MESA LABORATORIES INC /CO/ 10-Q

Item 1 . Financial Statements M esa Laboratories, Inc. Condensed Consolidated Balance Sheets (unaudited) (in thousands, except share amounts) December 31, March 31, 2023 2023 ASSETS Current assets: Cash and cash equivalents $ 28,224 $ 32,910 Accounts receivable, less allowance for doubtful accounts of $ 1,363 and $ 849 , respectively 36,023 42,551 Inventories 35,973 34,642 Prepaid expenses and other 18,135 8,872 Total current assets 118,355 118,975 Noncurrent assets: Property, plant and equipment, net of accumulated depreciation of $ 22,574 and $ 19,768 respectively 31,775 28,149 Deferred tax asset 1,092 1,076 Other assets 11,590 10,373 Customer relationships, net 162,890 152,189 Intellectual property, net 45,753 46,400 Other intangibles, net 24,131 18,226 Goodwill 346,183 286,444 Total assets $ 741,769 $ 661,832 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 4,554 $ 6,134 Accrued payroll and benefits 9,380 9,433 Unearned revenues 14,357 15,694 Other accrued expenses 15,892 12,098 Total current liabilities 44,183 43,359 Noncurrent liabilities: Deferred tax liability 44,340 34,028 Other long-term liabilities 17,320 7,693 Credit facility 62,000 13,000 Convertible senior notes, net of debt issuance costs 170,965 170,272 Total liabilities 338,808 268,352 Stockholders’ equity: Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 5,394,043 and 5,369,466 shares, respectively 340,852 332,076 Retained earnings 71,953 74,199 Accumulated other comprehensive (loss) ( 9,844 ) ( 12,795 ) Total stockholders’ equity 402,961 393,480 Total liabilities and stockholders’ equity $ 741,769 $ 661,832 See accompanying notes to Condensed C onsolidated Fi nancial Statements. Page 1 Table of Contents Mesa Laboratories, Inc. Condensed Consolidated Statements of Income (unaudited) (in thousands, except per share data) Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Revenues $ 53,473 $ 54,287 $ 157,283 $ 163,489 Cost of revenues 20,071 21,522 60,589 62,997 Gross profit 33,402 32,765 96,694 100,492 Operating expense: Selling 9,737 8,437 28,363 27,660 General and administrative 19,438 16,129 55,024 54,543 Research and development 4,294 4,797 14,098 15,486 Total operating expense 33,469 29,363 97,485 97,689 Operating (loss) income ( 67 ) 3,402 ( 791 ) 2,803 Nonoperating expense: Interest expense and amortization of debt issuance costs 1,856 1,162 3,809 3,390 Other (income) expense, net ( 3,869 ) 324 ( 4,284 ) ( 475 ) Total nonoperating (income) expense, net ( 2,013 ) 1,486 ( 475 ) 2,915 Earnings (loss) before income taxes 1,946 1,916 ( 316 ) ( 112 ) Income tax (benefit) expense ( 170 ) 1,465 ( 653 ) ( 431 ) Net income $ 2,116 $ 451 $ 337 $ 319 Earnings per share: Basic $ 0.39 $ 0.08 $ 0.06 $ 0.06 Diluted $ 0.39 $ 0.08 $ 0.06 $ 0.06 Weighted-average common shares outstanding: Basic 5,393 5,339 5,384 5,312 Diluted 5,396 5,360 5,394 5,354 See accompanying notes to Condensed Consolidated Financial Statements. Page 2 Table of Contents Mesa Laboratories, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) (in thousands) Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Net income $ 2,116 $ 451 $ 337 $ 319 Other comprehensive income (loss): Foreign currency translation adjustments 10,965 11,345 2,951 ( 17,838 ) Comprehensive income (loss) $ 13,081 $ 11,796 $ 3,288 $ ( 17,519 ) See accompanying notes to Condensed Consolidated Financial Statements. Page 3 Table of Contents Mesa Laboratories, Inc. Condensed Consolidated Statements of Stockholders’ Equity (unaudited) (dollars in thousands, except per share data) Common Stock Number of Shares Amount Retained Earnings AOCI* Total March 31, 2023 5,369,466 $ 332,076 $ 74,199 $ ( 12,795 ) $ 393,480 Exercise of stock options and vesting of restricted stock units 20,074 52 - - 52 Tax withholding on vesting of restricted stock units ( 5,260 ) ( 712 ) - - ( 712 ) Dividends paid, $ 0.16 per share - - ( 859 ) - ( 859 ) Stock-based compensation expense - 2,968 - - 2,968 Foreign currency translation - - - ( 6,661 ) ( 6,661 ) Net (loss) - - ( 549 ) - ( 549 ) June 30, 2023 5,384,280 $ 334,384 $ 72,791 $ ( 19,456 ) $ 387,719 Exercise of stock options and vesting of restricted stock units 7,464 304 - - 304 Tax withholding on vesting of restricted stock units ( 18 ) ( 2 ) - - ( 2 ) Dividends paid, $ 0.16 per share - - ( 862 ) - ( 862 ) Stock-based compensation expense - 3,183 - - 3,183 Foreign currency translation - - - ( 1,353 ) ( 1,353 ) Net (loss) - - ( 1,230 ) - ( 1,230 ) September 30, 2023 5,391,726 $ 337,869 $ 70,699 $ ( 20,809 ) $ 387,759 Exercise of stock options and vesting of restricted stock units 2,415 2 - - 2 Tax withholding on vesting of restricted stock units ( 98 ) ( 12 ) - - ( 12 ) Dividends paid, $ 0.16 per share - - ( 862 ) - ( 862 ) Stock-based compensation expense - 2,993 - - 2,993 Foreign currency translation - - - 10,965 10,965 Net income - - 2,116 - 2,116 December 31, 2023 5,394,043 $ 340,852 $ 71,953 $ ( 9,844 ) $ 402,961 Common Stock Number of Shares Amount Retained Earnings AOCI* Total March 31, 2022 5,265,627 $ 313,460 $ 76,675 $ 3,666 $ 393,801 Exercise of stock options and vesting of restricted stock units 31,690 1,438 - - 1,438 Tax withholding on vesting of restricted stock units ( 9 ) ( 2 ) - - ( 2 ) Dividends paid, $ 0.16 per share - - ( 843 ) - ( 843 ) Stock-based compensation expense - 3,432 - - 3,432 Foreign currency translation - - - ( 15,957 ) ( 15,957 ) Net (loss) - - ( 1,438 ) - ( 1,438 ) June 30, 2022 5,297,308 $ 318,328 $ 74,394 $ ( 12,291 ) $ 380,431 Exercise of stock options and vesting of restricted stock units 42,014 2,778 - - 2,778 Tax withholding on vesting of restricted stock units ( 3,051 ) ( 572 ) - - ( 572 ) Dividends paid, $ 0.16 per share - - ( 852 ) - ( 852 ) Stock-based compensation expense - 4,371 - - 4,371 Foreign currency translation - - - ( 13,226 ) ( 13,226 ) Net income - - 1,306 - 1,306 September 30, 2022 5,336,271 $ 324,905 $ 74,848 $ ( 25,517 ) $ 374,236 Exercise of stock options and vesting of restricted stock units 7,376 307 - - 307 Tax withholding on vesting of restricted stock units ( 1,757 ) ( 335 ) - - ( 335 ) Dividends paid, $ 0.16 per share - - ( 855 ) - ( 855 ) Stock-based compensation expense - 2,056 - - 2,056 Foreign currency translation - - - 11,345 11,345 Net income - - 451 - 451 December 31, 2022 5,341,890 $ 326,933 $ 74,444 $ ( 14,172 ) $ 387,205 *Accumulated Other Comprehensive (Loss) Income. See accompanying notes to Condensed Consolidated Financial Statements. Page 4 Table of Contents M esa Laboratories, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Nine Months Ended December 31, 2023 2022 Cash flows from operating activities: Net income $ 337 $ 319 Adjustments to reconcile net income to net cash from operating activities: Depreciation of property, plant and equipment 2,899 3,196 Amortization of acquisition-related intangibles 22,380 21,573 Stock-based compensation expense 9,144 9,859 Non-cash interest and debt amortization 692 679 Other ( 1,614 ) ( 1,038 ) Cash from changes in operating assets and liabilities: Accounts receivable, net 8,294 ( 1,979 ) Inventories 217 ( 9,191 ) Prepaid expenses and other assets ( 7,841 ) ( 2,312 ) Accounts payable ( 1,656 ) ( 1,339 ) Accrued liabilities and taxes payable ( 124 ) ( 5,221 ) Unearned revenues ( 1,478 ) 918 Net cash provided by operating activities 31,250 15,464 Cash flows from investing activities: Acquisitions, net of cash acquired ( 79,700 ) ( 4,950 ) Purchases of property, plant and equipment ( 2,032 ) ( 3,518 ) Net cash (used in) investing activities ( 81,732 ) ( 8,468 ) Cash flows from financing activities: Proceeds from the issuance of debt 71,000 - Repayment of debt ( 22,000 ) ( 30,000 ) Dividends paid ( 2,583 ) ( 2,550 ) Proceeds from the exercise of stock options 358 4,523 Payment of tax withholding obligation on vesting of restricted stock ( 726 ) ( 909 ) Other financing, net ( 280 ) - Net cash provided by (used in) financing activities 45,769 ( 28,936 ) Effect of exchange rate changes on cash and cash equivalents 27 ( 1,305 ) Net (decrease) in cash and cash equivalents ( 4,686 ) ( 23,245 ) Cash and cash equivalents at beginning of period 32,910 49,346 Cash and cash equivalents at end of period $ 28,224 $ 26,101 Supplemental non-cash activity: Acquisition-related consideration held back against potential indemnification losses $ 9,526 $ - See accompanying notes to Condensed C onsolidated Fin ancial Statements. Page 5 Table of Contents 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.” We are a multinational leader in the design and manufacture of life sciences tools and critical quality control solutions for regulated applications in the pharmaceutical, healthcare, and medical device industries. We offer products and services to help our customers ensure product integrity, increase patient and worker safety, and improve the quality of life throughout the world. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia Pacific, and by independent 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 profit margins. As of December 31, 2023 , we managed our operations in four reportable segments, or divisions: ● Sterilization and Disinfection Control - manufactures and sells biological, chemical, and cleaning indicators used to assess the effectiveness of sterilization and disinfection processes in the pharmaceutical, healthcare, medical device, and dental industries. The division also provides testing and laboratory services, mainly to the dental industry. ● Clinical Genomics - develops, manufactures and sells highly sensitive, low-cost, high-throughput genetic analysis tools and related consumables and services that enable clinical labs to perform genomic testing for a broad range of diagnostic and research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, and oncology related applications. ● Biopharmaceutical Development - develops, manufactures and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacture of biotherapeutic therapies, among other applications. ● Calibration Solutions - develops, manufactures and sells quality control products using principles of advanced metrology to measure or calibrate critical chemical or physical parameters in various dialysis, process monitoring, instrument monitoring, environmental monitoring, gas flow, environmental air quality, and torque applications, primarily in medical device manufacturing, pharmaceutical manufacturing, laboratory, and hospital environments. 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 the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for the fair statement of our financial position and results of operations. The results of operations for 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. The Condensed Consolidated Financial Statements include the accounts of Mesa and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We made no material changes to the application of our significant accounting policies disclosed in our annual report on Form 10 -K. 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, 2023 . Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “quarter” refer to our fiscal year or fiscal quarters, respectively. Prior Period Reclassifications Certain prior year amounts presented have been reclassified to conform with current presentation. The reclassifications have not resulted in any changes to consolidated or segment amounts reported in the Consolidated Financial Statements for any periods presented in this Form 10 -Q. 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 judgment about the outcome of future events. The global business environment continues to be impacted by cost pressure, the overall effects of economic uncertainty on customers' purchasing patterns, high interest rates, and other factors. It is not possible to accurately predict the future impact of such events and circumstances. Actual results could differ from our estimates. Recently Issued Accounting Pronouncements In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023 - 07, "Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures." ASU No. 2023 - 07 requires all annual disclosures currently required by Topic 280 to be included in interim periods and requires disclosure of significant segment expenses regularly provided to the chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and applicable additional measures of segment profit or loss used by the CODM when allocating resources and assessing business performance. The guidance is effective for public business entities for fiscal years beginning after December 31, 2023 ( our fiscal year 2025 ), with early adoption permitted. We are currently assessing the effect the adoption of this standard will have on our financial statements. Page 6 Table of Contents In December 2023, the FASB issued ASU No. 2023 - 09, "Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures." ASU No. 2023 - 09, which enhances the transparency, effectiveness and comparability of income tax disclosures by requiring consistent categories and greater disaggregation of information related to income tax rate reconciliations and the jurisdictions in which income taxes are paid. The guidance is effective for public business entities for fiscal years beginning after December 15, 2024 ( our fiscal year 2026 ), with early adoption permitted. We are currently assessing the effect the adoption of this standard will have on our financial statements. We have reviewed all recently issued accounting pronouncements and have concluded that, other than as described above, they are either not applicable to us or are not expected to have a significant impact on our consolidated financial statements. Note 2 . Significant Transactions Acquisition of GKE In accordance with the sale and purchase agreement executed October 14, 2023, we acquired 100 % of the outstanding shares of GKE GmbH and SAL GmbH effective October 16, 2023, and upon approval by applicable Chinese regulators, we acquired 100 % of the outstanding shares of Beijing GKE Science & Technology Co. Ltd. (“GKE China,” and, together with GKE GmbH and SAL GmbH, “GKE”), effective December 31, 2023 ( the "GKE acquisition"). GKE primarily develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets. GKE’s strength in chemical indicators and our Sterilization and Disinfection Control division’s strength in biologic indictors are complementary, as chemical and biologic indicators are used in the same sterility validation workflows. Additionally, GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain regulatory 510 (k) clearance on certain GKE products for sale in the United States, which would further expand organic revenues growth opportunities from the GKE business. Total cash consideration for the GKE acquisition was $ 88,789 , net of cash and financial liabilities and subject to customary purchase price adjustments, including working capital adjustments of approximately $ 1,000 expected to be paid to Mesa from the seller during the fourth quarter of fiscal year 2024. Of the total acquisition price approximately $ 9,500 , will be held back for a period of 18 months from the acquisition closing as security against potential indemnification losses. We funded the acquisition through a combination of cash on-hand and a total of $ 71,000 borrowed under our line of credit (See Note 7. "Indebtedness"). We began operating GKE GmbH and SAL GmbH on October 16, 2023, and they are included as wholly owned subsidiaries in our consolidated financial statements beginning on that date. GKE China is included as a wholly owned subsidiary in our Condensed Consolidated Balance Sheets as of December 31, 2023, and we began consolidating its results of operations beginning January 1, 2024. Preliminary Allocation of Purchase Price We accounted for the GKE acquisition as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the acquiree's identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values and are consolidated with those of Mesa. The relief from royalty method was used to value our trade names and intellectual property, while the multi-period excess earnings method, a form of the income approach, was used to value our customer relationships. The non-compete agreements were valued using a probability-weighted estimate of the expected economic impact that would occur in the absence of the agreements. Significant judgments and estimates are required when performing valuations, including, among other assumptions, internal rates of return, revenue growth rates, customer attrition rates, and royalty rates, all of which are considered Level 3 inputs. We worked with external valuation experts to prepare the preliminary valuation using information obtained during due diligence and from professional valuation databases and other sources. These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates. This preliminary purchase price allocation is subject to revision as more detailed analyses are completed. If additional information about the fair value of assets acquired and liabilities assumed becomes available, we may further revise the preliminary purchase price allocation as soon as is practical, but will not do so more than one year from the acquisition date. Only items identified as of the acquisition date are considered for subsequent adjustment. Any such revisions or changes may be material. The final valuation may include, but may not be limited to: ( 1 ) changes in allocations to intangible assets such as customer relationships, trade names, intellectual property, and non-compete agreements, as well as goodwill, ( 2 ) changes to inventory, ( 3 ) changes to deferred tax balances, ( 4 ) changes in our assessment of the purchase price, and ( 5 ) other changes to assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of acquisition: Life (in years) Amount Cash and cash equivalents $ 4,192 Accounts receivable (a) 2,252 Inventories (b) 3,823 Other current assets 188 Total current assets 10,455 Property, plant and equipment (c) 2,772 Other noncurrent assets 3,030 Intangible assets: Goodwill (d) 54,470 Customer relationships (e) 7 26,876 Intellectual property (e) 7 3,524 Tradenames (e) 10 6,049 Non-compete agreements (e) 3 743 Total assets acquired $ 107,919 Accounts payable 11 Other current liabilities 2,491 Deferred tax liabilities 9,763 Other long-term liabilities 2,673 Total liabilities assumed 14,938 Total purchase price, net of cash acquired and subject to adjustments for working capital $ 88,789 (a) Trade receivables are expected to be collected. (b) Includes $1,507 of preliminary inventory step up, which we expect to amortize within approximately three fiscal quarters from the acquisition date. During the period from October 16, 2023 to December 31, 2023, $412 of inventory step up amortization was recorded to cost of revenues. Preliminary accounting for the fair value step up of GKE China's inventory is incomplete due to the recent closing date. Page 7 Table of Contents (c) Includes $1,727 of preliminary property, plant and equipment step up, which will be amortized based on the underlying assets' expected lives. During the period from October 16, 2023 to December 31, 2023, $83 of depreciation expense was recorded related to the property, plant and equipment fair value step up. (d) Acquired goodwill of $54,470, all of which is allocated to the Sterilization Disinfection Control division, represents the value expected to arise from expanded global market opportunities, particularly in the healthcare industry, as well as expected synergies and GKE's assembled workforce, none of which qualify as amortizable intangible assets. The goodwill acquired is expected to be deductible for income tax purposes. (e) Acquired amortizable intangible assets are currently expected to be amortized on a straight line basis over a weighted average period of 7.4 years. The identified intangible assets will be amortized on a straight line basis over their useful lives, which approximates the pattern that the assets' economic benefits are expected to be consumed. Amortization expense for customer relationships, tradenames, and noncompete agreements will be expensed to general and administrative expense, and amortization expense for intellectual property will be expensed to cost of revenues. During the period from October 16, 2023 to December 31, 2023, $838 of amortization expense was recorded to general and administrative costs and $122 of amortization expense was recorded to cost of revenues in the Sterilization Disinfection Control division. Acquisition related costs, such as legal and advisory fees, and integration related costs of $ 770 and $ 1,275 for the three and nine months ended December 31, 2023, respectively, are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred and are reflected on the Condensed Consolidated Statements of Income in general and administrative expenses. GKE's operations contributed $ 3,837 to revenues and $ 565 of net income to our consolidated results during the three and nine months ended December 31, 2023. It is impracticable for us to disclose interim pro-forma information regarding the combined results of the operations of Mesa and GKE as if the acquisition had occurred at an earlier date. Prior to acquisition, GKE was a privately owned company with requirements to close their accounting records on an annual cadence rather than on an interim basis, and certain interim financial information cannot be recreated for accurate financial results. For example, prior to Mesa's ownership, GKE accounted for costs of goods sold at an unburdened rate and performed only annual inventory accounts. We would be unable to retroactively establish costs of revenues in accordance with U.S. GAAP given the unavailability of sufficient information for ending interim periods. Additionally, all transactions occurring between the three GKE entities, which are substantial, were accounted for at arms-length prior to acquisition. As presentation of pro-forma information would require extensive estimation and could not be sourced from sufficiently factual interim information reasonably aligned with U.S. GAAP, we are unable to disclose pro-forma information. Belyntic GmbH On November 17, 2022, we acquired substantially all of the assets and certain liabilities of Belyntic GmbH’s peptide purification business (“the Belyntic acquisition”) for $ 6,450 , of which $ 4,950 was paid on the date of acquisition. The remaining $ 1,500 is due to the Belyntic sellers as patent applications are approved (see Note 11. "Commitments and Contingencies"). The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line that can be used with the instruments we sell. The new PurePep® EasyClean products are an environmentally conscious chemistry solution to purify peptides. During fiscal year 2023 , we prepared an analysis of the valuation of net assets acquired in the Belyntic acquisition. During the nine months ended December 31, 2023, based on a detailed financial analysis of the financial model, we recorded certain measurement period adjustments to reclassify amounts from intangible assets into goodwill. Our preliminary purchase price allocation has been finalized as of December 31, 2023. Note 3. Revenue We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related consumables. We evaluate revenues internally primarily based on operating segment and the nature of goods and services provided. Hardware sales include physical products such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, and data loggers. Hardware sales may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function. Consumables are typically used on a one -time basis and require frequent replacement in our customers' operating cycles. Consumables sold by our Clinical Genomics and Biopharmaceutical Development divisions, such as reagents used for molecular and genetic analysis or solutions used for protein synthesis, are critical to the ongoing use of our instruments. Consumables such as biological indicator test strips sold by our Sterilization and Disinfection Control Division are used on a standalone basis. We also offer maintenance, calibration, and testing service contracts. Under our service contracts we perform labor and replace parts on an as-needed basis over a contractually specified period of time, or perform specific, discrete services. Typically, revenue is recognized upon shipment of a product, upon completion of a discrete service, or over a period of time reflective of the performance period in the applicable contract, depending on when our obligation to the customer is satisfied. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration. The following tables present disaggregated revenues for the three and nine months ended December 31, 2023 and December 31, 2022 , respectively: Three Months Ended December 31, 2023 Sterilization and Disinfection Control (1) Clinical Genomics Biopharmaceutical Development Calibration Solutions Total Consumables $ 16,832 $ 9,758 $ 4,080 $ 539 $ 31,209 Hardware and Software 180 1,639 2,672 8,254 12,745 Services 2,326 1,149 2,678 3,366 9,519 Total Revenues $ 19,338 $ 12,546 $ 9,430 $ 12,159 $ 53,473 ( 1 ) Revenues from GKE GmbH and SAL GmbH are included in the Sterilization and Disinfection Control division beginning upon acquisition on October 16, 2023. Page 8 Table of Contents Three Months Ended December 31, 2022 Sterilization and Disinfection Control Clinical Genomics Biopharmaceutical Development Calibration Solutions Total Consumables $ 14,307 $ 10,885 $ 3,584 $ 553 $ 29,329 Hardware and Software 95 3,371 5,844 7,023 16,333 Services 1,881 1,329 2,218 3,197 8,625 Total Revenues $ 16,283 $ 15,585 $ 11,646 $ 10,773 $ 54,287 Nine Months Ended December 31, 2023 Sterilization and Disinfection Control (1) Clinical Genomics Biopharmaceutical Development Calibration Solutions Total Consumables $ 45,288 $ 28,490 $ 12,753 $ 1,834 $ 88,365 Hardware and Software 381 9,540 7,838 22,216 39,975 Services 6,676 3,434 7,935 10,898 28,943 Total Revenues $ 52,345 $ 41,464 $ 28,526 $ 34,948 $ 157,283 ( 1 ) Revenues from GKE GmbH and SAL GmbH are included in the Sterilization and Disinfection Control division beginning upon acquisition on October 16, 2023. Nine Months Ended December 31, 2022 Sterilization and Disinfection Control Clinical Genomics Biopharmaceutical Development Calibration Solutions Total Consumables $ 41,239 $ 34,815 $ 11,248 $ 2,272 $ 89,574 Hardware and Software 619 9,349 16,656 18,696 45,320 Services 6,163 4,361 6,853 11,218 28,595 Total Revenues $ 48,021 $ 48,525 $ 34,757 $ 32,186 $ 163,489 Revenues from external customers are attributed to individual countries based upon the locations to which the products are shipped or exported, or locations where services are performed, as follows: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 United States $ 25,595 $ 28,645 $ 79,205 $ 88,756 China 4,942 7,482 18,584 18,659 Other 22,936 18,160 59,494 56,074 Total revenues $ 53,473 $ 54,287 $ 157,283 $ 163,489 Other than China, no foreign country exceeded 10% of total revenues for the three and nine months ended December 31, 2023 and 2022 . Contract Balances Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within unearned revenues in the accompanying Condensed Consolidated Balance Sheets, and long-term contract liabilities are included within Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. A summary of contract liabilities is as follows: Contract liabilities as of March 31, 2023 $ 16,098 Prior year liabilities recognized in revenues during the nine months ended December 31, 2023 ( 6,858 ) Contract liabilities added during the nine months ended December 31, 2023, net of revenues recognized 5,478 Contract liabilities balance as of December 31, 2023 $ 14,718 Contract liabilities primarily relate to service contracts with original expected service durations of 12 months or less and will be recognized to revenue as our performance obligations are satisfied. Page 9 Table of Contents Note 4. Fair Value Measurements Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable, and trade accounts payable approximate fair value; they are classified within Level 1 of the fair value hierarchy. Historically, the financial instruments that subject us to the highest concentration of credit risk are cash and cash equivalents and accounts receivable. We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss. Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. No customers accounted for more than 10% of total trade receivables as of December 31, 2023 . We have outstanding $ 172,500 aggregate principal amount of 1.375 % convertible senior notes due August 15, 2025 ( the "Notes"). We estimate the fair value of the Notes using Level 2 inputs based on the last actively traded price or observable market input preceding the end of the reporting period, and the fair value is approximately correlated to our stock price. The estimated fair value and carrying value of the Notes was as follows: December 31, 2023 March 31, 2023 Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2) Notes $ 170,965 $ 158,916 $ 170,272 $ 161,072 The Belyntic acquisition obligates us to pay contingent consideration of up to $ 1,500 cash upon regulatory approval of certain patent applications (see Note 11. "Commitments and Contingencies"). We estimate the fair value of the remaining contingent consideration using Level 3 inputs and a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input, and we adjust the estimated fair value at each reporting period through earnings. The fair value of the remaining contingent consideration was $ 1,067 as of December 31, 2023 and is recorded in other accrued expenses on the accompanying Condensed Consolidated Balance Sheets. Amounts recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include the initial recognition and disclosure of most assets and liabilities purchased in business acquisitions and any related measurement period adjustments. Additionally, assets such as property and equipment, operating lease assets, goodwill and other intangible assets are adjusted to fair value if determined to be impaired. We recorded no impairments during the three and nine months ended December 31, 2023 or 2022 . Fair values of such assets and liabilities require measurement using Level 3 inputs. There were no transfers between the levels of the fair value hierarchy during the three and nine months ended December 31, 2023 or 2022 . Note 5. Supplemental Balance Sheets Information Inventories consisted of the following: December 31, 2023 March 31, 2023 Raw materials $ 19,169 $ 20,064 Work in process 1,155 617 Finished goods 15,649 13,961 Total inventories $ 35,973 $ 34,642 Prepaid expenses and other current assets consisted of the following: December 31, 2023 March 31, 2023 Prepaid expenses $ 3,271 $ 2,498 Deposits 2,143 1,376 Prepaid income taxes 8,176 953 Other current assets 4,545 4,045 Total prepaid expenses and other $ 18,135 $ 8,872 Accrued payroll and benefits consisted of the following: December 31, 2023 March 31, 2023 Bonus payable $ 3,757 $ 4,461 Wages and paid-time-off payable 3,150 2,329 Payroll related taxes 1,998 1,982 Other benefits payable 475 661 Total accrued payroll and benefits $ 9,380 $ 9,433 Page 10 Table of Contents Other accrued expenses consisted of the following: December 31, 2023 March 31, 2023 Accrued business taxes $ 6,744 $ 5,941 Current operating lease liabilities 3,135 2,868 Income taxes payable 1,809 992 Other 4,204 2,297 Total other accrued expenses $ 15,892 $ 12,098 Note 6. Goodwill and Intangible Assets, Net Intangible assets, the significant majority of which are finite-lived, consisted of the following: December 31, 2023 March 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships $ 265,408 $ ( 102,518 ) $ 162,890 $ 238,247 $ ( 86,058 ) $ 152,189 Intellectual property 71,169 ( 25,416 ) 45,753 65,950 ( 19,550 ) 46,400 Other intangibles 31,867 ( 7,736 ) 24,131 24,793 ( 6,567 ) 18,226 Total $ 368,444 $ ( 135,670 ) $ 232,774 $ 328,990 $ ( 112,175 ) $ 216,815 Amortization expense for finite-lived intangible assets acquired in a business combination was as follows: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Amortization in cost of revenues $ 1,883 $ 1,695 $ 5,367 $ 5,094 Amortization in general and administrative 6,092 5,452 17,013 16,479 Total $ 7,975 $ 7,147 $ 22,380 $ 21,573 For the following fiscal years ending March 31, amortization expense is estimated as follows: Remainder of 2024 $ 8,389 2025 32,663 2026 31,857 2027 31,200 2028 30,587 The change in the carrying amount of goodwill was as follows: Sterilization and Disinfection Control Clinical Genomics Biopharmaceutical Development Calibration Solutions Total March 31, 2023 $ 29,559 $ 135,811 $ 83,857 $ 37,217 286,444 Effect of foreign currency translation 2,460 ( 55 ) 2,009 14 4,428 Goodwill related to GKE acquisition 54,470 - - - 54,470 Measurement period adjustment, Belyntic Acquisition - - 841 - 841 December 31, 2023 $ 86,489 $ 135,756 $ 86,707 $ 37,231 $ 346,183 Goodwill in the Biopharmaceutical Development division related to the Belyntic acquisition and goodwill in the Sterilization and Disinfection Control division related to the GKE acquisition are expected to be tax deductible. Note 7 . Indebtedness Credit Facility On October 5, 2023, we amended the terms of our four -year senior credit facility (the “Credit Facility”) to increase the maximum principal amount available to us from $ 75,000 to $ 125,000 . As of December 31, 2023 , the Credit Facility includes 1 ) a revolving credit facility in an amended aggregate principal amount of up to $ 125,000 , 2 ) a swingline loan in an aggregate principal amount not exceeding $ 5,000 , and 3 ) letters of credit in an aggregate stated amount not exceeding $ 2,500 . The Credit Facility also provides for an incremental term loan or an increase in revolving commitments in an aggregate principal amount of at a minimum $ 25,000 and at a maximum $ 75,000 , subject to the satisfaction of certain conditions and lender considerations. The Credit Facility matures in March 2025. The financial covenants in the Credit Facility include a maximum leverage ratio of 4.5 to 1.0 for the period ended December 31, 2023 , except that we may have a leverage ratio of 5.75 to 1.0 for a period of four consecutive quarters following a permitted acquisition, including the permitted GKE acquisition consummated during the three months ended December 31, 2023. The Credit Facility also stipulates a minimum fixed charge coverage ratio of 1.25 to 1.0. Other covenants include restrictions on our ability to incur debt, grant liens, make fundamental changes, engage in certain transactions with affiliates, or conduct asset sales. As of December 31, 2023 , we were in compliance with all covenants. Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate plus an applicable spread. The interest rate on borrowings under our line of credit as of December 31, 2023 was 7.2 %. We are obligated to pay quarterly unused commitment fees of between 0.15 % and 0.35 % of the Credit Facility’s aggregate principal amount, based on our leverage ratio. Page 11 Table of Contents During the three months ended December 31, 2023, we borrowed a total of $ 71,000 under the facility to fund the majority of the acquisition of GKE. See Note 2. "Significant Transactions" for further information. We paid $ 9,000 against the Credit Facility during our third fiscal quarter, and as of December 31, 2023 , $ 62,000 remained outstanding. We paid an additional $ 4,000 on the outstanding balance in January 2024. Convert ible Notes On August 12, 2019, we issued an aggregate principal amount of $ 172,500 of Notes. The net proceeds from the Notes, after deducting underwriting discounts and commissions and other related offering expenses payable by us, were approximately $ 167,056 . The Notes mature on August 15, 2025, unless earlier repurchased or converted, and bear interest at a rate of 1.375 % payable semi-annually in arrears on February 15 and August 15 each year. The Notes are initially convertible, subject to certain conditions, at a conversion rate of 3.5273 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $ 283.50 per share of common stock. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. The circumstances necessary for conversion were not met during the three and nine months ended December 31, 2023 . As of December 31, 2023 , the Notes were classified as a long-term liability on our Condensed Consolidated Balance Sheets. The if-converted value of the Notes did not exceed the principal balance as of December 31, 2023 . The net carrying amount of the Notes was as follows: December 31, 2023 March 31, 2023 Principal outstanding $ 172,500 $ 172,500 Unamortized debt issuance costs ( 1,535 ) ( 2,228 ) Net carrying value $ 170,965 $ 170,272 We recognized interest expense on the Notes as follows: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Coupon interest expense at 1.375% $ 593 $ 593 $ 1,779 $ 1,779 Amortization of debt issuance costs 231 227 692 679 Total interest and amortization of debt issuance costs $ 824 $ 820 $ 2,471 $ 2,458 The effective interest rate on the Notes is approximately 1.9 %. Note 8 . Stockholders' Equity Stock-Based Compensation During the nine months ended December 31, 2023 , we issued stock options, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") pursuant to the Mesa Laboratories, Inc. Amended and Restated 2021 Equity Incentive Plan, which authorizes the issuance of 660 shares of common stock to eligible participants. Expense recognized related to stock-based compensation is as follows: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Stock-based compensation expense $ 2,993 $ 2,056 $ 9,144 $ 9,859 Amount of income tax expense (benefit) recognized in earnings 210 226 727 ( 1,855 ) Stock-based compensation expense, net of tax $ 3,203 $ 2,282 $ 9,871 $ 8,004 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 nine months ended December 31, 2023 : Stock Options Shares Subject to Options Weighted- Average Exercise Price per Share Weighted-Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding as of March 31, 2023 163 $ 200.62 3.3 $ 1,643 Awards granted 53 131.67 Awards forfeited or expired ( 17 ) 208.03 Awards exercised ( 2 ) 132.40 Outstanding as of December 31, 2023 197 $ 182.12 3.5 $ - Page 12 Table of Contents The stock options granted during the nine months ended December 31, 2023 vest in equal installments on the first, second, and third anniversary of the grant date. The following is a summary of RSU and PSU award activity for the nine months ended December 31, 2023 : 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 Outstanding as of March 31, 2023 (1) 57 $ 209.27 44 $ 286.02 Awards granted (1) 54 134.03 32 132.29 Awards forfeited ( 5 ) 171.83 - - Awards distributed ( 27 ) 212.36 - - Outstanding as of December 31, 2023 (1) 79 $ 158.94 76 $ 223.07 ( 1 ) Balances for PSUs are reflected at target. Outstanding time-based RSUs vest and settle in shares of our common stock on a one -for- one basis. The majority of the RSUs granted to employees during the nine months ended December 31, 2023 vest in equal installments on the first, second, and third anniversary of the grant date. RSUs granted to certain executives during the nine months ended December 31, 2023 vest in equal installments on September 1, 2024, June 21, 2025 and June 21, 2026. RSUs granted to non-employee directors during the nine months ended December 31, 2023 vest one year from the grant date. We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period. We grant PSUs to certain key employees. The number of shares earned is determined at the end of each performance period based on Mesa's achievement of certain pre-defined targets per the related award agreement. The outstanding PSUs vest upon completion of the service period described in the award agreement. We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the performance targets on a straight-line basis over the service period. During the nine months ended December 31, 2023 , the Compensation Committee of the Board of Directors created a plan to award 32 PSUs at target with a grant date fair value of $ 132.29 that are subject to service, performance, and market conditions to eligible employees. The service period is from June 21, 2023 through June 21, 2026. The company performance conditions will be measured for the period from April 1, 2023 through March 31, 2024. The quantity of shares that will be earned based upon company performance will range from 0 % to 200 % of the targeted number of shares; if the defined minimum targets are not met, then no shares will vest for performance. In addition, the number of PSUs earned based on company performance will be adjusted up or down by a maximum of 20 % pursuant to a market-based measure of performance comparing Mesa’s share price to a peer group over the period from April 1, 2023 until March 31, 2026. Note 9 . Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share (“diluted EPS”) is computed similarly to basic earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include stock options and both time and performance based RSUs (collectively “stock awards”), as well as common shares underlying our Notes. Stock awards are excluded from the calculation of diluted EPS if they are subject to performance conditions that have not yet been achieved or if they are antidilutive. Diluted EPS does not consider the impact of potentially dilutive securities in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect in such cases. Shares underlying the Notes were excluded from the diluted EPS calculation for the three and nine months ended December 31, 2023 and December 31, 2022 as the impact of the assumed conversion of the Notes calculated under the if-converted method was antidilutive. The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Net income available for shareholders $ 2,116 $ 451 $ 337 $ 319 Weighted average outstanding shares of common stock 5,393 5,339 5,384 5,312 Dilutive effect of stock options - 17 1 28 Dilutive effect of RSUs 3 4 9 14 Fully diluted shares 5,396 5,360 5,394 5,354 Basic earnings per share $ 0.39 $ 0.08 $ 0.06 $ 0.06 Diluted earnings per share $ 0.39 $ 0.08 $ 0.06 $ 0.06 Page 13 Table of Contents The following stock awards were excluded from the calculation of diluted EPS: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Assumed conversion of the Notes 608 608 608 608 Stock awards that were anti-dilutive 277 176 223 159 Stock awards subject to performance and market conditions 57 49 46 51 Total stock awards excluded from diluted EPS 942 833 877 818 Note 10 . Income Taxes For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax income. Each quarter, our estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. There is a potential for volatility in the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which they relate, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations. Our effective income tax rate was ( 8.7 )% and 207.5 % for the three and nine months ended December 31, 2023, respectively, compared to 76.5 % and 384.8 % for the three and nine months ended December 31, 2022, respectively. The effective tax rate for the three and nine months ended December 31, 2023 differed from the statutory federal rate of 21 % primarily due to the share-based payment awards for employees and the effect of income generated in foreign jurisdictions. The change in our effective tax rate for the three and nine months ended December 31, 2023 compared to the prior periods is primarily due to lower windfall benefits on stock option exercises. Note 11 . Commitments and Contingencies We review the adequacy of our legal reserves on a quarterly basis and establish reserves for loss contingencies that are both probable and reasonably estimable. As of December 31, 2023 , there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets. As part of the Belyntic acquisition, we have agreed to pay $ 1,500 to the sellers if contractually specified patents are issued. During the three months ending December 31, 2023, a subset of the patents was issued by the European Patent Office and we remitted $ 188 to the Belyntic sellers. An additional subset of the patents was issued in January 2024, for which we will pay the Belyntic sellers an additional $ 563 during the fourth quarter of fiscal year 2024. We believe it is probable the remaining patents will be issued and we will pay the sellers in full within the next 12 months. As part of the GKE acquisition consummated during the three months ended December 31, 2023, we have agreed to pay the GKE sellers approximately $ 9,500 of the acquisition price approximately 18 months following the acquisition date, pending adjustments for potential indemnification losses that may arise. The liability is recorded as in Other long-term liabilities in our Condensed Consolidated Balance Sheets as of December 31, 2023. Note 12 . S egment Information The following tables set forth our segment information: Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Revenues: Sterilization and Disinfection Control $ 19,338 $ 16,283 $ 52,345 $ 48,021 Clinical Genomics 12,546 15,585 41,464 48,525 Biopharmaceutical Development 9,430 11,646 28,526 34,757 Calibration Solutions 12,159 10,773 34,948 32,186 Total revenues (a) $ 53,473 $ 54,287 $ 157,283 $ 163,489 Gross profit: Sterilization and Disinfection Control $ 13,951 $ 11,614 $ 38,018 $ 34,581 Clinical Genomics 6,449 8,045 20,904 26,535 Biopharmaceutical Development 5,841 7,359 17,783 21,993 Calibration Solutions 7,212 5,740 20,050 17,411 Reportable segment gross profit 33,453 32,758 96,755 100,520 Corporate and Other (b) ( 51 ) 7 ( 61 ) ( 28 ) Gross profit $ 33,402 $ 32,765 $ 96,694 $ 100,492 Reconciling Items: Operating expense 33,469 29,363 97,485 97,689 Operating (loss) income ( 67 ) 3,402 ( 791 ) 2,803 Nonoperating (income) expense, net ( 2,013 ) 1,486 ( 475 ) 2,915 Earnings (loss) before income taxes $ 1,946 $ 1,916 $ ( 316 ) $ ( 112 ) (a) Intersegment revenues are not significant and are eliminated to arrive at consolidated totals. (b) Unallocated corporate expenses are reported within Corporate and Other. Page 14 Table of Contents The following table sets forth inventories by reportable segment. Our chief operating decision maker is not provided with any other segment asset information. December 31, March 31, 2023 2023 Sterilization and Disinfection Control $ 7,593 $ 3,492 Clinical Genomics 11,529 13,985 Biopharmaceutical Development 8,183 8,384 Calibration Solutions 8,668 8,781 Total inventories $ 35,973 $ 34,642 Inventories from GKE total $ 4,077 as of December 31, 2023, net of $ 412 fair value amortization step-up recorded during the three months ended December 31, 2023. GKE inventories are included in our Sterilization and Disinfection Control division.