Mesa Laboratories Inc 10-Q for FY2021 Q3
Mesa Laboratories Inc (MLAB)
About this 10-Q
Mesa Laboratories Inc filed this 10-Q on February 3, 2021, covering the quarter ended December 31, 2020 (FY2021 Q3).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $34.17M
- up 8.0% from $31.66M a year earlier
- Diluted EPS
- -$0.89
- compared with -$1.03 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 |
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)
| December 31, | 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 | ||||||||
| 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 Operations
(unaudited)
(in thousands, except per share data)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Impairment of goodwill and long-lived assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Nonoperating expense: | ||||||||||||||||
| Interest expense and amortization of debt discount | ||||||||||||||||
| Other expense (income), net | ( | ) | ( | ) | ||||||||||||
| Total nonoperating expense | ||||||||||||||||
| (Loss) earnings before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (benefit) expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| (Loss) 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 December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss) 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)
| Nine Months Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) 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 | ||||||||
| Foreign currency adjustments | ( | ) | ||||||
| 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 | $ | $ | $ | $ | ||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | ||||||||||||||||||||
| Dividends paid, $ per share | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||
| Net (loss) income | - | ( | ) | ( | ) | |||||||||||||||
| December 31, 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 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercise of stock options and vesting of restricted stock units | ||||||||||||||||||||
| Dividends paid, $ per share | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||
| Net (loss) income | - | ( | ) | ( | ) | |||||||||||||||
| December 31, 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 December 31, 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 of 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 quantitative and qualitative 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. 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 intend to adopt the ASU effective April 1, 2021 but are still evaluating the method of adoption we will utilize. We are continuing to evaluate the 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 shared specific risk factors. Due to the short-term nature of trade receivables, the estimated accounts receivable that may not be collected is based on the aging of 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 with 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 based on assessment of anticipated payment and all other historical, current and future information 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 such consumables 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 single use items requiring frequent replacement in our customers' operating cycles. 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 nine months ended December 31, 2020 and three and nine months ended December 31, 2019, respectively:
| Three Months Ended December 31, 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 December 31, 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended December 31, 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended December 31, 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 products are shipped or exported, as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 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 nine months ended December 31, 2020 | ( | ) | |
| Contract liabilities added during the nine months ended December 31, 2020, net of revenues recognized | |||
| Contract liabilities balance as of December 31, 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 December 31, 2020 and March 31, 2020, cash and cash equivalents on our Condensed Consolidated Balance Sheets included $
During the year ended March 31, 2020, we issued $
| December 31, 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 in the unaudited condensed consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill, and other intangible assets, including those that were part of the GPT Acquisition. These assets are measured at fair value if determined to be impaired. The 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 nine months ended December 31, 2020 or nine months ended December 31, 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 any single issuer (except U.S. treasuries). Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. We reserve an allowance for potential write-offs of accounts receivable using historical collection experience, 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:
| December 31, 2020 | March 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Less: reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
The remaining balance of the adjustment to step up inventory to fair value as part of the GPT Acquisition, which was included in finished goods, was $
Note 5. Goodwill and Intangible Assets, Net
Finite-lived intangible assets consist of the following:
| December 31, 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 |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
The increase in the carrying amount of intangible assets was attributable to changes in foreign currency and adjustments to the preliminary purchase price of GPT that are discussed further in Note 12. "Significant Transactions". 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:
| Remainder of year 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 |
||||||||||||||||||||||||
| December 31, 2020 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note 6. Supplemental Balance Sheets Information
Accrued payroll and benefits consist of the following:
| December 31, 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:
| December 31, 2020 | March 31, 2020 | |||||||
| Accrued business taxes | $ | $ | ||||||
| Current operating lease liabilities | ||||||||
| Interest payable | ||||||||
| Professional services fees | ||||||||
| Contingent consideration | ||||||||
| 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:
| December 31, 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:
| December 31, 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 December 31, | Nine Months Ended December 31, | |||||||||||||||
| 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 December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| Amount of income tax expense (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 Operations.
The following is a summary of stock option award activity for the nine months ended December 31, 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 December 31, 2020 | $ | |||||||
The stock options granted during the nine months ended December 31, 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 nine months ended December 31, 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 December 31, 2020 | $ | $ | ||||||||||||||
The majority of the time-based RSUs granted during the nine months ended December 31, 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 -year period from the grant date. We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.
Performance-based RSUs vest upon completion of the service period described in the award agreement and based on 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.
During the three months ended December 31, 2020, we adjusted our estimate of performance share units expected to vest, based on actual results achieved. As a result, we recorded a cumulative effect catch up of $
Note 9. (Loss) Earnings Per Share
Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the reporting period. Diluted (loss) earnings per share (“diluted EPS”) is computed similarly to basic (loss) 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, including RSUs that contain performance conditions which have been achieved as of the reporting period (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. There was no dilution in our diluted EPS calculation for the three and nine months ended December 31, 2020 and the three months ended December 31, 2019 because we incurred net losses in those periods and the effect would have been antidilutive.
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 nine months ended December 31, 2020.
The following table presents a reconciliation of the denominators used in the computation of basic and diluted (loss) earnings per share (shares in thousands):
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss) income available for shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Weighted average outstanding shares of common stock | ||||||||||||||||
| Dilutive effect of stock options | ||||||||||||||||
| Dilutive effect of time-based non-vested shares | ||||||||||||||||
| Dilutive effect of performance-based non-vested shares | ||||||||||||||||
| Fully diluted shares | ||||||||||||||||
| Basic (loss) earnings per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Diluted (loss) earnings per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
The following stock awards were excluded from the calculation of diluted EPS:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 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 $
The tax year ended December 31, for Gyros US, Inc., and its subsidiary, which we acquired as part of the GPT Acquisition, is under examination by the IRS. We expect the examination for this tax year to be completed within the next 12 months.
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 December 31, 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 $
Companies are required to collect and remit sales tax from certain customers if the company is determined to have nexus in a particular state. The determination of nexus varies by state and often requires technical knowledge of each jurisdiction's tax case law. During the nine months ended December 31, 2020, we determined that certain subsidiaries of GPT had established nexus in various jurisdictions during prior periods without properly collecting and remitting sales tax, and in certain cases had collected sales tax and not remitted it. We estimate the total net exposure including interest and penalties is $
Note 12. Significant Transactions
GPT Acquisition
On October 31, 2019, we completed the acquisition of
Fair Value of Net Assets Acquired
We accounted for the GPT Acquisition as the purchase of a business and GPT's results of operations have been included in our consolidated statements of operations and cash flows from the date of acquisition. Under the acquisition method of accounting, the net assets of GPT were initially recorded as of the acquisition date at their respective estimated fair values, using information obtained during due diligence and from other sources, and consolidated with those of Mesa Labs. We refined our valuation models, assumptions, and inputs based on additional information obtained subsequent to the closing of the transaction related to facts and circumstances that existed at the acquisition date in order to estimate fair value more accurately for the purchase price allocation. 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.
During the three months ended December 31, 2020, we finalized the valuation of net assets acquired. The significant purchase price allocation changes during the nine months ended December 31, 2020 included: a net decrease of $
The cumulative impacts of all adjustments have been reflected in the unaudited condensed consolidated financial statements as of and for the nine months ended December 31, 2020. The components and allocation of the purchase price consist of the following amounts:
| Note | Fair Value | ||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable | (a) | ||||
| Inventories | (b) | ||||
| Prepaid income taxes | |||||
| Prepaid expenses and other | |||||
| Property, plant and equipment | |||||
| 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 $
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||
| 2019 | 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 depreciation expense of $ | |
| ● | Additional amortization expense of $ |
| ● | For the nine months ended December 31, 2019, $ |
| ● | Income tax effect of the adjustments made at a blended federal and state statutory rate (approximately |
Note 13. Segment Information
As of December 31, 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 December 31, 2020 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit (loss) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| (Loss) before income taxes | $ | ( | ) | |||||||||||||||||||||
| Three Months Ended December 31, 2019 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit (loss) | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| (Loss) before income taxes | $ | ( | ) | |||||||||||||||||||||
| Nine Months Ended December 31, 2020 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit (loss) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Reconciling items (2) | ( | ) | ||||||||||||||||||||||
| (Loss) before income taxes | $ | ( | ) | |||||||||||||||||||||
| Nine Months Ended December 31, 2019 | ||||||||||||||||||||||||
| Sterilization and Disinfection Control | Instruments | Biopharmaceutical Development | Continuous Monitoring | Corporate and Other | Total | |||||||||||||||||||
| Revenues (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit (loss) | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| 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:
| December 31, 2020 | March 31, 2020 | |||||||
| Sterilization and Disinfection Control | $ | $ | ||||||
| Instruments | ||||||||
| Biopharmaceutical Development | ||||||||
| Continuous Monitoring | ||||||||
| Corporate and administrative | ||||||||
| Total | $ | $ | ||||||
The increase in total assets was primarily attributable to $
Note 14. Subsequent Events
In January 2021, 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; technological or market viability 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; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; outstanding claims, legal proceedings, international business challenges and regulations including anti-corruption and sanctions laws; 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 December 31, 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 people, the environment, and end products.
Our revenues come from product sales, which includes hardware, 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 nine months ended December 31, 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 substantial public health and economic challenges 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 have continued to enforce company policies that are focused on ensuring the safety of our employees while also delivering 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's revenues have been inconsistent during the nine months ended December 31, 2020, which we believe is attributable to customers' reactions to COVID-19. The 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 to slow throughout the three months ended September 30, 2020 as advanced ordering began to reverse and customers used stock that they had purchased previously. During the three months ended December 31, 2020, revenues began to increase again as many customers depleted their stock and resumed ordering at more normal levels. We believe that the consumable, critical, and disposable nature of Sterilization and Disinfection Control products renders 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 countries increase focus on verifying the effectiveness of sterilization and disinfection processes. |
| ● |
Biopharmaceutical Development: Demand for hardware, consumables, and services sold by our Biopharmaceutical Development division declined during the start of the pandemic (the three months ended June 30, 2020), which we believe was mainly a result of COVID-19. Subsequently, as several of the restrictions limiting vendors from being on-site at customer facilities were eased during the summer and fall of 2020, demand for Biopharmaceutical Development products and services increased significantly compared to the three months ended June 30, 2020, but 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 have caused customers, including laboratories to reduce capacity or close completely, resulting in decreased demand for our products. In the future, when travel and gathering restrictions are lifted and we are permitted on-site at more customer facilities, and when laboratories globally are open for normal operations, we expect an opportunity for greater organic revenue growth in the Biopharmaceutical Development division. |
| ● |
Continuous Monitoring: Demand for hardware and software sold by our Continuous Monitoring division declined during the start of the pandemic (the three months ended June 30, 2020), which we believe was mainly a result of COVID-19. As restrictions limiting vendors from being on-site at customer facilities were eased during our second fiscal quarter, demand for Continuous Monitoring products and services increased somewhat compared to the three months ended June 30, 2020, some of which was a result of fulfilling backlog we were restricted from completing during the three months ended June 30, 2020. Although orders have increased steadily as our fiscal year has progressed, the global pandemic continues to inhibit our ability to install these products. Further, increases in COVID-19 cases throughout the U.S. and Canada could lead to customers further tightening facility access, resulting in 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 Continuous Monitoring division. |
| ● |
Instruments: Demand for hardware and certain services sold by our Instruments division declined during the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, which we believe was mainly a result of COVID-19 due to the discretionary nature of many instruments purchases. However, beginning late in September, 2020, and continuing through the three months ended December 31, 2020, we began to see demand for these products increase somewhat, and revenues increased as we fulfilled orders. Although demand for hardware sold by our Instruments division appears to be beginning to improve as customers resume making discretionary capital purchases, we continue to expect that it will be several quarters before demand and revenues recover. |
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, have and may continue to 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 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’ changed 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 9% and 18%, organic revenues growth was 1% and declined 3%, and gross profit as a percentage of revenues increased 14 percentage points and eight percentage points for the three and nine months ended December 31, 2020, as compared to the three and nine months ended December 31, 2019, respectively. Results by reportable segment are as follows:
| Revenues |
Organic Revenues Growth |
Gross Profit as a % of Revenues |
||||||||||||||||||||||
| Three Months Ended December 31, 2020 |
Three Months Ended December 31, 2019 |
Three Months Ended December 31, 2020 |
Three Months Ended December 31, 2019 |
Three Months Ended December 31, 2020 |
Three Months Ended December 31, 2019 |
|||||||||||||||||||
| Sterilization and Disinfection Control |
$ | 13,077 | $ | 11,619 | 13 | % | 1 | % | 71 | % | 70 | % | ||||||||||||
| Instruments |
8,971 | 10,014 | (10 | %) | 2 | % | 60 | % | 65 | % | ||||||||||||||
| Biopharmaceutical Development |
8,711 | 5,637 | 14 | % | N/A | 53 | % | (23 | %) | |||||||||||||||
| Continuous Monitoring |
3,413 | 4,156 | (18 | %) | 6 | % | 44 | % | 36 | % | ||||||||||||||
| Mesa Labs' reportable segments |
$ | 34,172 | $ | 31,426 | 1 | % | 2 | % | 61 | % | 47 | % | ||||||||||||
| Corporate and Other |
- | 229 | ||||||||||||||||||||||
| Total Company |
$ | 34,172 | $ | 31,655 | ||||||||||||||||||||
| Revenues |
Organic Revenues Growth |
Gross Profit as a % of Revenues |
||||||||||||||||||||||
| Nine Months Ended December 31, 2020 |
Nine Months Ended December 31, 2019 |
Nine Months Ended December 31, 2020 |
Nine Months Ended December 31, 2019 |
Nine Months Ended December 31, 2020 |
Nine Months Ended December 31, 2019 |
|||||||||||||||||||
| Sterilization and Disinfection Control |
$ | 37,696 | $ | 35,823 | 5 | % | 4 | % | 75 | % | 71 | % | ||||||||||||
| Instruments |
24,209 | 28,518 | (15 | %) | 1 | % | 62 | % | 64 | % | ||||||||||||||
| Biopharmaceutical Development |
23,791 | 5,637 | 14 | % | N/A | 64 | % | (23 | %) | |||||||||||||||
| Continuous Monitoring |
10,277 | 11,059 | (7 | %) | 3 | % | 39 | % | 36 | % | ||||||||||||||
| Mesa Labs' reportable segments |
$ | 95,973 | $ | 81,037 | (3 | %) | 3 | % | 65 | % | 57 | % | ||||||||||||
| Corporate and Other |
- | 2,442 | ||||||||||||||||||||||
| Total Company |
$ | 95,973 | $ | 83,479 | ||||||||||||||||||||
Our unaudited condensed consolidated results of operations are as follows:
| Three Months Ended December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Revenues |
$ | 34,172 | $ | 31,655 | 8 | % | $ | 95,973 | $ | 83,479 | 15 | % | ||||||||||||
| Gross profit |
20,653 | 14,803 | 40 | % | 62,278 | 46,593 | 34 | % | ||||||||||||||||
| Operating expenses |
20,631 | 18,058 | 14 | % | 54,216 | 39,697 | 37 | % | ||||||||||||||||
| Operating income (loss) |
22 | (3,255 | ) | (101 | %) | 8,062 | 6,896 | 17 | % | |||||||||||||||
| Net (loss) income |
$ | (4,542 | ) | $ | (4,504 | ) | 1 | % | $ | (646 | ) | $ | 3,330 | (119 | %) | |||||||||
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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Revenues |
$ | 13,077 | $ | 11,619 | 13 | % | $ | 37,696 | $ | 35,823 | 5 | % | ||||||||||||
| Gross profit |
9,308 | 8,101 | 15 | % | 28,098 | 25,334 | 11 | % | ||||||||||||||||
| Gross profit as a % of revenues |
71 | % | 70 | % | 1 | % | 75 | % | 71 | % | 4 | % | ||||||||||||
Sterilization and Disinfection Control revenues increased 13% for the three months ended December 31, 2020 as many of our customers resumed ordering at more normal levels. Revenues during the three months ended December 31, 2019 were lower than usual as a result of a supply disruption, creating a favorable comparison during the current year.
Sterilization and Disinfection Control revenues increased 5% for the nine months ended December 31, 2020 as a result of organic revenues growth resulting from the timing of several large orders and modest price increases.
Sterilization and Disinfection Control gross profit percentage increased one percentage point and four percentage points for the three and nine months ended December 31, 2020, respectively, primarily as a result of operating efficiencies from increased volume and favorable product 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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Revenues |
$ | 8,971 | $ | 10,014 | (10 | %) | $ | 24,209 | $ | 28,518 | (15 | %) | ||||||||||||
| Gross profit |
5,368 | 6,526 | (18 | %) | 14,909 | 18,164 | (18 | %) | ||||||||||||||||
| Gross profit as a % of revenues |
60 | % | 65 | % | (5 | %) | 62 | % | 64 | % | (2 | %) | ||||||||||||
Instruments revenues decreased 10% and 15% for the three and nine months ended December 31, 2020, respectively, as customers across all served markets continued to limit spending that is more discretionary in nature in response to economic uncertainty. However, we expect that the higher demand we experienced for our products during the three months ended December 31, 2020 does indicate that demand is beginning a slow return to more normal levels.
Instruments gross profit percentage decreased five and two percentage points during the three and nine months ended December 31, 2020, respectively. The decrease resulted from a $212 charge for severance related to employees who work in our Butler, New Jersey facility which we intend to close during the three months ending June 30, 2021, lower revenues on a partially fixed cost base, and to a lesser extent, unfavorable product mix.
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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Revenues |
$ | 8,711 | $ | 5,637 | 55 | % | $ | 23,791 | $ | 5,637 | 322 | % | ||||||||||||
| Gross profit (loss) |
4,616 | (1,294 | ) | 457 | % | 15,294 | (1,294 | ) | 1282 | % | ||||||||||||||
| Gross profit (loss) as a % of revenues | 53 | % | (23 | %) | 76 | % | 64 | % | (23 | %) | 87 | % | ||||||||||||
The results of the Biopharmaceutical development division were consolidated into our results beginning on November 1, 2019. Although we did experience positive organic growth during the three and nine months ended December 31, 2020, Biopharmaceutical Development's revenues were negatively impacted during the three and nine months ended December 31, 2020 by 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 period from July 1, 2020 until December 31, 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. Additionally, many global laboratories that use this division's products continue to be closed or have limited hours. Restrictions limiting vendors from going on-site at customers facilities eased during the summer and fall of 2020. Additionally, during this time we increased efforts to pursue digital marketing avenues to continue to create leads and demonstrate our products to potential customers. As a result of loosening restrictions and our digital marketing efforts, revenues during the second and third quarters of our fiscal year were significantly improved compared to our first quarter of our fiscal year.
Biopharmaceutical Development's gross profit percentage was 53% for the three months ended December 31, 2020. Substantially all of this division's sales are invoiced in either euros or U.S. dollars ("USD"); however, the majority of the costs in this division are recorded in Swedish Krona and translated to USD for reporting purposes. Since the USD has weakened significantly against the Swedish Krona during the three months ended December 31, 2020, our reported costs in USD have increased substantially, while revenues have not benefited significantly from the change in currency valuation. Additionally, during the three months ended December 31, 2020, we revised our estimate of inventory overhead rates for this division, which resulted in higher period costs as less of our overhead costs were capitalized into inventory, and we wrote off inventory that we determined was obsolete. We expect to sell the remainder of the inventory produced at the previously estimated rates over the next two to three quarters. Without the impact of the USD weakening and the inventory adjustments during the three months ended December 31, 2020, we estimate that gross profit would have been 61%. Finally, unfavorable product mix negatively impacted gross profit margin percentage for this division during the three months ended December 31, 2020.
Biopharmaceutical Development's gross profit for the nine months ended December 31, 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 nine months ended December 31, 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 net impact of the amortization catch ups and the weakening of the USD, gross profit percentage would have been 65% for the nine months ended December 31, 2020.
Biopharmaceutical Development gross profit (loss) margin was ($1,294) for the period from November 1, 2019 until December 31, 2019. The gross profit (loss) included $5,134 of amortization on an inventory step-up recorded in purchase accounting related to the GPT Acquisition. Excluding the step-up amortization, gross profit for the period ended December 31, 2019 would have been $3,840, and gross profit percentage would have been approximately 68%.
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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Revenues |
$ | 3,413 | $ | 4,156 | (18 | %) | $ | 10,277 | $ | 11,059 | (7 | %) | ||||||||||||
| Gross profit |
1,501 | 1,488 | 1 | % | 4,053 | 3,994 | 1 | % | ||||||||||||||||
| Gross profit as a % of revenues |
44 | % | 36 | % | 8 | % | 39 | % | 36 | % | 3 | % | ||||||||||||
The Continuous Monitoring division's revenues decreased 18% for the three months ended December 31, 2020, as we completed several large orders during the three months ended December 31, 2019, resulting in a higher than usual revenues in the comparable period. Continuous Monitoring's revenues decreased 7% for the nine months ended December 31, 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, our ability to go on-site to many of our customers facilities to install and service systems was severely restricted during April and May, 2020. Overall, restrictions began to ease late in our first fiscal quarter, which allowed our technicians to go on-site to perform work that was previously backlogged as a result of COVID-19 related restrictions, and our sales volumes began to increase during our second and third fiscal quarters; however, customer reaction to the acceleration of COVID-19 infections during our third fiscal quarter did negatively impact our ability to service customers and complete certain system installations. Overall, we continue to see strong demand, including market expansion as hospitals increase monitoring systems in response to the COVID-19 vaccine roll out.
Continuous Monitoring gross profit percentage increased eight percentage points and three percentage points for the three and nine months ended December 31, 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 as well as modifications made to our product offerings and pricing models which are intended to provide more predictable gross profit margins.
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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Revenues | $ | - | $ | 229 | (100 | %) | $ | - | $ | 2,442 | (100 | %) | ||||||||||||
| Gross profit (loss) |
(140 | ) | (18 | ) | 678 | % | (76 | ) | 395 | (119 | %) | |||||||||||||
| Gross profit (loss) as a % of revenues |
N/A | (8 | %) | N/A | N/A | 16 | % | N/A | ||||||||||||||||
Operating Expenses
Operating expenses for the three and nine months ended December 31, 2020 increased 14% and 37%, 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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Selling expense |
$ | 4,753 | $ | 4,067 | 17 | % | $ | 12,614 | $ | 8,549 | 48 | % | ||||||||||||
| As a percentage of revenues |
14 | % | 13 | % | 1 | % | 13 | % | 10 | % | 3 | % | ||||||||||||
Selling expense for the three and nine months ended December 31, 2020 increased 17% and 48%, respectively, primarily as a result of selling costs incurred by the Biopharmaceutical Development division which we acquired and began consolidating into our results as of November 1, 2019 and unfavorable foreign exchange rates for selling expenses incurred in Swedish Krona, 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 14% for the three months ended December 31, 2020 and was 13% for the nine months ended December 31, 2020 as compared to 13% and 10% for the three and nine months ended December 31, 2019, respectively. 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 December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| General and administrative expense |
$ | 13,173 | $ | 11,605 | 14 | % | $ | 33,887 | $ | 26,806 | 26 | % | ||||||||||||
| As a percentage of revenues |
39 | % | 37 | % | 2 | % | 35 | % | 32 | % | 3 | % | ||||||||||||
General and administrative expenses increased 14% for the three months ended December 31, 2020, primarily as a result of: increased amortization expense associated with intangible assets acquired from the GPT acquisition; three months of general and administrative costs incurred by the Biopharmaceutical Development division during the three months ended December 31, 2020, versus only two months of expenses during the three months ended December 31, 2019; higher non-cash stock-based compensation expense, including the cumulative-effect true up for performance stock units recorded during the three months ended December 31, 2020; and higher professional services fees incurred for the implementation of our enterprise resource planning tool for GPT, partially offset by lower acquisition related costs.
General and administrative expenses increased 26% for the nine months ended December 31, 2020 as a result of nine months of general and administrative costs incurred by the Biopharmaceutical Development division included in the results for the nine month period ended December 31, 2020 versus two months of results for the year to date period ended December 31, 2020 as the acquisition was completed on November 1, 2019. Additionally, general and administrative costs increased as a result of higher amortization expense associated with intangible assets acquired from the GPT acquisition, professional services fees related to the implementation of our enterprise resource planning tool for the division, and higher non-cash stock-based compensation expense, including the cumulative-effect true up for performance stock units recorded during the three months ended December 31, 2020, partially offset by lower acquisition related costs.
Research and Development
Research and development expense is predominantly comprised of labor costs and costs of third-party consultants.
| Three Months Ended December 31, |
Percentage |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Research and development expense |
$ | 2,705 | $ | 2,110 | 28 | % | $ | 7,715 | $ | 4,044 | 91 | % | ||||||||||||
| As a percentage of revenues |
8 | % | 7 | % | 1 | % | 8 | % | 5 | % | 3 | % | ||||||||||||
Research and development expenses increased 28% and 91% for the three and nine months ended December 31, 2020, respectively, primarily as a result of expenses attributable to the Biopharmaceutical Development division, which we acquired and began consolidating into our results as of November 1, 2019, and to a lesser extent because of unfavorable foreign exchange rates on research and development expenses incurred in Swedish Krona. 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
| Three Months Ended December 31, |
Percentage Change |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | 2020 | 2019 | Change | |||||||||||||||||||
| Nonoperating expense |
$ | 5,749 | 1,822 | 216 | % | $ | 10,651 | $ | 2,774 | 284 | % | |||||||||||||
Nonoperating expense for the three and nine months ended December 31, 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.
During the three and nine months ended December 31, 2020, we incurred significant realized and unrealized foreign currency losses as a result of the USD weakening significantly, particularly against the Swedish Krona.
Interest expense and amortization of debt discount was consistent for the three months ended December 31, 2020 compared to the three months ended December 31, 2019 and increased for nine months ended December 31, 2020 because the Note was outstanding for only part of the nine months ended December 31, 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 nine months ended December 31, 2019 compared to the three and nine months ended December 31, 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 December 31, |
Percentage Change |
Nine Months Ended December 31, |
Percentage |
|||||||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | 2020 | 2019 | Change | |||||||||||||||||||
| Income tax (benefit) expense |
$ | (1,185 | ) | $ | (573 | ) | 107 | % | $ | (1,943 | ) | $ | 792 | (345 | %) | |||||||||
| Effective tax rate |
21 | % | 11 | % | 10 | % | 75 | % | 19 | % | 56 | % | ||||||||||||
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 (Loss) Income
Net (loss) for the nine months ended December 31, 2020 varied with the changes in revenues, gross profit, and operating expenses (which includes $6,887, $10,694, and $4,024 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).
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 nine months ended December 31, 2020, we took 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 $267,525 and $96,784 at December 31, 2020, and March 31, 2020, respectively. As of December 31, 2020, and March 31, 2020, we had $253,731 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.
As of December 31, 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 December 31, 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 nine months ended December 31, 2020 as well as each quarter for the year ended March 31, 2020.
In January 2021, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on March 15, 2021, to shareholders of record at the close of business on February 26, 2021.
Cash Flows
Our cash flows from operating, investing, and financing activities were as follows (in thousands):
| Nine Months Ended December 31, |
||||||||
| 2020 |
2019 |
|||||||
| Net cash provided by operating activities |
$ | 23,553 | $ | 18,156 | ||||
| Net cash (used in) investing activities |
(954 | ) | (185,037 | ) | ||||
| Net cash provided by financing activities |
147,275 | 230,883 | ||||||
Cash flows from operating activities for the nine months ended December 31, 2020 provided $23,553, 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 nine months ended December 31, 2020 compared to the nine months ended December 31, 2019, which included a cash outlay for the IBP and GPT acquisitions. Cash provided by financing activities included our equity raise, which provided $145,935 during the nine months ended December 31, 2020 and our convertible debt offering and equity raise which provided $252,065 during the nine months ended December 31, 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 nine months ended December 31, 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 December 31, 2020, we had contractual obligations for open purchase orders of approximately $6,610 for routine purchases of supplies and inventory, which are payable in less than one year.
Off-Balance Sheet Arrangements
As of December 31, 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 expenses in Swedish Krona. Fluctuations in exchange rates have, and may continue to 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 December 31, 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 December 31, 2020.
Changes in Internal Control over Financial Reporting
The GPT Acquisition was completed on October 31, 2019, and the financial results of GPT are included in our unaudited consolidated financial statements as of December 31, 2020 and for the period then ended. During the time since acquisition, we have assessed the control environment of GPT, made certain changes to GPT's internal controls over financial reporting, including design changes that were required as we brought GPT onto our enterprise resource planning tool, and we have performed testing over the operating effectiveness of many of GPT's internal controls. We now consider GPT to be included in the scope of our assessment of internal controls over financial reporting.
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.
| 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 |
| 101.INS+ | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH+ | Inline XBRL Taxonomy Extension Schema Docment. |
| 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: February 3, 2021 | BY: | /s/ Gary M. Owens. Gary M. Owens Chief Executive Officer |
| DATED: February 3, 2021 | BY: | /s/ John V. Sakys John V. Sakys Chief Financial Officer |