What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 511 added, 219 removed, 857 unchanged (46% of the section changed)

3 unchanged sentences

(in thousands, except share amounts)

September 30,

Current assets:

68 unchanged sentences

(in thousands, except per share data)

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

$ 31,860  

$ 25,536  

$ 61,801  

$ 51,824  

Cost of revenues

10,575  

20,176  

20,034  

21,285  

15,586  

41,625  

31,790  

Operating expenses:

General and administrative

10,615  

20,714  

15,223  

Research and development

Total operating expenses

16,815  

10,892  

33,585  

21,639  

Operating income

10,151  

Nonoperating expense:

1 unchanged sentence

Other expense (income), net

Total nonoperating expense

( 477 )  

Total nonoperating expense  

Earnings before income taxes

Income tax (benefit) expense

( 295 )  

( 758 )  

$ 2,679  

$ 3,172  

$ 3,896  

$ 7,834  

Earnings per share:

$ 0.52  

$ 0.76  

$ 0.81  

$ 1.94  

Weighted-average common shares outstanding:

2 unchanged sentences

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

Three Months Ended June 30,

(in thousands)  

Three Months Ended September 30,

Six Months Ended September 30,

$ 2,679  

$ 3,172  

$ 3,896  

$ 7,834  

Other comprehensive income:

Foreign currency translation adjustments

( 986 )  

18,122  

Comprehensive income

$ 7,941  

$ 2,186  

$ 22,018  

$ 6,969  

See accompanying notes to Condensed Consolidated Financial Statements.

2 unchanged sentences

(in thousands)

Three Months Ended June 30,

Six Months Ended September 30,

Cash flows from operating activities:

Net income  

$ 3,896  

$ 7,834  

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Stock-based compensation

Non-cash interest and debt amortization

Amortization of step-up in inventory basis

Change in inventory reserve

Deferred taxes

Depreciation and amortization  

Stock-based compensation  

Non-cash interest and debt amortization  

Amortization of step-up in inventory basis  

( 436 )  

Change in inventory reserve  

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

Accounts receivable, net  

Inventories, net  

( 464 )  

Prepaid expenses and other assets  

( 1,941 )  

Accounts payable  

( 1,604 )  

Accrued liabilities and taxes payable  

( 4,811 )  

Unearned revenues  

( 140 )  

Net cash provided by operating activities  

12,610  

Cash flows from investing activities:

Purchases of property, plant and equipment

Net cash (used in) investing activities

Acquisitions  

Purchases of property, plant and equipment  

( 707 )  

Net cash (used in) investing activities  

( 707 )  

Cash flows from financing activities:

Proceeds from the issuance of common stock, net

Payments of debt

Proceeds from the exercise of stock options

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

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  

Dividends  

( 1,522 )  

Payments of Contingent Consideration  

( 10 )  

Proceeds from the exercise of stock options  

Net cash provided by financing activities  

147,104  

231,240  

Effect of exchange rate changes on cash and cash equivalents  

Net increase in cash and cash equivalents  

160,544  

235,258  

Cash and cash equivalents at beginning of period

81,380  

10,185  

Cash and cash equivalents at end of period

$ 241,924  

$ 245,443  

See accompanying notes to Condensed C onsolidated Fin ancial Statements.

10 unchanged sentences

$ 220,013  

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

690,000  

9 unchanged sentences

12,860  

Adoption of accounting standards, net  

June 30, 2020  

Adoption of accounting standards, net

June 30, 2020

5,102,939  

3 unchanged sentences

$ 382,234  

Number of Shares

Exercise of stock options and vesting of restricted stock units  

14,502  

Dividends paid, $ 0.16 per share

( 818 )  

Stock-based compensation expense

Foreign currency translation

September 30, 2020

5,117,441  

$ 309,935  

$ 74,724  

$ 7,753  

$ 392,412  

Number of Shares  

Retained Earnings

9 unchanged sentences

( 624 )  

Stock-based compensation

Stock-based compensation expense

Foreign currency translation

June 30, 2019  

3,921,579  

3 unchanged sentences

119,047  

*Accumulated Other Comprehensive (Loss).

Exercise of stock options and vesting of restricted stock units

12,220  

Proceeds from issuance of common stock, net of issuance costs of $ 5,568  

431,250  

84,995  

Proceeds from conversion feature of convertible senior notes, due 2025, net of allocated costs and taxes of $ 8,338

22,735  

Dividends paid, $ 0.16 per share

( 697 )  

Stock-based compensation expense

Foreign currency translation

( 986 )  

September 30, 2019  

4,365,049  

$ 153,110  

$ 79,816  

$ ( 2,680 )  

$ 230,246  

*Accumulated Other Comprehensive Income (Loss).

See accompanying notes to Condensed Consolidated Financial Statements.

10 unchanged sentences

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 the U.S., Canada, Europe, Japan, and by distributors in these areas as well as throughout the rest of the world.

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 June 30, 2020 , we managed our operations in four  reportable segments, or divisions.

As of September 30, 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.

14 unchanged sentences

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 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.

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 .

9 unchanged sentences

Estimates of the net realizable value for inventory.

Immaterial Error Correction

During the three months ended September 30, 2020, we identified an immaterial error in the design of our Enterprise Resource Planning tool that resulted in a system failure to eliminate intercompany cost of revenues for certain types of transactions.

The error resulted in an overstatement of cost of goods sold and an understatement in gross profit for the Continuous Monitoring, Instruments, and Sterilization and Disinfection Control divisions. The issue began during the three months ended June 30, 2019;

we have determined that no financial statement prior to April 1, 2019 was misstated as a result of the previously uneliminated balances in cost of revenues. 

In accordance with Staff Accounting Bulletin ("SAB") No.

99 Materiality , and SAB No.

108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements , we evaluated the error quantitatively and qualitatively and determined that the related impact was not material to our financial statements for any prior annual or interim period, but that correcting the cumulative impact of the error would be significant to our results of operations for the three months ended September 30, 2020.

In considering the materiality, we concluded that the impact of the error correction is not material in absolute dollar amount especially since our most recent fiscal year results included various new non cash charges that reduced net income below historical levels, [nor is it qualitatively material]. Accordingly, we have revised previously reported financial information for the immaterial error.

We performed manual intercompany elimination calculations and determined that cost of revenues and accumulated other comprehensive income were overstated by $ 429  for the year ended March 31, 2020, which would increase operating income and net income by approximately $ 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 were overstated by $ 372 , which after the impact of taxes would increase net income by approximately $ 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 from operating activities or total comprehensive income for any of the periods that were revised. 

Recently Issued Accounting Pronouncements

We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.

In August, 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2020 - 06, Debt with Conversion and Other Options and Derivatives and Hedging  

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity , which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, such as our convertible senior notes, due 2025.

ASU 2020 - 06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance.

It is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

The update permits the use of either the modified retrospective or fully retrospective method of transition.

We are currently evaluating the timing, method of adoption, and financial impact of the adoption of ASU 2020 - 06 on our financial statements but anticipate that subsequent to adoption, the equity conversion feature will be categorized as a liability and there will be a reduction in non-cash interest expense related to the 1.375 % convertible senior notes due August 15, 2025.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

In June 2016, the FASB issued ASU 

2016 - 13,  

6 unchanged sentences

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 June 30, 2020 reflects our best estimate of the expected future losses for our accounts receivable based on the 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 our current estimates.

As a result of the adoption of the ASU, our allowance for doubtful accounts as of September 30, 2020 reflects our best estimate of the expected future losses for our accounts receivable based on the 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 our current estimates.

We will continue to monitor economic conditions and will revise our estimate of the expected future losses for accounts receivable as necessary.  

13 unchanged sentences

Our consumables, such as biological indicator test strips are typically used on a standalone basis;

however, some, that are used in protein synthesis and calibration solutions, are also critical to the ongoing use of our instruments.

however, some that are used in protein synthesis and calibration solutions are also critical to the ongoing use of our instruments.

Hardware and software sales, such as medical meters, protein synthesizers, wireless sensor systems, and data loggers are generally driven by our acquisition of new customers, growth of existing customers, or customers' replacement of existing equipment.

Hardware sales may be offered with perpetual or annual software licenses, which in some cases are required for the hardware to function.

Our newly acquired division, Biopharmaceutical Development, designs, manufactures, markets, and sells instruments, such as protein synthesizers that are used to process immunoassay samples and related software designed to enhance productivity;

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;

3 unchanged sentences

Consumables are typically used on a one -time basis requiring frequent replacement in our customer's operating cycle. Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

The following tables present disaggregated revenues for the three months ended June 30, 2020 and 

three months ended June 30, 2019 respectively:

Three Months Ended June 30, 2020

The following tables present disaggregated revenues for the three and six months ended September 30, 2020 and 

three and six months ended September 30, 2019 , respectively:

Three Months Ended September 30, 2020

Sterilization and Disinfection Control

8 unchanged sentences

Hardware and Software

11,321  

Contracted Revenues

5 unchanged sentences

$ 31,860  

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Sterilization and Disinfection Control

6 unchanged sentences

$ 11,572  

Hardware and Software

Contracted Revenues

Total Revenues

$ 12,094  

$ 8,960  

$ 3,586  

$ 25,536  

Six Months Ended September 30, 2020

Sterilization and Disinfection Control

Biopharmaceutical Development

Continuous Monitoring

Corporate and Other

Discrete Revenues

Consumables  

$ 21,002  

$ 1,523  

$ 5,177  

$ 27,747  

Hardware and Software

20,981  

Contracted Revenues

5 unchanged sentences

$ 61,801  

Six Months Ended September 30, 2019

Sterilization and Disinfection Control

Biopharmaceutical Development

Continuous Monitoring

Corporate and Other

Discrete Revenues

Consumables  

$ 20,539  

$ 1,583  

$ 2,186  

$ 24,329  

Hardware and Software

12,401  

16,547  

Contracted Revenues

Total Revenues

$ 24,204  

$ 18,504  

$ 6,903  

$ 2,213  

$ 51,824  

Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

United States

3 unchanged sentences

$ 30,197  

20,638  

10,530  

34,207  

21,627  

Total revenues

1 unchanged sentence

$ 25,536  

$ 61,801  

$ 51,824  

No foreign country exceeds 10% of total revenues.

9 unchanged sentences

$ 7,217  

Prior year liabilities recognized in revenues during the three months ended June 30, 2020

Contract liabilities added during the three months ended June 30, 2020, net of revenues recognized

Contract liabilities balance as of June 30, 2020

Prior year liabilities recognized in revenues during the six months ended September 30, 2020

Contract liabilities added during the six months ended September 30, 2020, net of revenues recognized

Contract liabilities balance as of September 30, 2020

$ 7,136  

3 unchanged sentences

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 June 30, 2020  and 

As of September 30, 2020  and 

March 31, 2020 , cash and cash equivalents on our Condensed Consolidated Balance Sheets included $ 222,806  and $ 66,735 , respectively, in a money market account.

The increase in the balance in our money market account is a result of our public offering of common stock described in further detail in Note 8.

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 our year ended March 31, 2020, we issued $ 172,500 aggregate principal amount of 1.375 % convertible senior notes due August 15, 2025 ( the "Notes").

During our year ended March 31, 2020, we issued $ 172,500 aggregate principal amount 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 were as follows:

June 30, 2020

September 30, 2020

March 31, 2020

2 unchanged sentences

Carrying Value

Fair Value (Level 2)

$ 142,945  

8 unchanged sentences

"Significant Transactions." There were no transfers between the levels of the fair value hierarchy during the 

three months ended June 30, 2020  and three months ended June 30, 2019  respectively. 

six months ended September 30, 2020  or 

six months ended September 30, 2019 .

Cash and cash equivalents and accounts receivables are the financial instruments that subject us to the highest concentration of credit risk.

6 unchanged sentences

Inventories consist of the following:

June 30, 2020

September 30, 2020

March 31, 2020

8 unchanged sentences

$ 14,230  

As of June 30, 2020 

and March 31, 2020, finished goods inventory included $ 0 and $ 2,901 , respectively, which was the remaining balance of the adjustment to step up inventory acquired as part of the GPT Acquisition to fair value; see Note 

September 30, 2020 and March 31, 2020, finished goods inventory included $ 0 and $ 2,901 , respectively, which was the remaining balance of the adjustment to step-up inventory acquired as part of the GPT Acquisition to fair value; see Note 

"Significant Transactions." 

1 unchanged sentence

Finite-lived intangible assets consist of the following:

June 30, 2020

September 30, 2020

March 31, 2020

30 unchanged sentences

$ 119,871  

Amortization expense for finite-lived intangible assets acquired in a business combination was $ 3,354  and $ 1,672  for the three months ended June 30, 2020  and June 30, 2019 , respectively.

The increase in the amortization expense was attributable to intangible assets acquired as part of the GPT acquisition, including a cumulative effect true up that we recorded in the three months ended June 30, 2020 as we made adjustments to purchase accounting, see Note 12.

Amortization expense for finite-lived intangible assets acquired in a business combination was $ 3,512  and $ 6,866  for the three and six  months ended September 30, 2020  and $ 1,658  and $ 3,330 for the three and six months ended 

September 30, 2019 , respectively.

The increase in the amortization expense was attributable to intangible assets acquired as part of the GPT acquisition, including a cumulative effect true up that we recorded during the three months ended June 30, 2020 as we made adjustments to purchase accounting, see Note 12.

"Significant Transactions." 

17 unchanged sentences

Effect of foreign currency translation

Goodwill adjustment related to GPT acquisition

June 30, 2020

Goodwill adjustment related to GPT acquisition  

September 30, 2020

$ 30,094  

5 unchanged sentences

Accrued payroll and benefits consist of the following:

June 30, 2020

September 30, 2020

March 31, 2020

3 unchanged sentences

Wages payable

Payroll taxes

Payroll related taxes

Other benefits payable

3 unchanged sentences

Other accrued expenses consist of the following:

June 30, 2020

September 30, 2020

March 31, 2020

2 unchanged sentences

$ 3,796  

Current lease liabilities

Current operating lease liabilities

Interest payable

20 unchanged sentences

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 June 30, 2020 . 

As of June 30, 2020 , the if-converted value of the Notes did not exceed the principal balance.

The circumstances required to allow the holders to convert their Notes were not met during the three  months ended September 30, 2020 . 

As of September 30, 2020 , the if-converted value of the Notes did not exceed 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 and was calculated by 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-Frenandes model;

all other assumptions used in measuring the fair value represent what 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. 

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.

5 unchanged sentences

The net carrying amount of the Notes were as follows:

June 30, 2020

September 30, 2020

March 31, 2020

10 unchanged sentences

The net carrying amount of the equity component of the Notes were as follows:

June 30, 2020

September 30, 2020

March 31, 2020

8 unchanged sentences

We recognized interest expense on the Notes as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Coupon interest expense at 1.375 %

$ 1,186  

Amortization of debt discounts and issuance costs

$ 1,934  

$ 1,023  

$ 3,853  

$ 1,023  

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

3 unchanged sentences

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 . 

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 June 30,

Three Months Ended September 30,  

Six Months Ended September 30,  

Stock-based compensation expense

$ 2,008  

$ 1,182  

$ 3,276  

$ 2,050  

Amount of income tax (benefit) recognized in earnings

( 522 )  

( 368 )  

( 1,447 )  

Stock-based compensation expense, net of tax

$ 1,486  

$ 1,829  

$ 1,142  

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

The following is a summary of stock option award activity for the three months ended June 30, 2020 (shares in thousands):

The following is a summary of stock option award activity for the six months ended September 30, 2020 (shares in thousands):

Stock Options

10 unchanged sentences

( 36 )  

Outstanding as of June 30, 2020

Outstanding as of September 30, 2020

$ 126.30  

The stock options granted during the three months ended June 30, 2020 vest in equal installments on each of the first three anniversaries of the grant date. 

The stock options granted during the 

six months ended September 30, 2020 vest in equal installments on each of the first three anniversaries of the grant date. 

The following is a summary of restricted stock unit ("RSU") award activity for the 

three months ended June 30, 2020  (shares in thousands): 

six months ended September 30, 2020  (shares in thousands): 

Time-Based Restricted Stock Units

14 unchanged sentences

177.17  

Nonvested as of June 30, 2020

Nonvested as of September 30, 2020

$ 201.49  

$ 204.80  

The majority of the time-based RSUs granted during the three months ended June 30, 2020 vest and settle in shares of our common stock, on a 

The majority of the time-based RSUs granted during the 

six months ended September 30, 2020 vest and settle in shares of our common stock, on a 

one -for- one basis, in equal installments on each of the first three anniversaries of the grant date.

Time-based RSUs issued to non-employee directors vest after a 

Time-based RSUs issued to non-employee directors and a portion of the awards granted to executives of the company vest after a 

one -year period from the grant date.

7 unchanged sentences

Stock awards are excluded from the calculation of diluted EPS in the event that they are subject to performance conditions that have not yet been achieved or are antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect. 

The impact of the assumed conversion of the Notes calculated under the if-converted method was anti-dilutive, and as such shares underlying the Notes were excluded from the diluted EPS calculation for the 

three months ended June 30, 2020 . 

The impact of the assumed conversion of the Notes calculated under the if-converted method was anti-dilutive, and as such, shares underlying the Notes were excluded from the diluted EPS calculation for the three and  

six months ended September 30, 2020 . 

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

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Net income available for shareholders

1 unchanged sentence

$ 3,172  

$ 3,896  

$ 7,834  

Weighted average outstanding shares of common stock

6 unchanged sentences

$ 1.94  

$ 0.51  

$ 0.73  

$ 0.79  

$ 1.86  

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

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Assumed conversion of convertible debt

7 unchanged sentences

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 ( 168.3 )% and 14.2 % for the three months ended June 30, 2020 and June 30, 2019 , respectively. 

The effective tax rate for the three months ended June 30, 2020 differed from the statutory federal rate of 21 % primarily due to the benefit of share-based payment awards for employees and research and development tax credits, partially offset by expenses for state income taxes, the limitations imposed by Section 162 (m), and the foreign rate differential.

Our effective income tax rate was ( 12.4 )% and ( 24.2 )% for the three and six  months ended September 30, 2020 and was 16.0 % and 14.8 % for the three and six months ended 

September 30, 2019 , respectively. 

The effective tax rate for the 

three and six months ended September 30, 2020 differed from the statutory federal rate of 21 % primarily due to the release of an uncertain tax position during the three months ended September 

30, 2020 as discussed further below, the benefit of share-based payment awards for employees and research and development tax credits, partially offset by expenses for state income taxes, the limitations imposed by Section 162 (m), and the foreign rate differential.

As part of our adoption of the Tax Cuts and Jobs Act, we recorded an uncertain tax position in the amount of $ 630 .

During the three months ended September 30, 2020, the Internal Revenue Service issued final regulations clarifying the law and providing greater flexibility to companies regarding substantiation requirements.

As a result of the clarifications, we have determined that the uncertain tax position is no longer required and we have released it, which resulted in a $ 630  tax benefit during the three months ended September 30, 2020.

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.

2 unchanged sentences

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 June 30, 2020, there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets. 

Under the terms of the IBP agreement, we are required to pay contingent consideration if the company is able to achieve certain regulatory milestones.

The potential undiscounted consideration payable ranges from $ 0 to $ 490 , depending on whether units being developed are certified for sale by U.S.

As of September 30, 2020 , there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets. 

Under the terms of the revised IBP agreement, we are required to pay contingent consideration if the company is able to achieve certain operational and regulatory milestones.

The potential undiscounted consideration payable ranges from €0 to €450, depending on whether units being developed are certified for sale by U.S.

and foreign regulatory bodies.

We currently believe that it is more likely than not that all aspects of the contingency will be achieved and we expect to pay $ 490 during the year ending March 31, 2021.

We currently believe that it is more likely than not that all aspects of the contingency will be achieved and we expect to pay $ 530 , depending on foreign exchange rates, during the year ending March 31, 2021.

Significant Transactions

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On October 31, 2019, we completed the acquisition of 100 % of the outstanding shares of GPT, which comprises our new reportable segment - Biopharmaceutical Development.

The acquisition of GPT expanded our presence into a new market--immunoassays and peptide synthesis solutions--that accelerate the discovery, development, and manufacturing of biotherapeutic drugs. GPT systems include laboratory instruments, consumables, kits, and software that maximize laboratory productivity by miniaturizing and automating immunoassays at nanoliter scale. Protein detection is used most frequently by pharmaceutical and biotech companies who are developing protein-based drugs.

GPT's protein detection is used most frequently by pharmaceutical and biotech companies that are developing protein-based drugs.

This division also provides instruments, consumables, and software for the chemical synthesis of peptides from amino acids which are used in the discovery of new peptide-based drug therapies. 

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We accounted for the GPT Acquisition as the purchase of a business under U.S.

Under the acquisition method of accounting, the assets of GPT will be recorded as of the acquisition date, at their respective estimated fair values, and consolidated with those of Mesa Labs.

The estimated consideration and preliminary purchase price allocation has been prepared using a preliminary valuation.

We obtained the information used to prepare the preliminary valuation during due diligence and from other sources.

Only items identified as of the acquisition date are considered for subsequent adjustment.

Under the acquisition method of accounting, the assets of GPT were recorded as of the acquisition date, at their respective estimated fair values, and consolidated with those of Mesa Labs.

During the three months ended September 30, 2020, we finalized the valuation of net assets acquired. We obtained the information used to prepare the preliminary valuation during due diligence and from other sources.

In the months after closing, we obtained additional information about these assets and liabilities as we learned more about GPT.

We refined the estimates of fair value to more accurately allocate the purchase price.

Only items identified as of the acquisition date were considered for subsequent adjustment.

The preparation of the valuation required the use of Level 3 inputs, which are subject to significant assumptions and estimates.

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These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates. 

During the three months ended June 30, 2020, we finalized the valuation of the inventory step-up and intangible assets acquired;

however we have not finalized the valuation of property, plant, and equipment or deferred taxes. The final purchase price allocation will be completed within one year of the closing of the transaction, and may be refined further in the coming months as we learn more about GPT and therefore we can more accurately allocate the purchase price. 

During the six  months ended 

September 30, 2020,  

we finalized the valuation of the inventory step-up, intangible assets acquired, and property, plant, and equipment;

however we have not finalized the valuation of certain tax related items, including deferred taxes. The final purchase price allocation will be completed within one year of the closing of the transaction, and may be refined further in the coming months as we learn more about GPT and therefore we can more accurately allocate the purchase price. 

The measurement period adjustments to the acquisition fair values of the assets were due to the refinement of our valuation models, assumptions and inputs. The updated assumptions and inputs incorporated additional information obtained subsequent to the closing of the transaction related to facts and circumstances that existed as of the acquisition date. 

The significant purchase price allocation changes during the three months ended June 30, 2020 

included a net decrease of $ 6,002  in the value of intangible assets, and a decrease of $ 3,752  in the value of the inventory step-up. 

Long-term deferred tax liabilities also decreased by $ 2,275 primarily due to the tax effect of these changes to the purchase price allocation.

During the three months ended June 30, 2020, the cumulative net decrease to amortization expense recorded as a result of the decrease to intangible assets was $ 344 , of which $ 178 of expense is recorded to cost of revenues and a benefit of $ 522  is recorded in general and administrative costs.

The cumulative impacts of all adjustments to date have been reflected in the unaudited condensed consolidated financial statements as of and for the three months ended June 30, 2020.

The preliminary amounts are summarized in the table below:

Fair Value at October 31, 2019

The significant purchase price allocation changes during the 

six months ended September 

30, 2020  included a net decrease of $ 6,002  in the value of intangible assets, a decrease of $ 3,752  in the value of the inventory step-up, and an increase of $ 878  in the value of property, plant and equipment, net. 

Long-term deferred tax liabilities also decreased by a net amount of $ 2,010 , primarily due to the tax effect of these changes to the purchase price allocation.

During the six months ended September 

30, 2020, the cumulative net decrease to amortization expense recorded as a result of the decrease to intangible assets was $ 344 , of which $ 178 of expense was recorded to cost of revenues and a benefit of $ 522 was recorded in general and administrative costs.

Additionally, a $ 207  cumulative increase to depreciation expense was recorded to general and administrative costs during the three months ended September 30, 2020 as a result of the increase in the fair value of property, plant and equipment. 

The cumulative impacts of all adjustments to date have been reflected in the Unaudited Condensed Consolidated Financial Statements as of and for the six  months ended September 

The components and allocation of the purchase price consist of the following amounts:

Cash and cash equivalents

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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 Statement of Income.

The final inventory valuation was completed during the three months ended June 30, 2020 and was lower than our preliminary valuation, resulting in a cumulative effect decrease of $ 436 in amortization of inventory step up costs.

The final inventory valuation was completed during the six months ended September 30, 2020 and was lower than our preliminary valuation, resulting in a cumulative effect decrease of $ 436 in amortization of inventory step up costs.

We do not expect further adjustments to the inventory step-up valuation, nor do we expect changes in the amortization to be recorded.

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amortization expense for acquired technology is recorded to cost of revenues.

During the three months ended June 30, 2020, $ 1,409  of amortization expense related to the GPT intangible assets was recorded to general and administrative costs and $ 473  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.

During the six  months ended September 

30, 2020, $ 1,409  of amortization expense related to the GPT intangible assets was recorded to general and administrative costs and $ 473  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. 

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The goodwill acquired is not deductible for income tax purposes.

This preliminary purchase price allocation is subject to adjustment as purchase accounting is finalized.

The valuation of property, plant, and equipment and deferred taxes are still preliminary and their final valuation could differ materially from the preliminary allocation. 

Unaudited Pro Forma Information

GPT's operations contributed $ 5,949  to revenues and ($ 2,176 ) of net loss to our consolidated results during the three months ended June 30, 2020  including cumulative-effect adjustments.

We included the operating results of GPT in our Condensed Consolidated Statements of Operations beginning on November 1, 2019, subsequent to the acquisition date.

GPT's operations contributed $ 15,080  to revenues and ($ 2,083 ) of net loss to our consolidated results during the 

six months ended September 30, 2020  including cumulative-effect adjustments.

We included the operating results of GPT in our Condensed Consolidated Statements of Income beginning on November 1, 2019, subsequent to the acquisition date.

The following pro forma financial information presents the combined results of operations of Mesa Labs and GPT as if the acquisition had occurred on April 1, 2019 

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or of future results.

Three Months Ended June 30,

Prior to the GPT Acquisition, GPT did not generate monthly or quarterly financial statements that were prepared in accordance with GAAP. 

Six Months Ended September 30,

Pro forma total revenues (1)

$ 67,907  

Pro forma net (loss) (2)

Pro forma net income (2)

( 1 ) Net revenues were adjusted to include net revenues of GPT. 

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Additional amortization expense of $ 4,057  for the 

three months ended June 30, 2019  based on the increased fair value of amortizable intangible assets acquired.

For the three months ended June 30, 2019, $ 315 additional stock based compensation expense representing expense for performance share units awarded to certain key GPT employees.

six months ended September 30, 2019  based on the increased fair value of amortizable intangible assets acquired.

For the six  months ended September 

30, 2019, $ 351  additional stock based compensation expense representing expense for performance share units awarded to certain key GPT employees.

Income tax effect of the adjustments made at a blended federal and state statutory rate (approximately 25 %).

S egment Information

As of June 30, 2020 , we had four  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 June 30, 2020

As of September 30, 2020 , we had four  reportable segments, Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring. Results for the Cold Chain Packaging division, which we exited during the year ended March 31, 2020, are now presented within Corporate and Other.

The following tables set forth our segment information: 

Three Months Ended September 30, 2020

Sterilization and Disinfection Control

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$ 31,860  

Gross profit (loss)

$ 8,770  

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Earnings before income taxes

Three Months Ended June 30, 2019

$ 2,384  

Three Months Ended September 30, 2019

Sterilization and Disinfection Control

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$ 15,586  

Reconciling items (2)

Earnings before income taxes

$ 3,774  

Six Months Ended September 30, 2020

Sterilization and Disinfection Control

Biopharmaceutical Development

Continuous Monitoring

Corporate and Other

$ 24,619  

$ 15,238  

$ 15,080  

$ 6,864  

$ 61,801  

$ 18,790  

$ 9,541  

$ 10,678  

$ 2,552  

$ 41,625  

Reconciling items (2)

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$ 3,138  

Six Months Ended September 30, 2019

Sterilization and Disinfection Control

Biopharmaceutical Development

Continuous Monitoring

Corporate and Other

$ 24,204  

$ 18,504  

$ 6,903  

$ 2,213  

$ 51,824  

Gross profit  

$ 17,233  

$ 11,639  

$ 2,506  

$ 31,790  

Reconciling items (2)

Earnings before income taxes

$ 9,199  

Intersegment revenues are not significant and are eliminated to arrive at consolidated totals.

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The following table sets forth assets by reportable segment: 

June 30, 2020

September 30, 2020

March 31, 2020

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Subsequent Event

In July 2020, we announced that our Board of Directors declared a quarterly cash dividend of $ 0.16 per share of common stock, payable on September 15, 2020, to shareholders of record at the close of business on August 31, 2020.

In October 2020, we announced that our Board of Directors declared a quarterly cash dividend of $ 0.16 per share of common stock, payable on December 15, 2020 , to shareholders of record at the close of business on November 30, 2020 .

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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 June 30, 2020, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring, each of which are described further in 

As of September 30, 2020, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring, each of which are described further in 

Results of Operations  below. 

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 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 environment, products, and people. 

Our revenues come from product sales, which includes hardware and software, and consumables;

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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 three months ended June 30, 2020 and we are unable to ascertain the full extent of the impact on our business as of the date of this filing.

As was the case as of the end of the year ended March 31, 2020, the pandemic continues to present a substantial public health and economic challenge around the world and is affecting our employees, business operations, and operating segments in various ways.

During March 2020, the impact from the spreading of COVID-19 was declared a global pandemic by the World Health Organization and a national public health emergency in the United States. The consequences of the outbreak and impact to the economy have continued to evolve throughout the six months ended September 30, 2020 and we are unable to ascertain the full extent of the impact on our business as of the date of this filing.

Throughout our fiscal year, the pandemic has continued to present a substantial public health and economic challenge around the world and is affecting our employees, business operations, and operating segments in various ways.

As COVID-19 has continued to spread and significantly affect markets around the world, we continued to enforce company policies that are focused on ensuring the safety of our employees, while continuing to deliver our goods to customers across the world.

Due to the critical nature of our products and services, we are generally exempt from governmental orders in the U.S.

and other countries requiring businesses to suspend operations. Nevertheless, the pandemic brought a material disruption to our operations. To protect employees and comply with regulations and recommendations to limit gatherings and increase social distancing, we require office-based employees to work remotely, and we implemented enhanced safety protocols at our manufacturing facilities, including operating with split shifts to reduce the size of the workforce on premises, performing temperature checks at the start of shifts, 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 hospitals and other customers.

Additionally, we continue working closely with our suppliers to develop contingency plans for potential supply interruptions. 

Most of our operating segments have 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.

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:

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This division benefited in the three months ended June 30, 2020 from fulfilling temporary advanced buying orders placed by certain customers during the three months ended March 31, 2020;

however, overall orders slowed significantly in the three months ended June 30, 2020 as advanced ordering began to reverse.

The critical and disposable nature of Sterilization and Disinfection Control products makes them less sensitive to general economic conditions, and the demand for Sterilization and Disinfection Control products has remained fairly strong.

Prior to the COVID-19 pandemic, the worldwide market for sterilization and disinfection control products had been growing as more countries focus on verifying the effectiveness of sterilization and disinfection processes and some of the products used in this division can be used support the changing environment resulting from COVID-19.

Instruments, Biopharmaceutical Development, and Continuous Monitoring:

Demand for hardware and certain services sold by our Instruments, Biopharmaceutical Development, and Continuous Monitoring divisions declined during the three months ended June 30, 2020, which we believe was mainly a result of COVID-19.

Although demand for the Biopharmaceutical Development division's products has increased in recent years, the global pandemic has inhibited our ability to use proven strategies to market and sell these products.

When travel restrictions are lifted and we are able to go on-site at customer facilities, we expect to continue to grow revenues organically in the Biopharmaceutical Development division;

however, we expect that demand for hardware sold by our Instruments division will return more slowly.

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 behaving similarly, as businesses are postponing spending in response to economic uncertainty, declines in income and asset values, tighter credit, unemployment, and negative financial news.

Worldwide and regional economic conditions have reduced the demand for our products and services as our customers reduced or delayed capital equipment and other types of purchases.

We expect this trend to continue and to result in lower sales in our Instruments, Biopharmaceutical Development, and Continuous Monitoring divisions until the broader healthcare industry returns to normal levels. 

Overall, we anticipate a gradual return to more normal demand for our products as the broader healthcare industry and other served industry verticals slowly return to more normal levels;

however, due to outbreaks and increasing levels of COVID-19 in many areas, especially the U.S., strict regulations may be reinstated, inhibiting a return to more normal operations across healthcare and the broader economy.

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.  

however, overall orders slowed significantly during the latter part of the three months ended June 30, 2020 and continued throughout the three months ended September 30, 2020 as advanced ordering began to reverse.

Additionally, sales to distributors that service high growth economies that were severely impacted by COVID-19 have declined. Nevertheless, we believe that the consumable, critical, and disposable nature of Sterilization and Disinfection Control products makes them less sensitive to general economic conditions, and the demand for Sterilization and Disinfection Control products has remained relatively strong. Prior to the COVID-19 pandemic, the worldwide market for sterilization and disinfection control products had been growing as more countries increase their focus on verifying the effectiveness of sterilization and disinfection processes.

Biopharmaceutical Development, and Continuous Monitoring:

Demand for hardware, consumables, and services sold by our Biopharmaceutical Development and hardware and software sold by our Continuous Monitoring divisions declined during the three months ended June 30, 2020, which we believe was mainly a result of COVID-19.

As several of the restrictions limiting vendors from going on-site at customer facilities were lifted during the three months ended September 30, 2020, demand for both Biopharmaceutical Development and Continuous Monitoring products and services increased significantly compared to the three months ended June 30, 2020. 

Although orders increased during the three months ended September 30, 2020, the global pandemic continues to inhibit our ability to use proven strategies to market and sell these products. 

Further, increases in COVID-19 cases throughout the world could lead to customers closing their facilities again and decreased demand for our products.

In the future, when travel and gathering restrictions are lifted more broadly and we are able to go on-site at more customer facilities, we expect to continue to grow revenues organically in the Biopharmaceutical Development and Continuous Monitoring divisions.

Demand for hardware and certain services sold by our Instruments division declined during the six months ended September 30, 2020, which we believe was mainly a result of COVID-19.

We expect that demand for hardware sold by our Instruments division will return to more normal levels slowly, given the discretionary nature of the products.

Sales of our hardware products have historically been more sensitive to general economic conditions than sales of our consumables. The COVID-19 induced economic downturn appears to be having a similar impact, as businesses are postponing certain capital spending in response to economic uncertainty, declines in income and asset values, tighter credit, unemployment, and negative financial news.

Even as the broad healthcare industry has begun to return to more normal operations resulting in increased sales levels in some of our divisions, outbreaks and increasing numbers of COVID-19 cases in many areas, especially the U.S.

and Europe, may result in the reinstatement of strict regulations, which we expect would result in lower sales levels.

We believe that COVID-19 related uncertainties, restrictions, and suppressed demand will continue to negatively impact our business during the remainder of the year ending March 31, 2021, and potentially continuing into our year ending March 31, 2022. Even after the COVID-19 pandemic has subsided as a public health matter, we may experience material adverse impacts to our business as a result of its adverse impact on the global economy, in-person collaboration and sales efforts, and our customers’

purchasing behavior and confidence.

Gross profit is affected by our product mix, manufacturing efficiencies, and price competition.

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Financial Statements (in thousands, except percent data).

Overall revenues increased 14%, organic revenues growth declined 4% and gross profit increased 6 percentage points for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Revenues from our reportable segments increased 29% and 25%, organic revenues growth declined 8% and 6%, and gross profit as a percentage of revenues increased four percentage points for both the three and six months ended September 30, 2020, as compared to the three and six months ended September 30, 2019, respectively.

Results by reportable segment are as follows:

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Gross Profit as a % of Revenues

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

Sterilization and Disinfection Control

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Total Company

Organic Revenues Growth

Gross Profit as a % of Revenues

Six Months Ended September 30, 2020

Six Months Ended September 30, 2019

Six Months Ended September 30, 2020

Six Months Ended September 30, 2019

Six Months Ended September 30, 2020

Six Months Ended September 30, 2019

Sterilization and Disinfection Control

Biopharmaceutical Development

Continuous Monitoring

Mesa Labs' reportable segments

Corporate and Other

Total Company

Our unaudited condensed consolidated results of operations are as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Cost of revenues

Six Months Ended September 30,

Percentage Change

Operating Expenses

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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, thus product sales are less sensitive to general economic conditions. 

Three Months Ended June 30,

The division also provides testing and laboratory services, mainly to the dental industry. Sterilization and disinfection control products are disposable and are used on a routine basis.

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Gross profit as a % of revenues

Sterilization and Disinfection Control revenues increased 8% for the three months ended June 30, 2020, as a result of organic revenues growth, which was achieved primarily through volume increases with existing customers and to a lesser extent, modest price increases. Sales in our Sterilization and Disinfection Control division have been increasing since late in the three months ended March 31, 2020, because several customers ordered larger quantities than usual in an effort to mitigate supply chain risks, which resulted in an increase in our backlog at the end of the fiscal year. 

During the three months ended June 30, 2020, overall orders slowed significantly as advanced ordering began to reverse and we reduced our backlog significantly.

Sterilization and Disinfection Control gross profit margin percentage increased 6 percentage points for the three months ended June 30, 2020, primarily as a result of efficiencies gained from higher sales volumes and operational improvements.

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.

Sterilization and Disinfection Control revenues decreased 4% for the three months ended September 30, 2020 as a result of reduced sales to distributors that service high growth economies that were severely impacted by COVID-19, the loss of certain OEM hospital oriented customers that began to diversify their supply chains, as well as decreased demand due primarily to timing as certain customers had ordered larger than normal quantities earlier in the calendar year to mitigate supply chain risk.

As these orders were filled during the quarter ended June 30, 2020, our backlog decreased, and ordering remains slower as customers continue to use the inventory they purchased from us in the previous two quarters. We expect the impacts from the loss of customers and to a lesser extent, the temporary advanced ordering that occurred during the three months ended June 30, 2020 will negatively impact organic revenues growth in this division for the remainder of the fiscal year.

Sterilization and Disinfection Control revenues increased 2% for the six months ended September 30, 2020 as result of organic revenues growth, which was achieved primarily through volume increases resulting from advanced ordering with existing customers during the quarter ended June 30, 2020, and to a lesser extent, modest price increases.

Increases were partially offset by reduced sales to distributors that service high growth economies that were severely impacted by COVID-19, the loss of a portion of our business with certain OEM hospital-oriented customers, and lower demand during the three months ended September 30, 2020 as advanced ordering reversed. 

Sterilization and Disinfection Control gross profit margin percentage increased four percentage points and five percentage points for the three and six months ended September 30, 2020, respectively, primarily as a result of labor efficiencies and favorable customer mix. 

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.

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quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products.

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Gross profit as a % of revenues

Instruments revenues decreased 20% for the three months ended June 30, 2020, as customers across all served markets continued to limit spending that is more discretionary in nature in response to economic uncertainty. 

Instruments gross profit margin percentage decreased 3 percentage points during the three months ended June 30, 2020, primarily due to lower sales volumes that reduced our efficiencies. 

Instruments revenues decreased 16% and 18% for the three and six months ended September 30, 2020, respectively, as customers across all served markets continued to limit spending that is more discretionary in nature in response to economic uncertainty. 

Instruments gross profit margin percentage increased two percentage points during the three months ended September 30, 2020, primarily due to favorable product mix.

Gross margin percentage was flat for the six months ended September 30, 2020.  

Biopharmaceutical Development

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Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacturing of biotherapeutic drugs. 

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Gross profit as a % of revenues

Biopharmaceutical Development's sales during the three months ended June 30, 2020 were negatively impacted by the economic uncertainty and social restrictions related to the COVID-19 pandemic.

Global efforts to stop the spread of COVID-19 and the resulting shut down or slowing of many facets of our society and commerce have resulted in reduced demand as we are unable to market our products at industry conferences or go on-site to most customers' locations to demonstrate the products;

however, we are pursuing digital sales efforts to continue to create leads and demonstrate our products to customers.

Biopharmaceutical Development's gross profit 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 also includes $178 of incremental amortization expense related to the adjustment of the value of technology intangibles that are amortized to cost of revenues.

Excluding the amortization catch ups, gross profit for the three months ended June 30, 2020 would have been $4,208, and gross profit margin percentage would have been 71%. 

Biopharmaceutical Development's revenues during the three and six months ended September 30, 2020 were negatively impacted by the economic uncertainty and social restrictions related to the COVID-19 pandemic. 

Particularly during the three months ended June 30, 2020, and to a lesser extent during the three months ended September 30, 2020, global efforts to stop the spread of COVID-19 and the resulting shut down and slowing of many facets of our society and commerce resulted in reduced demand as we became unable to market our products at industry conferences or visit customers at their facilities.

Restrictions limiting vendors from going on-site at customers facilities were partially lifted during the three months ended September 30, 2020.

Additionally, we pursued digital marketing avenues to continue to create leads and demonstrate our products to potential customers.

Primarily as a result of these factors, demand for Biopharmaceutical Development products and services increased significantly as compared to the three months ended June 30, 2020. 

Biopharmaceutical Development's gross profit for the six months ended September 30, 2020 includes a $436 reduction in amortization expense as a result of an adjustment booked to the value of an inventory step-up recorded in purchase accounting related to the GPT Acquisition.

Gross profit for the six months ended September 30, 2020 also includes $178 of incremental amortization expense related to the adjustment of the value of technology intangibles that are amortized to cost of revenues.

Excluding the amortization catch ups, gross profit for the six months ended September 30, 2020 would have been $10,242 and gross profit margin percentage would have been 69% for the six months ended September 30, 2020. 

Continuous Monitoring

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quality control and regulatory environments, which require periodic repair and recalibration or certification of our continuous monitoring systems.

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Gross profit as a % of revenues

Continuous Monitoring's revenues decreased 2% for the three months ended June 30, 2020.

Beginning late in our year ended March 31, 2020, the business was significantly affected by the shut down and slowing of many facets of the U.S.

Continuous Monitoring's revenues increased 1% for the three months ended September 30, 2020 primarily because of eased restrictions at many of our customer sites, which allowed our technicians to go on-site to perform work that was previously backlogged as a result of COVID-19 related restrictions.

Continuous Monitoring's revenue decreased 1% for the six months ended September 30, 2020 as a result of 

the shut down and slowing of many facets of the U.S.

society and economy in response to the COVID-19 outbreak.

Specifically, for most of the three months ended June 30, 2020, our ability to go on-site to many of our customers' facilities to install and service systems was severely restricted.

These restrictions were beginning to ease in May, 2020. 

Continuous Monitoring gross profit margin percentage decreased 11 percentage points for the three months ended June 30, 2020, primarily due to low service revenues volumes while we continued to pay many of our salaried technicians who were unable to complete revenue-generating orders. We also reorganized the business unit during the three months ended June 30, 2020, which we believe will allow it to operate more efficiently moving forward.

This reorganization was one step in our road map to improve the division’s operations and resulting gross profit percentage.

Specifically, during April and May, 2020, our ability to go on-site to many of our customers' facilities to install and service systems was severely restricted.

These restrictions began to ease late in our first fiscal quarter and our sales volumes began to increase as a result. 

Continuous Monitoring gross profit margin percentage increased four percentage points and one percentage point for the three and six months ended September 30, 2020, respectively, primarily due to the reorganization of the business unit during the three months ended June 30, 2020, which has resulted in steady improvements to its operating efficiency.

This reorganization was one step in our road map to improve the division’s operations and resulting gross profit percentage. 

Corporate and Other

Corporate and Other primarily consists of results from our Cold Chain Packaging division which was dissolved during the year ended March 31, 2020 and is no longer considered a reportable segment, as well as unallocated corporate expenses.  

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Gross profit as a % of revenues

Operating Expenses

Operating expenses for the three months ended June 30, 2020 increased 56% as compared to the prior year.

Operating expenses for the three and six months ended September 30, 2020 increased 54% and 55%, respectively, as compared to the prior year.

Selling expense is driven primarily by labor costs, including salaries and commissions;

accordingly, it may vary with sales levels.

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Selling expense

As a percentage of revenues

Selling expense for the three months ended June 30, 2020 increased 85% primarily as a result of selling costs incurred by the Biopharmaceutical Development division, partially offset by lower industry conferences and travel 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 June 30, 2020, as compared to 8% for the three months ended June 30, 2019.

Selling expense for the three and six months ended September 30, 2020 increased 66% and 75%, respectively, primarily as a result of selling costs incurred by the Biopharmaceutical Development division, partially offset by lower professional services costs, lower commission costs, and lower travel-related costs as we implemented strict travel restrictions for our employees beginning in March, 2020.

As a percentage of revenues, selling expense was 12% for the three months ended September 30, 2020 and was 13% for the six months ended September 30, 2020 as compared to 9% for both the three and six months ended September 30, 2019.

We plan to continue making modest, strategic investments in sales and marketing resources in order to further increase organic revenues growth.

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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 June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

General and administrative expense

As a percentage of revenues

General and administrative expenses for the three months ended June 30, 2020 increased 34%. 

General and administrative expenses increased 38% and 36% for the three and six months ended September 30, 2020, respectively. 

The increase was primarily attributable to increased amortization expense associated with intangible assets acquired from the GPT acquisition;

higher non-cash stock-based compensation expense, which was almost fully offset by lower bonus expense as certain executives of the Company converted portions of cash bonus incentives to non-cash stock-based compensation expense for the year ending March 31, 2021;

and costs associated with the Biopharmaceutical Development division including professional services fees related to the implementation of our enterprise resource planning tool for Biopharmaceutical Development. 

costs associated with the Biopharmaceutical Development division including professional services fees related to the implementation of our enterprise resource planning tool for the division, and higher non-cash stock-based compensation expense, which was almost fully offset by lower bonus and salaries expense as certain executives of the Company converted portions of cash incentives to non-cash stock-based compensation for the year ending March 31, 2021. 

Research and Development

Research and development expense is predominantly comprised of labor costs and costs of third-party consultants.

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Research and development expense

As a percentage of revenues

Research and development expenses for the three months ended June 30, 2020 increased 155% primarily as a result of expenses attributable to the Biopharmaceutical Development division.

Research and development expenses increased 164% and 159% for the three and six months ended September 30, 2020, respectively, primarily as a result of expenses attributable to the Biopharmaceutical Development division.

Including the Biopharmaceutical Development division, we expect research and development expenses will be approximately 7%-10% of revenues in the near term in part depending on the pace of the economic recovery.

Nonoperating Expense (Income) 

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

Six Months Ended September 30,

Percentage Change

Nonoperating expense

Nonoperating expense for the three months ended June 30, 2020 is composed primarily of interest expense associated with our 1.375% convertible senior notes issued in August 2019 (the "Notes"), gains and losses on foreign currency transactions, and gains and losses on sales of property, plant and equipment.

Interest expense for the three months ended June 30, 2020 increased by $1,524 compared to the three months ended June 30, 2019 due to interest expense related to the Notes, partially offset by lower interest expense as a result of paying off our credit facility. 

Three Months Ended June 30,

Nonoperating expense for the three and six months ended September 30, 2020 is composed primarily of interest expense and amortization of the debt discount associated with our 1.375% convertible senior notes issued in August 2019 (the "Notes"), interest income earned on cash and cash equivalents, and gains and losses on foreign currency transactions.

Interest expense and amortization of debt discount increased for both the three and six months ended September 30, 2020, compared to the three and six months ended September 30, 2019 due to interest expense related to the Notes which were outstanding for all of the three and six months ended September 30, 2020, but only part of the three and six months ended September 30, 2019.

Interest expense was offset primarily by interest income earned on our money market account.

Higher interest was earned on the money market during the three and six months ended September 30, 2019 compared to the three and six months ended September 30, 2020 as interest rates were higher in the prior year. 

As discussed in Note 1.

within Item 1.

Financial Statements , subsequent to the adoption of Accounting Standards Update 2020-06, there will be a reduction in non-cash interest expense related to the 1.375% convertible senior notes due August 15, 2025.

Three Months Ended September 30,

Percentage Change

Income tax expense

Six Months Ended September 30,

Percentage Change

Income tax (benefit) expense

Effective tax rate

Our effective tax rate benefited notably from the exercise of stock options and to a lesser extent, lower pre-tax income.

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;

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Net Income 

Net income for the three months ended June 30, 2020 varied with the changes in revenues, gross profit, and operating expenses (which includes $1,268, $3,354, and $1,326 of non-cash:

Net income for the six months ended September 30, 2020 varied with the changes in revenues, gross profit, and operating expenses (which includes $3,276, $6,866, and $2,667 of non-cash:

stock-based compensation, amortization of intangible assets acquired in a business combination, and interest expense and discount amortization on the Notes, respectively, partially offset by a $436 benefit associated with a cumulative effect true up of inventory step up amortization). 

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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 sales overall, we continue to believe that we have the liquidity required to continue operations during this volatile period.

During the three months ended June 30, 2020, we continued taking steps to reduce cash outlays and expenses, including limiting travel, reducing hiring new employees, and converting a portion of our executives' remuneration from cash to non-cash stock-based compensation incentives. 

Although the COVID-19 pandemic has resulted in lower revenues overall, we continue to believe that we have the liquidity required to continue operations during this volatile period.

During the six months ended September 30, 2020, we continued taking steps to reduce cash outlays and expenses, including limiting travel, reducing hiring new employees, and converting a portion of our executives' remuneration from cash to non-cash stock-based compensation incentives. 

Even given current macroeconomic conditions, we believe that cash and cash equivalents on hand and cash generated from operations will be sufficient to meet our short-term and long-term needs.

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Working capital is the amount by which current assets exceed current liabilities.

We had working capital of $249,281 and $96,784 at June 30, 2020, and March 31, 2020, respectively.

As of June 30, 2020, and March 31, 2020, we had $230,951 and $81,380, respectively, of cash and cash equivalents, which were held primarily in money market funds.

We had working capital of $260,592 and $96,784 at September 30, 2020, and March 31, 2020, respectively.

As of September 30, 2020, and March 31, 2020, we had $241,924 and $81,380, respectively, of cash and cash equivalents, which were held primarily in money market funds.

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. 

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The total proceeds we received from the offering, net of underwriting discounts and commissions and other offering expenses that we initially paid was $145,935. 

Under the terms of the IBP agreement, we are required to pay contingent consideration if the company is able to achieve certain regulatory milestones.

The potential undiscounted consideration payable ranges from $0 to $490, depending on whether units being developed are certified for sale by U.S.

Under the terms of the amended IBP agreement, we are required to pay contingent consideration if the company is able to achieve certain operational and regulatory milestones.

The potential undiscounted consideration payable ranges from €0 to €450, depending on whether units being developed are certified for sale by U.S.

and foreign regulatory bodies.

We currently believe that it is more likely than not that all aspects of the contingency will be achieved and we expect to pay $490 during the year ending March 31, 2021.

As of June 30, 2020, $172,500 in aggregate principal amount Notes was outstanding.

We currently believe that it is more likely than not that all aspects of the contingency will be achieved and we expect to pay $530 during the year ending March 31, 2021.

As of September 30, 2020, $172,500 in aggregate principal amount Notes was outstanding.

The Notes bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 of each year, beginning with our first payment made on February 15, 2020.

These Notes can be converted prior to maturity if certain conditions are met.

We currently expect to settle future conversions of the Notes entirely in shares of our common stock and will reevaluate this policy from time to time in the event that conversion notices are received from holders of the Notes.   We were in compliance with all debt agreements at June 30, 2020 and for all prior years presented and have met all debt payment obligations.

We currently expect to settle future conversions of the Notes entirely in shares of our common stock and will reevaluate this policy from time to time in the event that conversion conditions are met and conversion notices are received from holders of the Notes.   We were in compliance with all debt agreements at September 30, 2020 and for all prior years presented and have met all debt payment obligations.

Refer to Note 7. "Indebtedness" within Item 1.

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We have paid regular quarterly dividends since 2003.

We declared and paid dividends of $0.16 per share during the three months ended June 30, 2020 as well as each quarter for the year ended March 31, 2020.

In July 2020, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on September 15, 2020, to shareholders of record at the close of business on August 31, 2020.

We declared and paid dividends of $0.16 per share during the six months ended September 30, 2020 as well as each quarter for the year ended March 31, 2020.

In October 2020, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on December 15, 2020, to shareholders of record at the close of business on November 30, 2020.

Our cash flows from operating, investing, and financing activities were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended September 30,

Net cash provided by operating activities

Net cash (used in) investing activities

Net cash provided by (used in) financing activities

Cash flows from operating activities for the three months ended June 30, 2020 provided $2,068, which primarily resulted from increased collections of accounts receivable, partially offset by an increase in the realization of unearned revenues.

Cash used in investing was lower during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, which included a cash outlay for the IBP acquisition.

Cash provided by financing increased due to proceeds raised through our equity offering, which was completed in June, 2020.   

Net cash provided by financing activities

Cash flows from operating activities for the six months ended September 30, 2020 provided $12,610, which primarily resulted from cash provided by GPT's operations and favorable changes in our working capital accounts.

Cash used in investing was lower during the six months ended September 30, 2020 compared to the six months ended September 30, 2019, which included a cash outlay for the IBP acquisition.

Cash provided by financing activities included our equity raise, which provided $145,935 during the six months ended September 30, 2020 and our convertible debt offering and equity raise which provided $252,065 during the six months ended September 30, 2019. 

Contractual Obligations and Other Commercial Commitments

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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 current three months ended June 30, 2020, there were no material changes with respect to the nature of our contractual obligations and other commercial commitments outside the ordinary course of business.

At June 30, 2020, we had contractual obligations for open purchase orders of approximately $4,153 for routine purchases of supplies and inventory, which are payable in less than one year.  

During the six months ended September 30, 2020, there were no material changes with respect to the nature of our contractual obligations and other commercial commitments outside the ordinary course of business.

At September 30, 2020, we had contractual obligations for open purchase orders of approximately $4,902 for routine purchases of supplies and inventory, which are payable in less than one year.  

Off-Balance Sheet Arrangements

As of June 30, 2020, we had no off-balance sheet arrangements or obligations.

As of September 30, 2020, we had no off-balance sheet arrangements or obligations.

Critical Accounting Policies and Estimates

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Quantitative and Qualitative Disclosures a bout Market Risk

We have no derivative instruments and minimal exposure to commodity market risks. A portion of our operations consist of activities outside of the U.S.

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.

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These exposures have increased as a result of the GPT Acquisition, which conducts a substantial portion of its business in Swedish Krona.

A hypothetical 10 percent reduction (U.S.

dollar strengthening) in currency exchange rates compared to the U.S.

dollar would result in an estimated $1,800 reduction in net earnings over a one-year period.

Actual changes in market prices or rates may differ from hypothetical changes.

Fluctuations in exchange rates may adversely affect our results of operations, financial position, and cash flows. 

We hold investments in money market funds.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements