors” in our Annual Report on Form 10-K, for the year ended March 31, 2020 and our subsequent Quarterly Reports on Form 10-Qs. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Business Overview
We are a multinational manufacturer, developer, and seller of quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in North America and Europe and our products are marketed by our sales personnel in North America, Europe, China, Japan, and by 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 of September 30, 2020, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring, each of which are described further in Results of Operations below. Non-reportable operating segments (including our Cold Chain Packaging division which ceased operations during the year ended March 31, 2020) and unallocated corporate expenses are reported within Corporate and Other.
As discussed in Note 8. "Stockholders' Equity" within Item 1. "Financial Statements," we completed an equity offering of our common stock, which provided $145,935, net of discounts and issuance costs. We intend to use the money raised for general corporate purposes, which may include furthering our acquisition strategy.
Corporate Strategy
We strive to create shareholder value and further our purpose of Protecting the Vulnerable® by growing our business both organically and through further acquisitions, by improving our operating efficiency, and by continuing to hire, develop and retain top talent. As a business, we commit to our purpose of Protecting the Vulnerable® every day by taking a customer-focused approach to developing, building, and delivering our products. We serve a broad set of industries that require dependable quality control and calibration solutions to ensure the safety and efficacy of the products they use, and by delivering the highest quality products possible, we are committed to protecting the environment, products, and people.
Our revenues come from product sales, which includes hardware and software, and consumables; as well as services, which include installation, discrete maintenance services, and ongoing maintenance contracts. Revenues increase as a result of organic or inorganic revenues growth. Inorganic revenues growth is driven by acquisitions.
We continue to focus on improving our operating efficiency The Mesa Way, which is our customer-centric, lean based system for continuously improving and operating a set of high-margin, niche businesses. The Mesa Way is based on four pillars:
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Measure what matters: We use “True North,” our customer’s perspective, to measure what matters most to customers and to set high standards for performance. We manage to leading indicators, whenever possible, which drives us to proactively avoid problems before they are apparent to our customers. |
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Empower Teams: We move decision making as close to the customer as possible and provide the structure and real-time communication forum to align the whole organization towards surpassing customer expectations. |
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Steadily Improve: We leverage a common and proven set of lean-based tools to identify the root cause of opportunities, prioritize our biggest opportunities, and enable change to be embraced and implemented quickly. |
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Always Learn: We ensure that improvements are sustained, enabling us to raise performance expectations and repeat the cycle of improvement. Equally, this cycle strengthens the Mesa team by providing endless learning opportunities for our employees and helps us to become an employer of choice in our communities. |
Finally, we hire, develop, and retain top talent, capable of taking on new challenges using a team approach to continuously improve our products, our services, and ourselves, resulting in long-term value creation for our shareholders.
COVID-19 and Business Update
During March 2020, the impact from the spreading of COVID-19 was declared a global pandemic by the World Health Organization and a national public health emergency in the United States. The consequences of the outbreak and impact to the economy have continued to evolve throughout the six months ended September 30, 2020 and we are unable to ascertain the full extent of the impact on our business as of the date of this filing. Throughout our fiscal year, the pandemic has continued to present a substantial public health and economic challenge around the world and is affecting our employees, business operations, and operating segments in various ways.
As COVID-19 has continued to spread and significantly affect markets around the world, we continued to enforce company policies that are focused on ensuring the safety of our employees, while continuing to deliver our goods to customers across the world. Due to the critical nature of our products and services, we are generally exempt from governmental orders in the U.S. and other countries requiring businesses to suspend operations. Nevertheless, the pandemic brought a material disruption to our operations. To protect employees and comply with regulations and recommendations to limit gatherings and increase social distancing, we require office-based employees to work remotely in most cases, and we implemented enhanced safety protocols at our manufacturing facilities, including performing health checks at the start of shifts, utilizing contact tracing technology to support case investigation when needed, and maximizing the amount of space between workspaces. We have taken aggressive steps to limit the exposure and enhance the safety of our facilities for employees working so that we can continue to supply products and services to our customers, although there is no guarantee that our measures will be successful. Additionally, we continue to evaluate and monitor the condition of our supply chain and work with our suppliers to develop contingency plans for potential supply interruptions.
Our business has encountered challenges resulting from COVID-19, as the global downturn resulted in a slow-down in demand for many of the products and services that we offer. The impact on our businesses is outlined below:
| ● |
Sterilization and Disinfection Control: This division benefited in the three months ended June 30, 2020 from fulfilling temporary advanced buying orders placed by certain customers during the three months ended March 31, 2020; however, overall orders slowed significantly during the latter part of the three months ended June 30, 2020 and continued throughout the three months ended September 30, 2020 as advanced ordering began to reverse. Additionally, sales to distributors that service high growth economies that were severely impacted by COVID-19 have declined. Nevertheless, we believe that the consumable, critical, and disposable nature of Sterilization and Disinfection Control products makes them less sensitive to general economic conditions, and the demand for Sterilization and Disinfection Control products has remained relatively strong. Prior to the COVID-19 pandemic, the worldwide market for sterilization and disinfection control products had been growing as more countries increase their focus on verifying the effectiveness of sterilization and disinfection processes. |
| ● |
Biopharmaceutical Development, and Continuous Monitoring: Demand for hardware, consumables, and services sold by our Biopharmaceutical Development and hardware and software sold by our Continuous Monitoring divisions declined during the three months ended June 30, 2020, which we believe was mainly a result of COVID-19. As several of the restrictions limiting vendors from going on-site at customer facilities were lifted during the three months ended September 30, 2020, demand for both Biopharmaceutical Development and Continuous Monitoring products and services increased significantly compared to the three months ended June 30, 2020. Although orders increased during the three months ended September 30, 2020, the global pandemic continues to inhibit our ability to use proven strategies to market and sell these products. Further, increases in COVID-19 cases throughout the world could lead to customers closing their facilities again and decreased demand for our products. In the future, when travel and gathering restrictions are lifted more broadly and we are able to go on-site at more customer facilities, we expect to continue to grow revenues organically in the Biopharmaceutical Development and Continuous Monitoring divisions. |
| ● |
Instruments: Demand for hardware and certain services sold by our Instruments division declined during the six months ended September 30, 2020, which we believe was mainly a result of COVID-19. We expect that demand for hardware sold by our Instruments division will return to more normal levels slowly, given the discretionary nature of the products. |
Sales of our hardware products have historically been more sensitive to general economic conditions than sales of our consumables. The COVID-19 induced economic downturn appears to be having a similar impact, as businesses are postponing certain capital spending in response to economic uncertainty, declines in income and asset values, tighter credit, unemployment, and negative financial news. Even as the broad healthcare industry has begun to return to more normal operations resulting in increased sales levels in some of our divisions, outbreaks and increasing numbers of COVID-19 cases in many areas, especially the U.S. and Europe, may result in the reinstatement of strict regulations, which we expect would result in lower sales levels. We believe that COVID-19 related uncertainties, restrictions, and suppressed demand will continue to negatively impact our business during the remainder of the year ending March 31, 2021, and potentially continuing into our year ending March 31, 2022. Even after the COVID-19 pandemic has subsided as a public health matter, we may experience material adverse impacts to our business as a result of its adverse impact on the global economy, in-person collaboration and sales efforts, and our customers’ purchasing behavior and confidence.
Gross profit is affected by our product mix, manufacturing efficiencies, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately the mix of sales will continue to impact our overall gross profit.
Results of Operations
Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing in Item 1. Financial Statements (in thousands, except percent data).
Revenues from our reportable segments increased 29% and 25%, organic revenues growth declined 8% and 6%, and gross profit as a percentage of revenues increased four percentage points for both the three and six months ended September 30, 2020, as compared to the three and six months ended September 30, 2019, respectively. Results by reportable segment are as follows:
| Revenues |
Organic Revenues Growth |
Gross Profit as a % of Revenues |
||||||||||||||||||||||
| Three Months Ended September 30, 2020 |
Three Months Ended September 30, 2019 |
Three Months Ended September 30, 2020 |
Three Months Ended September 30, 2019 |
Three Months Ended September 30, 2020 |
Three Months Ended September 30, 2019 |
|||||||||||||||||||
| Sterilization and Disinfection Control |
$ | 11,552 | $ | 12,094 | (4 | %) | 4 | % | 76 | % | 72 | % | ||||||||||||
| Instruments |
7,558 | 8,960 | (16 | %) | (3 | %) | 64 | % | 62 | % | ||||||||||||||
| Biopharmaceutical Development |
9,131 | - | N/A | N/A | 68 | % | N/A | |||||||||||||||||
| Continuous Monitoring |
3,619 | 3,586 | 1 | % | 16 | % | 38 | % | 34 | % | ||||||||||||||
| Mesa Labs' reportable segments |
$ | 31,860 | $ | 24,640 | (8 | %) | 3 | % | 67 | % | 63 | % | ||||||||||||
| Corporate and Other |
- | 896 | ||||||||||||||||||||||
| Total Company |
$ | 31,860 | $ | 25,536 | ||||||||||||||||||||
| Revenues |
Organic Revenues Growth |
Gross Profit as a % of Revenues |
||||||||||||||||||||||
| Six Months Ended September 30, 2020 |
Six Months Ended September 30, 2019 |
Six Months Ended September 30, 2020 |
Six Months Ended September 30, 2019 |
Six Months Ended September 30, 2020 |
Six Months Ended September 30, 2019 |
|||||||||||||||||||
| Sterilization and Disinfection Control |
$ | 24,619 | $ | 24,204 | 2 | % | 6 | % | 76 | % | 71 | % | ||||||||||||
| Instruments |
15,238 | 18,504 | (18 | %) | 1 | % | 63 | % | 63 | % | ||||||||||||||
| Biopharmaceutical Development |
15,080 | - | N/A | N/A | 71 | % | N/A | |||||||||||||||||
| Continuous Monitoring |
6,864 | 6,903 | (1 | %) | 1 | % | 37 | % | 36 | % | ||||||||||||||
| Mesa Labs' reportable segments |
$ | 61,801 | $ | 49,611 | (6 | %) | 3 | % | 67 | % | 63 | % | ||||||||||||
| Corporate and Other |
- | 2,213 | ||||||||||||||||||||||
| Total Company |
$ | 61,801 | $ | 51,824 | ||||||||||||||||||||
Our unaudited condensed consolidated results of operations are as follows:
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Revenues |
$ | 31,860 | $ | 25,536 | 25 | % | $ | 61,801 | $ | 51,824 | 19 | % | ||||||||||||
| Gross profit |
21,285 | 15,586 | 37 | % | 41,625 | 31,790 | 31 | % | ||||||||||||||||
| Operating Expenses |
16,815 | 10,892 | 54 | % | 33,585 | 21,639 | 55 | % | ||||||||||||||||
| Operating Income |
4,470 | 4,694 | (5 | %) | 8,040 | 10,151 | (21 | %) | ||||||||||||||||
| Net income |
$ | 2,679 | $ | 3,172 | (16 | %) | $ | 3,896 | $ | 7,834 | (50 | %) | ||||||||||||
Reportable Segments
Sterilization and Disinfection Control
Our Sterilization and Disinfection Control division manufactures and sells biological, cleaning, and chemical indicators. Biological, cleaning, and chemical indicators 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. Sterilization and disinfection control products are disposable and are used on a routine basis.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Revenues |
$ | 11,552 | $ | 12,094 | (4 | %) | $ | 24,619 | $ | 24,204 | 2 | % | ||||||||||||
| Gross profit |
8,770 | 8,723 | 1 | % | 18,790 | 17,233 | 9 | % | ||||||||||||||||
| Gross profit as a % of revenues |
76 | % | 72 | % | 4 | % | 76 | % | 71 | % | 5 | % | ||||||||||||
Sterilization and Disinfection Control revenues decreased 4% for the three months ended September 30, 2020 as a result of reduced sales to distributors that service high growth economies that were severely impacted by COVID-19, the loss of certain OEM hospital oriented customers that began to diversify their supply chains, as well as decreased demand due primarily to timing as certain customers had ordered larger than normal quantities earlier in the calendar year to mitigate supply chain risk. As these orders were filled during the quarter ended June 30, 2020, our backlog decreased, and ordering remains slower as customers continue to use the inventory they purchased from us in the previous two quarters. We expect the impacts from the loss of customers and to a lesser extent, the temporary advanced ordering that occurred during the three months ended June 30, 2020 will negatively impact organic revenues growth in this division for the remainder of the fiscal year.
Sterilization and Disinfection Control revenues increased 2% for the six months ended September 30, 2020 as result of organic revenues growth, which was achieved primarily through volume increases resulting from advanced ordering with existing customers during the quarter ended June 30, 2020, and to a lesser extent, modest price increases. Increases were partially offset by reduced sales to distributors that service high growth economies that were severely impacted by COVID-19, the loss of a portion of our business with certain OEM hospital-oriented customers, and lower demand during the three months ended September 30, 2020 as advanced ordering reversed.
Sterilization and Disinfection Control gross profit margin percentage increased four percentage points and five percentage points for the three and six months ended September 30, 2020, respectively, primarily as a result of labor efficiencies and favorable customer mix.
Instruments
Our Instruments division designs, manufactures, and markets quality control instruments and consumable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. Instrument products have a longer life, and their purchase by our customers is discretionary, so sales are more sensitive to general economic conditions. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Revenues |
$ | 7,558 | $ | 8,960 | (16 | %) | $ | 15,238 | $ | 18,504 | (18 | %) | ||||||||||||
| Gross profit |
4,852 | 5,557 | (13 | %) | 9,541 | 11,639 | (18 | %) | ||||||||||||||||
| Gross profit as a % of revenues |
64 | % | 62 | % | 2 | % | 63 | % | 63 | % | - | % | ||||||||||||
Instruments revenues decreased 16% and 18% for the three and six months ended September 30, 2020, respectively, as customers across all served markets continued to limit spending that is more discretionary in nature in response to economic uncertainty.
Instruments gross profit margin percentage increased two percentage points during the three months ended September 30, 2020, primarily due to favorable product mix. Gross margin percentage was flat for the six months ended September 30, 2020.
Biopharmaceutical Development
Our Biopharmaceutical Development division was created as a result of the GPT acquisition on October 31, 2019. The division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacturing of biotherapeutic drugs.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Revenues |
$ | 9,131 | $ | - | N/A | $ | 15,080 | $ | - | N/A | ||||||||||||||
| Gross profit |
6,212 | - | N/A | 10,678 | - | N/A | ||||||||||||||||||
| Gross profit as a % of revenues | 68 | % | - | % | N/A | 71 | % | - | % | N/A | ||||||||||||||
Biopharmaceutical Development's revenues during the three and six months ended September 30, 2020 were negatively impacted by the economic uncertainty and social restrictions related to the COVID-19 pandemic. Particularly during the three months ended June 30, 2020, and to a lesser extent during the three months ended September 30, 2020, global efforts to stop the spread of COVID-19 and the resulting shut down and slowing of many facets of our society and commerce resulted in reduced demand as we became unable to market our products at industry conferences or visit customers at their facilities. Restrictions limiting vendors from going on-site at customers facilities were partially lifted during the three months ended September 30, 2020. Additionally, we pursued digital marketing avenues to continue to create leads and demonstrate our products to potential customers. Primarily as a result of these factors, demand for Biopharmaceutical Development products and services increased significantly as compared to the three months ended June 30, 2020.
Biopharmaceutical Development's gross profit for the six months ended September 30, 2020 includes a $436 reduction in amortization expense as a result of an adjustment booked to the value of an inventory step-up recorded in purchase accounting related to the GPT Acquisition. Gross profit for the six months ended September 30, 2020 also includes $178 of incremental amortization expense related to the adjustment of the value of technology intangibles that are amortized to cost of revenues. Excluding the amortization catch ups, gross profit for the six months ended September 30, 2020 would have been $10,242 and gross profit margin percentage would have been 69% for the six months ended September 30, 2020.
Continuous Monitoring
Our Continuous Monitoring division designs, develops, and markets systems which are used to monitor various environmental parameters such as temperature, humidity, and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies, and laboratory environments. Continuous monitoring products and systems have a longer life, and their purchase by our customers is discretionary, so sales are sensitive to general economic conditions. Continuous monitoring products may be sold in conjunction with a perpetual or subscription-based software license, which may be required for the related hardware to function. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our continuous monitoring systems.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Revenues |
$ | 3,619 | $ | 3,586 | 1 | % | $ | 6,864 | $ | 6,903 | (1 | %) | ||||||||||||
| Gross profit |
1,368 | 1,221 | 12 | % | 2,552 | 2,506 | 2 | % | ||||||||||||||||
| Gross profit as a % of revenues |
38 | % | 34 | % | 4 | % | 37 | % | 36 | % | 1 | % | ||||||||||||
Continuous Monitoring's revenues increased 1% for the three months ended September 30, 2020 primarily because of eased restrictions at many of our customer sites, which allowed our technicians to go on-site to perform work that was previously backlogged as a result of COVID-19 related restrictions. Continuous Monitoring's revenue decreased 1% for the six months ended September 30, 2020 as a result of the shut down and slowing of many facets of the U.S. society and economy in response to the COVID-19 outbreak. Specifically, during April and May, 2020, our ability to go on-site to many of our customers' facilities to install and service systems was severely restricted. These restrictions began to ease late in our first fiscal quarter and our sales volumes began to increase as a result.
Continuous Monitoring gross profit margin percentage increased four percentage points and one percentage point for the three and six months ended September 30, 2020, respectively, primarily due to the reorganization of the business unit during the three months ended June 30, 2020, which has resulted in steady improvements to its operating efficiency. This reorganization was one step in our road map to improve the division’s operations and resulting gross profit percentage.
Corporate and Other
Corporate and Other primarily consists of results from our Cold Chain Packaging division which was dissolved during the year ended March 31, 2020 and is no longer considered a reportable segment, as well as unallocated corporate expenses.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Revenues | $ | - | $ | 896 | (100 | %) | $ | - | $ | 2,213 | (100 | %) | ||||||||||||
| Gross profit |
83 | 85 | (2 | %) | 64 | 412 | (84 | %) | ||||||||||||||||
| Gross profit as a % of revenues |
N/A | 9 | % | N/A | N/A | 19 | % | N/A | ||||||||||||||||
Operating Expenses
Operating expenses for the three and six months ended September 30, 2020 increased 54% and 55%, respectively, as compared to the prior year.
Selling
Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Selling expense |
$ | 3,786 | $ | 2,274 | 66 | % | $ | 7,861 | $ | 4,482 | 75 | % | ||||||||||||
| As a percentage of revenues |
12 | % | 9 | % | 3 | % | 13 | % | 9 | % | 4 | % | ||||||||||||
Selling expense for the three and six months ended September 30, 2020 increased 66% and 75%, respectively, primarily as a result of selling costs incurred by the Biopharmaceutical Development division, partially offset by lower professional services costs, lower commission costs, and lower travel-related costs as we implemented strict travel restrictions for our employees beginning in March, 2020. As a percentage of revenues, selling expense was 12% for the three months ended September 30, 2020 and was 13% for the six months ended September 30, 2020 as compared to 9% for both the three and six months ended September 30, 2019. We plan to continue making modest, strategic investments in sales and marketing resources in order to further increase organic revenues growth. In addition, costs associated with the Biopharmaceutical Development division's sales force are expected to continue to result in higher selling expense as a percentage of revenues than we incurred historically; however, increases are expected to begin to normalize once the Biopharmaceutical Development division returns to normal sales levels. In the near-term, we expect total selling expense to approximate 10%-15% of revenues.
General and Administrative
Labor costs, including non-cash stock-based compensation and amortization of intangible assets drive the substantial majority of general and administrative expense.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| General and administrative expense |
$ | 10,615 | $ | 7,703 | 38 | % | $ | 20,714 | $ | 15,223 | 36 | % | ||||||||||||
| As a percentage of revenues |
33 | % | 30 | % | 3 | % | 34 | % | 29 | % | 5 | % | ||||||||||||
General and administrative expenses increased 38% and 36% for the three and six months ended September 30, 2020, respectively. The increase was primarily attributable to increased amortization expense associated with intangible assets acquired from the GPT acquisition; costs associated with the Biopharmaceutical Development division including professional services fees related to the implementation of our enterprise resource planning tool for the division, and higher non-cash stock-based compensation expense, which was almost fully offset by lower bonus and salaries expense as certain executives of the Company converted portions of cash incentives to non-cash stock-based compensation for the year ending March 31, 2021.
Research and Development
Research and development expense is predominantly comprised of labor costs and costs of third-party consultants.
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||
| Research and development expense |
$ | 2,414 | $ | 915 | 164 | % | $ | 5,010 | $ | 1,934 | 159 | % | ||||||||||||
| As a percentage of revenues |
8 | % | 4 | % | 4 | % | 8 | % | 4 | % | 4 | % | ||||||||||||
Research and development expenses increased 164% and 159% for the three and six months ended September 30, 2020, respectively, primarily as a result of expenses attributable to the Biopharmaceutical Development division. Including the Biopharmaceutical Development division, we expect research and development expenses will be approximately 7%-10% of revenues in the near term in part depending on the pace of the economic recovery.
Nonoperating Expense (Income)
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 vs. 2019 |
2020 |
2019 |
||||||||||||||||||||
| Nonoperating expense |
$ | 2,086 | 920 | 127 | % | $ | 4,902 | $ | 952 | 415 | % | |||||||||||||
Nonoperating expense for the three and six months ended September 30, 2020 is composed primarily of interest expense and amortization of the debt discount associated with our 1.375% convertible senior notes issued in August 2019 (the "Notes"), interest income earned on cash and cash equivalents, and gains and losses on foreign currency transactions.
Interest expense and amortization of debt discount increased for both the three and six months ended September 30, 2020, compared to the three and six months ended September 30, 2019 due to interest expense related to the Notes which were outstanding for all of the three and six months ended September 30, 2020, but only part of the three and six months ended September 30, 2019. Interest expense was offset primarily by interest income earned on our money market account. Higher interest was earned on the money market during the three and six months ended September 30, 2019 compared to the three and six months ended September 30, 2020 as interest rates were higher in the prior year.
As discussed in Note 1. within Item 1. Financial Statements, subsequent to the adoption of Accounting Standards Update 2020-06, there will be a reduction in non-cash interest expense related to the 1.375% convertible senior notes due August 15, 2025.
Income Taxes
| Three Months Ended September 30, |
Percentage Change |
Six Months Ended September 30, |
Percentage Change |
|||||||||||||||||||||
| 2020 |
2019 |
2020 vs. 2019 |
2020 |
2019 |
||||||||||||||||||||
| Income tax (benefit) expense |
$ | (295 | ) | $ | 602 | (149 | %) | $ | (758 | ) | $ | 1,365 | (156 | %) | ||||||||||
| Effective tax rate |
(12 | %) | 16 | % | (28 | %) | (24 | %) | 15 | % | (39 | %) | ||||||||||||
Our effective tax rate benefited notably from the release of an uncertain tax position of $630, the exercise of stock options and to a lesser extent, lower pre-tax income. Our income tax rate varies based upon many factors, but in general, we anticipate that on a go-forward basis our effective tax rate as adjusted for the GPT Acquisition will be approximately 25%, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees; see Note 10. “Income Taxes” within Item 1. Financial Statements for additional discussion. The excess tax benefits and deficiencies associated with share-based payment awards to our employees have caused and, in the future, may cause large fluctuations in our realized effective tax rate based on timing, volume, and nature of stock options exercised under our share-based payment program.
Net Income
Net income for the six months ended September 30, 2020 varied with the changes in revenues, gross profit, and operating expenses (which includes $3,276, $6,866, and $2,667 of non-cash: stock-based compensation, amortization of intangible assets acquired in a business combination, and interest expense and discount amortization on the Notes, respectively, partially offset by a $436 benefit associated with a cumulative effect true up of inventory step up amortization).
Seasonality
Our Biopharmaceutical Development division is subject to modest seasonal fluctuations that align with the budget cycles of our customers. Sales of capital equipment and consumables for that segment are typically the lowest in the first calendar quarter of the year, and highest during the fourth calendar quarter of the year (which is the third quarter of our fiscal year). The other reportable segments are typically not subject to seasonality.
Liquidity and Capital Resources
Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, working capital and potential additional equity and debt offerings. Our more significant uses of resources have historically included acquisitions, long-term capital expenditures, payment of debt and interest obligations, and quarterly dividends to shareholders. Although the COVID-19 pandemic has resulted in lower revenues overall, we continue to believe that we have the liquidity required to continue operations during this volatile period. During the six months ended September 30, 2020, we continued taking steps to reduce cash outlays and expenses, including limiting travel, reducing hiring new employees, and converting a portion of our executives' remuneration from cash to non-cash stock-based compensation incentives.
Even given current macroeconomic conditions, we believe that cash and cash equivalents on hand and cash generated from operations will be sufficient to meet our short-term and long-term needs. Additionally, we believe that we have access to equity and credit markets if necessary. However, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all.
Working capital is the amount by which current assets exceed current liabilities. We had working capital of $260,592 and $96,784 at September 30, 2020, and March 31, 2020, respectively. As of September 30, 2020, and March 31, 2020, we had $241,924 and $81,380, respectively, of cash and cash equivalents, which were held primarily in money market funds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
On June 9, 2020, we completed the sale and issuance of 600,000 shares of our common stock and on June 16, 2020, our underwriters exercised in full their option to purchase an additional 90,000 shares of our common stock. The offering price to the public was $225.00 per share. The total proceeds we received from the offering, net of underwriting discounts and commissions and other offering expenses that we initially paid was $145,935.
Under the terms of the amended IBP agreement, we are required to pay contingent consideration if the company is able to achieve certain operational and regulatory milestones. The potential undiscounted consideration payable ranges from €0 to €450, depending on whether units being developed are certified for sale by U.S. and foreign regulatory bodies. We currently believe that it is more likely than not that all aspects of the contingency will be achieved and we expect to pay $530 during the year ending March 31, 2021.
As of September 30, 2020, $172,500 in aggregate principal amount Notes was outstanding. The Notes bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 of each year, beginning with our first payment made on February 15, 2020. These Notes can be converted prior to maturity if certain conditions are met. We currently expect to settle future conversions of the Notes entirely in shares of our common stock and will reevaluate this policy from time to time in the event that conversion conditions are met and conversion notices are received from holders of the Notes. We were in compliance with all debt agreements at September 30, 2020 and for all prior years presented and have met all debt payment obligations. Refer to Note 7. "Indebtedness" within Item 1. Financial Statements for more details on these transactions. We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include retirements or refinancing of outstanding debt, privately negotiated transactions or otherwise. The amount of debt that may be retired, if any, could be material and would be decided at the sole discretion of our Board of Directors and will depend on market conditions, our cash position and other considerations.
We routinely evaluate opportunities for strategic acquisitions. We currently have significant cash and cash equivalents on hand, but future material acquisitions may require that we obtain additional capital, assume additional third-party debt or incur other long-term obligations. We believe that we have the ability to issue more equity or debt in the future in order to finance our acquisition and investment activities.
Dividends
We have paid regular quarterly dividends since 2003. We declared and paid dividends of $0.16 per share during the six months ended September 30, 2020 as well as each quarter for the year ended March 31, 2020.
In October 2020, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on December 15, 2020, to shareholders of record at the close of business on November 30, 2020.
Cash Flows
Our cash flows from operating, investing, and financing activities were as follows (in thousands):
| Six Months Ended September 30, |
||||||||
| 2020 |
2019 |
|||||||
| Net cash provided by operating activities |
$ | 12,610 | $ | 7,149 | ||||
| Net cash (used in) investing activities |
(707 | ) | (3,098 | ) | ||||
| Net cash provided by financing activities |
147,104 | 231,240 | ||||||
Cash flows from operating activities for the six months ended September 30, 2020 provided $12,610, which primarily resulted from cash provided by GPT's operations and favorable changes in our working capital accounts. Cash used in investing was lower during the six months ended September 30, 2020 compared to the six months ended September 30, 2019, which included a cash outlay for the IBP acquisition. Cash provided by financing activities included our equity raise, which provided $145,935 during the six months ended September 30, 2020 and our convertible debt offering and equity raise which provided $252,065 during the six months ended September 30, 2019.
Contractual Obligations and Other Commercial Commitments
We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of our contractual obligations and other commercial commitments as of March 31, 2020, see our Form 10-K for the fiscal year ended March 31, 2020, filed with the Securities and Exchange Commission on June 1, 2020. During the six months ended September 30, 2020, there were no material changes with respect to the nature of our contractual obligations and other commercial commitments outside the ordinary course of business. At September 30, 2020, we had contractual obligations for open purchase orders of approximately $4,902 for routine purchases of supplies and inventory, which are payable in less than one year.
Off-Balance Sheet Arrangements
As of September 30, 2020, we had no off-balance sheet arrangements or obligations.
Critical Accounting Policies and Estimates
Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 2020, in the Critical Accounting Policies and Estimates section of “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have no derivative instruments and minimal exposure to commodity market risks. Our reporting currency is U.S. dollars, and the functional currency of each of our foreign subsidiaries is its respective local currency. Our operations include activities outside of the U.S. and we have currency risk on the transactions in other currencies and translation adjustments resulting from the conversion of our international financial results into the U.S. dollar. We face currency exposures in our global operations as a result of various factors including intercompany currency denominated loans, selling our products in various currencies, purchasing raw materials and equipment in various currencies and tax exposures not denominated in the functional currency. These exposures have increased as a result of the GPT Acquisition, which conducts a substantial portion of its business in Swedish Krona. Fluctuations in exchange rates may adversely affect our results of operations, financial position, and cash flows.
We hold investments in money market funds. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, credit quality of the issuer, or other factors.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As of September 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, given the remediation of the material weakness described in more detail below.
Remediation of Material Weakness
As disclosed in Part II Item 9A. "Controls and Procedures" in our annual report on Form 10-K for the year ended March 31, 2020, during the three months ended March 31, 2020, we identified a material weakness in internal controls related to ineffective information technology general controls ("ITGCs") in the areas of user access and program change management over certain information technology ("IT") systems that support our financial reporting processes.
Beginning during the three months ended March 31, 2020, and continuing through June 30, 2020, we implemented our previously-disclosed remediation plan that included: (i) training programs addressing ITGCs and policies around internal controls over financial reporting, which included educating control owners concerning the requirements of each control that they are responsible for; (ii) creation of roles that are responsible for IT compliance and oversight; (iii) development of documentation underlying ITGCs to promote knowledge transfer upon personnel and function changes; (iv) an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (v) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors.
During the three months ended June 30, 2020, we completed our testing of the operating effectiveness of the affected ITGC controls and found them to be effective. As a result, we have concluded that the material weakness was remediated as of June 30, 2020 and our disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting
The GPT Acquisition was completed on October 31, 2019. The financial results of GPT are included in our unaudited consolidated financial statements as of September 30, 2020 and for the period then ended. The GPT business represented approximately $15,080 of revenues and ($2,083) of net loss for the six months ended September 30, 2020. As this acquisition occurred in the third quarter of fiscal year 2020, the scope of our assessment of our internal control over financial reporting does not include GPT. This exclusion is in accordance with the Securities and Exchange Commission’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.
See Note 11. “Commitments and Contingencies” within Item 1. “Financial Statements.” for information regarding any legal proceedings in which we may be involved.
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are described in our Annual Report on Form 10-K for the year ended March 31, 2020, under the heading “Risk Factors” in Part I – Item 1A. Information regarding risk factors also appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements” in Part I - Item 2 of this Form 10-Q. The Risk Factors section in our Annual Report on Form 10-K for the year ended March 31, 2020, as updated by this Form 10-Q including the discussions in “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Business Overview—COVID-19 and Business Update”, remains current in all material respects. These risk factors do not identify all risks that we face—our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 7, 2005, our Board of Directors adopted a share repurchase plan which allows for the repurchase of up to 300,000 of our common shares, of which 162,486 have been purchased to date; however, no shares have been purchased under the plan in the last three fiscal years. This plan will continue until the maximum is reached or the plan is terminated by further action of the Board of Directors. We have made no repurchases of our common stock in the current or any of the last three fiscal years.
| Exhibit No. |
Description of Exhibit |
| 31.1+ |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2+ |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1* |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* |
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 101.SCH+ | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL+ | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF+ | Inline XBRL Taxonomy Extension Definitions Linkbase Document |
| 101.LAB+ | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE+ | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104+ |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*). |
+ Filed herewith
* Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MESA LABORATORIES, INC.
(Registrant)
| DATED: November 5, 2020 | BY: | /s/ Gary M. Owens. Gary M. Owens Chief Executive Officer |
| DATED: November 5, 2020 | BY: | /s/ John V. Sakys John V. Sakys Chief Financial Officer |