0000724004 MESA LABORATORIES INC /CO false --03-31 Q3 2020 153 159 14,623 12,741 0 0 25,000,000 25,000,000 5,131,031 5,131,031 4,387,140 4,387,140 9,315 0.16 382,234 0.16 392,412 0.16 0.16 5,568 8,338 0.16 230,246 0.64 429 429 429 0.10 65 110 126 128 0.04 0 0 6 1.375 1.375 1.375 1.375 1 2018 0 450 10 4 March 15, 2021 February 26, 2021 Accounts receivable is composed of trade accounts receivable, net which is expected to be collected. Intersegment revenues are not significant and are eliminated to arrive at consolidated totals. Accumulated Other Comprehensive Income (Loss). 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 $66 based on the increased fair value of property, plant and equipment. Additional amortization expense of $4,801 for the nine months ended December 31, 2019 based on the increased fair value of amortizable intangible assets acquired, net of adjustments. For the nine months ended December 31, 2019, $358 additional stock based compensation expense representing expense for performance share units awarded to certain key GPT employees net of actual forfeitures. Income tax effect of the adjustments made at a blended federal and state statutory rate (approximately 25%). Customer relationships and acquired technology are being amortized on a straight-line basis over a 10 year period. Amortization expense for customer relationships is recorded to general and administrative expenses; amortization expense for acquired technology is recorded to cost of revenues. During the nine months ended December 31, 2020, $5,328 of amortization expense related to the GPT intangible assets was recorded to general and administrative costs and $1,101 of amortization expense was recorded to cost of goods sold and allocated to the Biopharmaceutical Development division, including the cumulative-effect benefit to amortization expense discussed above. Trademarks associated with this acquisition are considered indefinite-lived intangibles. The estimated fair value of identifiable intangible assets was determined primarily using the income approach, which requires a forecast of all the expected future cash flows associated with the identified intangible assets. Net revenues were adjusted to include net revenues of GPT. Finished goods inventory of GPT includes $8,066 of inventory-step up, which is required to report inventory at fair value at the time of acquisition. The inventory step-up was amortized to cost of revenues over approximately eight months following the acquisition date, which resulted in a temporary reduction in gross profit for the business. During the period from November 1, 2019 until March 31, 2020, we recorded $8,502 of amortization of inventory step-up costs in cost of revenues on the Condensed Consolidated Statements of Operations. The final inventory valuation was completed during the nine months ended December 31, 2020 and was lower than our preliminary valuation, resulting in a cumulative effect decrease of $436 in amortization of inventory step up costs. Reconciling items include selling, general and administrative, research and development, interest expense and amortization of debt discount, and other (income) expenses. Acquired goodwill of $85,130, all of which is allocated to the Biopharmaceutical Development reportable segment, represents the value expected to arise from organic revenues growth projections that are expected to exceed that of our legacy divisions, and the opportunity to expand into a new market with well-established market share. 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Table of Contents

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

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

For the quarterly period ended December 31, 2020

or

 

 

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

 

For the transition period from ___ to ___

 

Commission File No: 0-11740

 


 

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Colorado

 

84-0872291

 
 

(State or other jurisdiction of

 

(I.R.S. Employer

 
 

incorporation or organization)

 

Identification number)

 
     
 

12100 West Sixth Avenue

   
 

Lakewood, Colorado

 

80228

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

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

 

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

Yes      No ☒

 

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

 

There were 5,132,003 shares of the Issuer’s common stock, no par value, outstanding as of January 28, 2021.

 



 

 

 



 

Table of Contents

 

 

 

Part I. Financial Information

1
   
 

Item 1. Financial Statements

1
 

Condensed Consolidated Balance Sheets

1
 

Condensed Consolidated Statements of Operations

2
 

Condensed Consolidated Statements of Comprehensive Income

3
 

Condensed Consolidated Statements of Cash Flows

4
 

Condensed Consolidated Statements of Stockholders’ Equity

5
 

Notes to Condensed Consolidated Financial Statements

6
 

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

17
 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

25
 

Item 4.  Controls and Procedures

26
     

Part II. Other Information

27
   
 

Item 1.  Legal Proceedings

27
 

Item 1A.  Risk factors

27
 

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

27
 

Item 6.  Exhibits

28
 

Signatures

29
 

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

 
 

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

 
 

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

 
 

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

 

 

 

 

 
 

Part I. Financial Information

 

Item 1. Financial Statements

 

Mesa Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share amounts)

 

  

December 31,

  

March 31,

 
  

2020

  

2020

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $253,731  $81,380 

Accounts receivable, less allowances of $153 and $159, respectively

  20,410   21,132 

Inventories, net

  11,965   14,230 

Prepaid income taxes

  5,327   1,914 

Prepaid expenses and other

  3,842   4,136 

Total current assets

  295,275   122,792 

Property, plant and equipment, net of accumulated depreciation of $14,623 and $12,741, respectively

  22,295   22,066 

Deferred tax asset

  15,673   11,461 

Other assets

  1,806   2,480 

Intangibles, net

  120,803   119,871 

Goodwill

  165,784   141,536 

Total assets

 $621,636  $420,206 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $3,751  $3,408 

Accrued payroll and benefits

  7,188   8,940 

Unearned revenues

  7,646   6,814 

Other accrued expenses

  9,165   6,846 

Total current liabilities

  27,750   26,008 

Deferred tax liability

  36,103   32,549 
Convertible senior notes, net of discounts and debt issuance costs  144,302   140,278 

Other long-term liabilities

  686   1,358 

Total liabilities

  208,841   200,193 

Stockholders’ equity:

        

Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 5,131,031 and 4,387,140 shares, respectively

  314,537   158,023 

Retained earnings

  69,363   72,359 

Accumulated other comprehensive income (loss)

  28,895   (10,369)

Total stockholders’ equity

  412,795   220,013 

Total liabilities and stockholders’ equity

 $621,636  $420,206 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

Page 1

 

 

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Revenues

 $34,172  $31,655  $95,973  $83,479 

Cost of revenues

  13,519   16,852   33,695   36,886 

Gross profit

  20,653   14,803   62,278   46,593 

Operating expenses:

                

Selling

  4,753   4,067   12,614   8,549 

General and administrative

  13,173   11,605   33,887   26,806 

Research and development

  2,705   2,110   7,715   4,044 
Impairment of goodwill and long-lived assets  -   276   -   298 

Total operating expenses

  20,631   18,058   54,216   39,697 

Operating income (loss)

  22   (3,255)  8,062   6,896 

Nonoperating expense:

                

Interest expense and amortization of debt discount

  1,950   1,929   5,803   3,522 

Other expense (income), net

  3,799   (107)  4,848   (748)
Total nonoperating expense  5,749   1,822   10,651   2,774 

(Loss) earnings before income taxes

  (5,727)  (5,077)  (2,589)  4,122 

Income tax (benefit) expense

  (1,185)  (573)  (1,943)  792 

Net (loss) income

 $(4,542) $(4,504) $(646) $3,330 
                 

(Loss) earnings per share:

                

Basic

 $(0.89) $(1.03) $(0.13) $0.80 

Diluted

  (0.89)  (1.03)  (0.13)  0.75 
                 

Weighted-average common shares outstanding:

                

Basic

  5,125   4,367   4,922   4,142 

Diluted

  5,125   4,367   4,922   4,418 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

Page 2

 

 

Mesa Laboratories, Inc.

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

 $(4,542) $(4,504) $(646) $3,330 

Other comprehensive income:

                

Foreign currency translation adjustments

  21,142   6,615   39,264   5,750 

Comprehensive income

 $16,600  $2,111  $38,618  $9,080 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

Page 3

 

 

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

  

Nine Months Ended December 31,

 
  

2020

  

2019

 

Cash flows from operating activities:

        
Net (loss) income $(646) $3,330 

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

        
Depreciation and amortization  12,933   7,501 
Stock-based compensation  6,887   5,310 
Non-cash interest and debt amortization  4,024   2,002 
Amortization of step-up in inventory basis  (436)  5,134 
Change in inventory reserve  368   577 
Foreign currency adjustments  4,583   (256)
Other  (1,285)  758 

Cash provided by changes in operating assets and liabilities

        
Accounts receivable, net  2,224   11 
Inventories, net  (485)  304 
Prepaid expenses and other assets  (2,691)  (2,410)
Accounts payable  71   64 
Accrued liabilities and taxes payable  (2,517)  (4,396)
Unearned revenues  523   227 
Net cash provided by operating activities  23,553   18,156 

Cash flows from investing activities:

        
Acquisitions $-  $(184,102)
Purchases of property, plant and equipment  (954)  (935)
Net cash (used in) investing activities  (954)  (185,037)

Cash flows from financing activities:

        
Proceeds from the issuance of convertible senior notes, net  -   167,070 
Proceeds from the issuance of common stock, net  145,935   84,995 
Payments of debt  -   (23,000)
Dividends  (2,341)  (2,019)
Payments of Contingent Consideration  (11)  (11)
Proceeds from the exercise of stock options  3,692   3,848 
Net cash provided by financing activities  147,275   230,883 
Effect of exchange rate changes on cash and cash equivalents  2,477   (509)
Net increase in cash and cash equivalents  172,351   63,493 

Cash and cash equivalents at beginning of period

  81,380   10,185 

Cash and cash equivalents at end of period

 $253,731  $73,678 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

Page 4

 

 

Mesa Laboratories, Inc.

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

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

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

  690,000   145,935   -   -   145,935 

Exercise of stock options and vesting of restricted stock units

  25,799   1,654   -   -   1,654 

Dividends paid, $0.16 per share

  -   -   (704)  -   (704)

Stock-based compensation expense

  -   1,268   -   -   1,268 

Foreign currency translation

  -   -   -   12,860   12,860 

Adoption of accounting standards, net

  -   -   (9)  -   (9)

Net income

  -   -   1,217   -   1,217 

June 30, 2020

  5,102,939  $306,880  $72,863  $2,491  $382,234 
Exercise of stock options and vesting of restricted stock units  14,502   1,047   -   -   1,047 

Dividends paid, $0.16 per share

  -   -   (818)  -   (818)

Stock-based compensation expense

  -   2,008   -   -   2,008 

Foreign currency translation

  -   -   -   5,262   5,262 

Net income

  -   -   2,679   -   2,679 

September 30, 2020

  5,117,441  $309,935  $74,724  $7,753  $392,412 
Exercise of stock options and vesting of restricted stock units  13,590   991   -   -   991 
Dividends paid, $0.16 per share  -   -   (819)  -   (819)
Stock-based compensation  -   3,611   -   -   3,611 
Foreign currency translation  -   -   -   21,142   21,142 
Net (loss) income  -   -   (4,542)  -   (4,542)
December 31, 2020  5,131,031  $314,537  $69,363  $28,895  $412,795 

 

  

Common Stock

             
  Number of Shares  

Amount

  

Retained Earnings

  

AOCI*

  

Total

 

March 31, 2019

  3,890,138  $39,823  $73,303  $(1,815) $111,311 

Exercise of stock options and vesting of restricted stock units

  31,441   2,709   -   -   2,709 

Dividends paid, $0.16 per share

  -   -   (624)  -   (624)

Stock-based compensation expense

  -   868   -   -   868 

Foreign currency translation

  -   -   -   121   121 

Net income

  -   -   4,662   -   4,662 

June 30, 2019

  3,921,579   43,400   77,341   (1,694)  119,047 

Exercise of stock options and vesting of restricted stock units

  12,220   798   -   -   798 
Proceeds from issuance of common stock, net of issuance costs of $5,568  431,250   84,995   -   -   84,995 
Proceeds from conversion feature of convertible senior notes, due 2025, net of allocated costs and taxes of $8,338  -   22,735   -   -   22,735 

Dividends paid, $0.16 per share

  -   -   (697)  -   (697)

Stock-based compensation expense

  -   1,182   -   -   1,182 

Foreign currency translation

  -   -   -   (986)  (986)

Net income

  -   -   3,172   -   3,172 
September 30, 2019  4,365,049  $153,110  $79,816  $(2,680) $230,246 
Exercise of stock options and vesting of restricted stock units  5,419   341   -   -   341 
Dividends paid, $0.64 per share  -   -   (698)  -   (698)
Stock-based compensation  -   3,260   -   -   3,260 
Foreign currency translation  -   -   -   6,615   6,615 
Net (loss) income  -   -   (4,504)  -   (4,504)
December 31, 2019  4,370,468  $156,711  $74,614  $3,935  $235,260 

 

*Accumulated Other Comprehensive Income (Loss).

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

Page 5

 

Mesa Laboratories, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

 

 

 

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

 

Description of Business

  

In this quarterly report on Form 10-Q, Mesa Laboratories, Inc., a Colorado corporation, together with its subsidiaries is collectively referred to as “we,” “us,” “our,” the “Company” or “Mesa 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 four reportable segments, or divisions. Our Sterilization and Disinfection Control division manufactures and sells biological, cleaning, and chemical indicators which are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Our Instruments division designs, manufactures, and markets quality control hardware and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. During the year ended March 31, 2020, we added a new reportable segment: Biopharmaceutical Development as a result of our acquisition of Gyros Protein Technologies Holding AB ("GPT" or the "GPT acquisition"), which is discussed further in Note 12. "Significant Transactions". Our Biopharmaceutical Development 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. 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.  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.

 

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.

 

Page 6

 

We performed manual intercompany elimination calculations and determined that cost of revenues and accumulated other comprehensive income were overstated by $429 for the year ended March 31, 2020, which would increase operating income and net income by $429 and diluted earnings per share by $0.10; there was no income tax impact on the full year adjustment since the inventory balance was not misstated.  To correct the immaterial error, we have restated retained earnings as of March 31, 2020. The error resulted in overstated cost of goods sold and a corresponding understatement of net income of: $65 during the three months ended June 30, 2019; $110 during the three months ended September 30, 2019, $126 during the three months ended December 31, 2019, and $128 during the three months ended March 31, 2020. Additionally, during the three months ended June 30, 2020, cost of revenues was overstated by $372, which after the impact of taxes would increase net income by $192 and diluted earnings per share by $0.04. We have restated retained earnings as of June 30, 2020 in the amount of $192. The immaterial error has no impact on total cash flows or total comprehensive income for any of the periods that were revised. 

 

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 1.375% convertible senior notes due August 15, 2025 (the "Notes"). Non-cash interest on the equity conversion feature has contributed $3,510 to expense during the nine months ended December 31, 2020, which would not have been incurred under ASU 2020-06, which we will adopt as of April 1, 2021.

 

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 $9 as of April 1, 2020 due to the cumulative effect of adopting Topic 326's requirement to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on our trade receivables. As a result of the adoption of the ASU, our allowance for doubtful accounts as of December 31, 2020 reflects our best estimate of the expected future losses for our accounts receivable based on current economic conditions. We have accounted for the macroeconomic impact of the COVID-19 pandemic in our estimates, but due to the unprecedented nature of the impact of the pandemic, our estimates may change and future actual losses may differ from current estimates. We will continue to monitor economic conditions and will revise our estimate of expected future losses for accounts receivable as necessary.  

 

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.

 

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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 $11,250  $717  $3,406  $9  $-  $15,382 

Hardware and Software

  151   6,210   3,771   1,920   -   12,052 

Services

  433   2,042   506   799   -   3,780 

Contracted Revenues

                        

Services

  1,243   2   1,028   685   -   2,958 

Total Revenues

 $13,077  $8,971  $8,711  $3,413  $-  $34,172 

 

  

Three Months Ended December 31, 2019

 
  

Sterilization and Disinfection Control

  

Instruments

  

Biopharmaceutical Development

  

Continuous Monitoring

  

Corporate and Other

  

Total

 

Discrete Revenues

                        
Consumables $9,948  $781  $1,941  $13  $229  $12,912 

Hardware and Software

  95   6,881   2,571   2,562   -   12,109 

Services

  360   2,352   656   849   -   4,217 

Contracted Revenues

                        

Services

  1,216   -   469   732   -   2,417 

Total Revenues

 $11,619  $10,014  $5,637  $4,156  $229  $31,655 

 

  

Nine Months Ended December 31, 2020

 
  

Sterilization and Disinfection Control

  

Instruments

  

Biopharmaceutical Development

  

Continuous Monitoring

  

Corporate and Other

  

Total

 

Discrete Revenues

                        
Consumables $32,252  $2,240  $8,583  $54  $-  $43,129 

Hardware and Software

  388   16,045   10,518   6,082   -   33,033 

Services

  1,389   5,922   2,293   1,944   -   11,548 

Contracted Revenues

                        

Services

  3,667   2   2,397   2,197   -   8,263 

Total Revenues

 $37,696  $24,209  $23,791  $10,277  $-  $95,973 

 

  

Nine Months Ended December 31, 2019

 
  

Sterilization and Disinfection Control

  

Instruments

  

Biopharmaceutical Development

  

Continuous Monitoring

  

Corporate and Other

  

Total

 

Discrete Revenues

                        
Consumables $30,487  $2,364  $1,941  $34  $2,415  $37,241 

Hardware and Software

  429   19,282   2,571   6,374   -   28,656 

Services

  1,301   6,872   656   1,959   27   10,815 

Contracted Revenues

                        

Services

  3,606   -   469   2,692   -   6,767 

Total Revenues

 $35,823  $28,518  $5,637  $11,059  $2,442  $83,479 

 

Page 8

 

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

 $18,480  $17,810  $52,246  $48,007 

Foreign

  15,692   13,845   43,727   35,472 

Total revenues

 $34,172  $31,655  $95,973  $83,479 

 

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 not have any contract assets. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.

 

A summary of contract liabilities is as follows:

 

Contract liabilities balance as of March 31, 2020

$7,217 

Prior year liabilities recognized in revenues during the nine months ended December 31, 2020

 (4,131)

Contract liabilities added during the nine months ended December 31, 2020, net of revenues recognized

 4,984 

Contract liabilities balance as of December 31, 2020

$8,070 

 

 

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 $222,819 and $66,735, respectively, in a money market account. The increase in the balance in our money market account is primarily a result of our public offering of common stock described in further detail in Note 8. "Stockholders' Equity". 

 

During the year ended March 31, 2020, we issued $172,500 aggregate principal of 1.375% convertible senior notes due August 15, 2025. We estimate the fair value of the Notes based on the last actively traded price or market observable input before the end of the reporting period. The estimated fair value and carrying value of the Notes are as follows:

 

  

December 31, 2020

  

March 31, 2020

 
  

Carrying Value

  

Fair Value (Level 2)

  

Carrying Value

  

Fair Value (Level 2)

 

Notes

 $144,302  $206,569  $140,278  $173,363 

 

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

 $8,151  $6,757 

Work-in-process

  436   329 

Finished goods

  6,370   9,768 

Less: reserve

  (2,992)  (2,624)

Inventories, net

 $11,965  $14,230 

 

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 $0 and $2,901, respectively, as of  December 31, 2020 and March 31, 2020; see Note 12. "Significant Transactions." 

 

Page 9

 
 

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

  $ 21,909     $ (8,262 )   $ 13,647     $ 15,731     $ (6,454 )   $ 9,277  

Trade names

    8,875       (3,060 )     5,815       5,839       (2,855 )     2,984  

Customer relationships

    151,027       (49,800 )     101,227       146,106       (38,777 )     107,329  

Non-compete agreements

    1,299       (1,185 )     114       1,447       (1,166 )     281  

Total

  $ 183,110     $ (62,307 )   $ 120,803     $ 169,123     $ (49,252 )   $ 119,871  

 

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 $3,828 and $10,694 for the three and nine months ended December 31, 2020 and $2,565 and $5,895 for the three and nine months ended December 31, 2019, respectively. The increase in amortization expense was attributable to intangible assets acquired as part of the GPT acquisition, including a cumulative effect true up recorded during the three months ended June 30, 2020 as we made adjustments to purchase accounting, see Note 12. "Significant Transactions." 

 

The following is estimated amortization expense for the years ending March 31:

 

Remainder of year ending March 31, 2021

  $ 3,891  

2022

    15,470  

2023

    15,261  

2024

    14,746  

2025

    13,143  

 

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

  $ 29,594     $ 19,123     $ 74,716     $ 18,103     $ -     $ 141,536  

Effect of foreign currency translation

    894       106       16,183       -       -       17,183  

Goodwill adjustment related to GPT acquisition

    -       -       7,065       -       -       7,065  

December 31, 2020

  $ 30,488     $ 19,229     $ 97,964     $ 18,103     $ -     $ 165,784  

 

 

Note 6. Supplemental Balance Sheets Information

 

Accrued payroll and benefits consist of the following:

 

  

December 31, 2020

  

March 31, 2020

 

Bonus payable

 $2,796  $4,069 

Wages payable

  2,746   2,485 

Payroll related taxes

  1,478   2,228 

Other benefits payable

  168   158 

Total accrued payroll and benefits

 $7,188  $8,940 

 

Other accrued expenses consist of the following:

 

  

December 31, 2020

  

March 31, 2020

 

Accrued business taxes

 $4,798  $3,796 

Current operating lease liabilities

  1,057   1,095 

Interest payable

  889   296 

Professional services fees

  404   857 
Contingent consideration  555   504 

Other

  1,462   298 

Total other accrued expenses

 $9,165  $6,846 

 

Page 10

 
 

Note 7.  Indebtedness

 

On August 12, 2019, we issued an aggregate principal amount of $172,500 of convertible senior notes (the "Notes"). The Notes mature on August 15, 2025, unless earlier repurchased or converted and bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 each year beginning on February 15, 2020. The Notes are initially convertible at a conversion rate of 3.5273 shares of the common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $283.50 per share of common stock. Noteholders may convert their Notes at their option only in the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ended on December 31, 2019 (and only during such calendar quarter), if the last reported sale price per share of  our common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (ii) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; (iii) upon the occurrence of certain corporate events or distributions on our common stock, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the Notes) or a transaction resulting in the Company’s common stock converting into other securities or property or assets; and (iv) at any time from, and including, April 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.  Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. Our current intent is to settle conversions entirely in shares of common stock. We will reevaluate this policy from time to time as conversion notices are received from holders of the Notes. The circumstances required to allow the holders to convert their Notes were not met during the three months ended December 31, 2020.  As of December 31, 2020, the if-converted value of the Notes exceeded the principal balance.

 

We accounted for the transaction by bifurcating the Notes into liability and equity components. The carrying amount of the liability component was $141,427 upon issuance as calculated using the income approach and measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The implied interest rate (a Level 3 unobservable input) assuming no conversion option was estimated using the Tsiveriotis-Fernandes model; all other assumptions used in measuring the fair value represent inputs market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs before allocated issuance costs and deferred taxes.  The carrying amount of the equity component representing the conversion option was $31,073 and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (the "Debt Discount") is being amortized to interest expense using the effective interest method over the six-year contractual term of the Notes.

 

Debt issuance costs related to the Notes comprised of discounts and commissions payable to the initial purchasers of $5,175 and third party offering costs of $255. We allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $4,452 and are being amortized to interest expense using the effective interest method over the contractual term.  Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

 

The net carrying amount of the Notes were as follows:

 

 

  

December 31, 2020

  

March 31, 2020

 

Principal outstanding

 $172,500  $172,500 

Unamortized debt discount

  (24,696)  (28,205)

Unamortized debt issuance costs

  (3,502)  (4,017)

Net carrying value

 $144,302  $140,278 

 

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

 $31,073  $31,073 

Less: allocated issuance costs and deferred taxes

  (8,338)  (8,338)

Equity component, net

 $22,735  $22,735 

 

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 1.375%

 $593  $593  $1,779  $909 

Amortization of debt discounts and issuance costs

  1,357   1,295   4,024   2,002 

Total

 $1,950  $1,888  $5,803  $2,911 

 

The effective interest rate of the liability component of the note is approximately 5.5%.

 

Page 11

 
 

Note 8. Stockholders' Equity

 

Public Offerings of Common Stock

On June 12, 2020, we completed the sale and issuance of 600,000 shares of our common stock and on June 19, 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 was $145,935

 

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

 $3,611  $3,260  $6,887  $5,310 

Amount of income tax expense (benefit) recognized in earnings

  320   (78)  (1,127)  (986)

Stock-based compensation expense, net of tax

 $3,931  $3,182  $5,760  $4,324 

 

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

  286  $107.72 

Awards granted

  36   226.72 

Awards forfeited or expired

  (12)  116.24 

Awards exercised

  (47)  85.64 

Outstanding as of December 31, 2020

  263  $127.63 
 

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

  28  $180.15   22  $204.68 

Awards granted

  21   230.36   -   - 

Awards forfeited or expired

  (3)  204.40   (1)