MESA LABORATORIES INC /CO/ 10-Q

Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except per share amounts) Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ” ). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position; results of acquisitions; management ’ s strategy, plans and objectives for future operations or acquisitions, product development and sales; and adequacy of capital resources and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management ’ s beliefs and assumptions. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company ’ s behalf. Words such as “ seek, ” “ believe, ” “ may, ” “ intend, ” “ could, ” “ target, ” “ expect, ” “ anticipate, ” “ plan, ” “ estimate, ” “ project, ” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including risks associated with: our ability to successfully grow our business, including as a result of acquisitions; the effect that acquisitions have on our operations; our ability to consummate acquisitions at our historical rate and at appropriate prices, and our ability to effectively integrate acquired businesses and achieve desired results; the market acceptance of our products; technological or market viability of our products; reduced demand for our products, including as a result of competitive factors; conditions in the global economy and the particular markets we serve; significant developments or uncertainties stemming from governmental actions, including changes in trade policies and medical device regulations; the timely development and commercialization, and customer acceptance, of enhanced and new products and services; retirement of old products and customer migration to new products; the potential inaccuracy of projections of revenues, growth, operating results, profit margins, earnings, expenses, margins, tax rates, tax provisions, liquidity, cash flows, demand, and competition; the effects of additional actions taken to become more efficient or lower costs ; supply chain challenges; cost pressures; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; product liability; information security; outstanding claims, legal and regulatory proceedings; international business challenges including anti-corruption and sanctions laws and political developments; tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic, industry, and capital markets conditions ; the timing of any of the foregoing ; and assumptions underlying any of the foregoing. Such risks and uncertainties also include those listed in Item 1A. “ Risk Factors ” in our Annual Report on Form 10-K for the year ended March 31, 2024 and in this report. The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. Overview We are a global 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 September 30, 2024, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions is described further in "Results of Operations" below. Unallocated corporate expenses and other business activities are reported within Corporate and Other. Corporate Strategy We strive to create stakeholder value and further our purpose of Protecting the Vulnerable® by growing our business both organically and through acquisitions, by improving our operating efficiency, and by continuing to hire, develop and retain top talent. As a business, we commit to our purpose of Protecting the Vulnerable® every day by taking a customer-focused approach to developing, building, and delivering our products. We serve a broad set of industries, in particular the pharmaceutical, healthcare services, and medical device verticals, in which the safety, quality, and efficacy of products is critical, by delivering the highest quality products possible. We are committed to protecting the communities we serve. Organic Revenues Growth Organic revenues growth is driven by the expansion of our customer base, increases in sales volumes, new product offerings, and price increases, and may be affected positively or negatively by changes in foreign currency rates. Our ability to increase organic revenues is affected by general economic conditions, both domestic and international, customer capital spending trends, competition, and the introduction of new products. Our policy is to price our products competitively and, where possible, we pass along cost increases to our customers in order to maintain our margins. We typically evaluate costs and pricing annually, with price increases effective January 1. Inorganic Growth - Acquisitions Over the past decade, we have consummated a number of acquisitions as part of our growth strategy. These acquisitions have allowed us to expand our product offerings and the industries we serve, globalize our company, and increase the scale at which we operate. In turn, this growth affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®. Improving Our Operating Efficiency Our ongoing goal is to maximize value in our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations. We achieve efficiencies using the four pillars that make up the Mesa Way , which is our customer-centric, lean-based system for continuously improving and operating the manufacturing and administrative aspects of our high-margin, niche businesses. The Mesa Way is focused on: "Measuring What Matters" using our customers' perspective and setting high standards for performance; "Empowering Teams" to improve operationally and exceed customer expectations; "Sustainably Improving" using lean-based tools designed to help us identify and prioritize the biggest opportunities; and "Always Learning" so that performance continuously improves. Page 15 Table of Contents Gross profit is affected by many factors including our product mix, foreign currency rates, manufacturing efficiencies, costs of products and labor, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately our mix of revenues will continue to impact our overall gross profit. Hire, Develop, and Retain Top Talent At the center of our organization are talented people who are capable of taking on new challenges using a team approach. Indeed, it is our exceptionally talented workforce that works together and uses our lean-based tool set to find ways to continuously and sustainably improve our products, our services, and ourselves, resulting in long-term value creation for our stakeholders. General Trends We are a global company with multinational operations. During the six months ended September 30, 2024, approximately 53% of our revenues were earned outside of the United States. We face both opportunities and challenges resulting from our geographic and industry diversity, such as varied economic environments across served geographies, technology changes in served markets, opportunities in high-growth markets, the impact of foreign currency movements against the U.S. dollar ("USD"), changes in trends and costs of a global labor force, and increasing regulation. Continued growth of our revenue will depend on our ability to (i) continue commercial efforts to expand business with new and existing customers, (ii) identify, consummate, and integrate acquisitions successfully, and (iii) develop or purchase differentiated products and services. We maintain our profitability by improving the effectiveness of our sales forces, continuing to pursue cost reduction initiatives, and improving our operating efficiency. During the first half of fiscal year 2025, our revenues increased 11.7%, versus the comparable prior year period, primarily driven by revenues of $12,117 from GKE, which we acquired in the third quarter of fiscal year 2024. Organic revenues increased 0.1% during the first half of fiscal year 2025 primarily as a result of 25.0% organic revenues growth from our Biopharmaceutical Development division, and to a lesser extent organic revenues increases of 5.6% from our Calibration Solutions division. Our Biopharmaceutical Development division, in particular, benefited from an improved environment for capital equipment purchases in the biopharmaceutical vertical. Organic revenues in our Clinical Genomics business declined 20.8% as we continue to experience challenges from the economic slowdown in China and regulatory challenges that are impacting sales of new Clinical Genomics instruments in the United States. However, the Clinical Genomics division's revenues have increased sequentially in both the first and second quarters of fiscal year 2025. Gross profit as a percentage of revenues increased 1.7 percentage points in the first half of fiscal year 2025 compared to the first half of fiscal year 2024, primarily attributable to lower amortization of intangible expenses flowing through cost of revenues as a result of the Clinical Genomics intangible asset impairment charge recorded in the fourth quarter of fiscal year 2024 and margin contribution of 62.3% from the GKE acquisition, including $1,232 of non-cash inventory step up amortization. Operating expenses declined slightly during the first half of fiscal year 2025 versus the comparable prior year period, despite an 11.7% increase in revenues. Operating expenses incurred by GKE during the six months ended September 30, 2024 were offset by lower amortization expense as we impaired a portion of the intangible assets held by the Clinical Genomics division in fiscal year 2024. The weakening of the USD increased reported expenses incurred in Europe, but despite foreign currency headwinds, operating income was $9,088, an increase of $9,812 versus the comparable prior year period. Additionally, we recorded about $900 more for bonuses in the first six months of fiscal year 2025 versus the comparable prior year period due to improved performance. GKE contributed $4,533 to our consolidated operating income during the first half of fiscal year 2025. A weakening or strengthening of foreign currencies against the USD increases or decreases our reported revenues, gross profit margins, and operating expenses, and impacts the comparability of our results between periods. Results of Operations Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and the notes thereto appearing in Item 1. Financial Statements (in thousands, except percent data). Results by reportable segment are as follows: Revenues Organic Revenues Growth (non-GAAP) (a) Gross Profit as a % of Revenues Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30, 2024 2023 2024 2023 2024 2023 Sterilization and Disinfection Control $ 22,205 $ 17,080 (4.3 %) 0.7 % 68.3 % 73.0 % Clinical Genomics 11,499 15,549 (26.0 %) (15.7 %) 51.4 % 49.7 % Biopharmaceutical Development 11,867 9,207 28.9 % (24.4 %) 60.4 % 59.8 % Calibration Solutions 12,262 11,329 8.2 % 1.1 % 58.8 % 56.6 % Mesa's reportable segments $ 57,833 $ 53,165 (2.2 %) (9.6 %) 61.3 % 60.4 % Revenues Organic Revenues Growth (non-GAAP) (a) Gross Profit as a % of Revenues Six Months Ended September 30, Six Months Ended September 30, Six Months Ended September 30, 2024 2023 2024 2023 2024 2023 Sterilization and Disinfection Control $ 45,162 $ 33,007 0.1 % 4.0 % 68.0 % 72.9 % Clinical Genomics 22,903 28,918 (20.8 %) (12.2 %) 54.1 % 50.0 % Biopharmaceutical Development 23,875 19,096 25.0 % (17.8 %) 63.4 % 62.5 % Calibration Solutions 24,063 22,789 5.6 % 6.4 % 60.1 % 56.3 % Mesa's reportable segments $ 116,003 $ 103,810 0.1 % (5.0 %) 62.7 % 61.0 % (a) Organic revenues growth is a non-GAAP measure of financial performance. See "Non-GAAP Measures" below for further information and for a reconciliation of organic revenues growth to total revenues growth. Page 16 Table of Contents Our unaudited condensed consolidated results of operations are as follows: Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Revenues $ 57,833 $ 53,165 8.8 % $ 116,003 $ 103,810 11.7 % Gross profit 35,455 32,109 10.4 % 72,704 63,292 14.9 % Operating expense 31,947 32,169 (0.7 %) 63,616 64,016 (0.6 %) Operating income (loss) 3,508 (60 ) 5,946.7 % 9,088 (724 ) 1,355.2 % Net income (loss) $ 3,428 $ (1,230 ) 378.7 % $ 6,816 $ (1,779 ) 483.1 % Reportable Segments Sterilization and Disinfection Control Our Sterilization and Disinfection Control division manufactures and sells biological, chemical and cleaning indicators used to assess the effectiveness of sterilization, decontamination, disinfection and cleaning processes in the pharmaceutical, medical device, and healthcare industries. The division also provides testing and laboratory services, mainly to the dental and pharmaceutical industries. Sterilization and Disinfection Control products are disposable and are used on a routine basis. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Revenues $ 22,205 $ 17,080 30.0 % $ 45,162 $ 33,007 36.8 % Gross profit 15,172 12,476 21.6 % 30,730 24,067 27.7 % Gross profit as a % of revenues 68.3 % 73.0 % (4.7 pt) 68.0 % 72.9 % (4.9 pt) The Sterilization and Disinfection Control division's revenues increased 30.0% and 36.8% for the three and six months ended September 30, 2024, respectively versus the comparable prior year periods. The GKE acquisition contributed inorganic revenues of $5,863 and $12,117 for the three and six months ended September 30, 2024, respectively. Organic revenues declined 4.3% for the three months ended September 30, 2024 and increased 0.1% for the six months ended September 30, 2024. Strong commercial execution that resulted in organic revenues growth in the first quarter of fiscal year 2025 and significant orders growth of 6% in the first half of the fiscal year excluding GKE was largely offset by lower than expected order fulfillments. However, the past due backlog for the division has increased and is expected to be fulfilled over the next two quarters. We anticipate positive organic revenues growth in the Sterilization and Disinfection Control division in fiscal year 2025. The Sterilization and Disinfection Control division's gross profit percentage decreased 4.7 percentage points and 4.9 percentage points for the three and six months ended September 30, 2024, respectively, versus the comparable prior year periods. The three and six months ended September 30, 2024 includes $588 and $1,476, respectively, of both amortization of GKE’s intangible assets and amortization of non-cash inventory step-up, which affect the comparability of gross margins as a percentage of revenues. There will be no further charges for the inventory step up. Excluding these non-cash charges from purchase accounting, the Sterilization and Disinfection Control division’s margin decreased 2.1 percentage points and 1.6 percentage points for the three and six months ended September 30, 2024, respectively. Beginning in the third quarter of fiscal year 2025, when the inventory step up is no longer being amortized through cost of revenues, we expect GKE's gross profit percentage will be in the low 70s. Clinical Genomics The Clinical Genomics division develops, manufactures and sells highly sensitive, low-cost, high-throughput genetic analysis tools and related consumables and services that enable clinical research labs and contract research organizations to perform genomic testing for a broad range of research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, oncology related applications, and toxicology research. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Revenues $ 11,499 $ 15,549 (26.0 %) $ 22,903 $ 28,918 (20.8 %) Gross profit 5,906 7,727 (23.6 %) 12,396 14,455 (14.2 %) Gross profit as a % of revenues 51.4 % 49.7 % 1.7 pt 54.1 % 50.0 % 4.1 pt The Clinical Genomics division's revenues decreased 26.0% and 20.8% for the three and six months ended September 30, 2024 versus the comparable prior year periods. The decrease for the three and six months ended September 30, 2024 was primarily due to decreases in revenues from consumables, and to a lesser extent, new systems in China as a result of China's economic slowdown and anti-corruption initiatives, which began to significantly impact us during the third quarter of fiscal year 2024. Decreased instrument sales in the United States due to increased regulation of lab-developed tests further contributed to decreased revenues. Gross profit percentage for the Clinical Genomics division increased 1.7 and 4.1 percentage points for the three and six months ended September 30, 2024 versus the comparable prior year periods, primarily due to lower intangibles amortization expense as a result of an impairment charge recorded in the fourth quarter of fiscal year 2024. Excluding the impact of amortization expense, gross profit as a percentage of revenues would have decreased 5.8 and 4.0 percentage points for the three and six months ended September 30, 2024, respectively, primarily as a result of lower revenues on a partially fixed cost base as well as realizing lower margins on certain strategic instrument sales into our APAC region that we expect will increase our consumables sales in the future. Biopharmaceutical Development Our Biopharmaceutical Development division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacture of biotherapeutic therapies, among other applications. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Revenues $ 11,867 $ 9,207 28.9 % $ 23,875 $ 19,096 25.0 % Gross profit 7,167 5,509 30.1 % 15,126 11,942 26.7 % Gross profit as a % of revenues 60.4 % 59.8 % 0.6 pt 63.4 % 62.5 % 0.9 pt Page 17 Table of Contents The Biopharmaceutical Development division's revenues increased 28.9% and 25.0% for the three and six months ended September 30, 2024 versus the comparable prior year periods, primarily due to increased capital spending in the biopharmaceutical markets. Revenues from hardware and software sales increased 108.8% and 93.7% for the three and six months ended September 30, 2024, respectively, versus the comparable prior year periods. For the three and six months ended September 30, 2024, gross margin as a percentage of revenues for the Biopharmaceutical Development division increased slightly as a result of favorable product mix, as well as increased revenues on a partially fixed cost base. Calibration Solutions The Calibration Solutions division 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. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Revenues $ 12,262 $ 11,329 8.2 % $ 24,063 $ 22,789 5.6 % Gross profit 7,210 6,407 12.5 % 14,452 12,838 12.6 % Gross profit as a % of revenues 58.8 % 56.6 % 2.2 pt 60.1 % 56.3 % 3.8 pt The Calibration Solutions division's revenues increased 8.2% and 5.6%, respectively, for the three and six months ended September 30, 2024 versus the comparable prior year period, primarily due to commercial efforts and increases in prices, particularly in our Renal Care product lines. The Calibration Solutions division's gross profit percentage increased 2.2 and 3.8 percentage points for the three and six months ended September 30, 2024, respectively, versus the comparable prior year period, primarily due to increased revenues on a partially-fixed cost base and favorable product mix. Operating Expense Operating expense decreased 0.7% and 0.6% for the three and six months ended September 30, 2024, respectively, versus the comparable prior year period. Increases in operating expenses from GKE's operations were offset by lower amortization of intangible assets as a result of the Clinical Genomics impairment charge recorded in the fourth quarter of fiscal year 2024. Selling Expense Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Selling expense $ 9,849 $ 9,650 2.1 % $ 19,965 $ 18,626 7.2 % As a percentage of revenues 17.0 % 18.2 % (1.2 pt) 17.2 % 17.9 % (0.7 pt) Selling expense for the three and six months ended September 30, 2024 increased 2.1% and 7.2%, respectively, versus the comparable prior year periods. The increase is primarily attributable to sales and marketing costs from GKE and higher commissions as revenues increased. General and Administrative Expense Labor costs, non-cash stock-based compensation and non-cash amortization of intangible assets drive the substantial majority of our general and administrative expense. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change General and administrative expense $ 17,464 $ 17,526 (0.4 %) $ 34,282 $ 35,586 (3.7 %) As a percentage of revenues 30.2 % 33.0 % (2.8 pt) 29.6 % 34.3 % (4.7 pt) General and administrative expenses decreased 0.4% and 3.7% for the three and six months ended September 30, 2024, respectively, versus the comparable prior year period, largely due to the decrease of amortization of intangible assets due to an impairment charge recorded in the fourth quarter of fiscal year 2024. Excluding amortization expense, general and administrative expense would have increased 12.3% for the three months ended September 30, 2024, primarily as a result of GKE's general and administrative expenses as well as higher non-cash stock-based compensation expense. Excluding amortization expense, for the six months ended September 30, 2024, general administrative costs would have increased 9.4%, primarily as a result of general and administrative costs from GKE and costs associated with integrating GKE into our enterprise resource planning tool. Research and Development Expense Research and development expense is predominantly comprised of labor costs and costs of third-party consultants. Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Research and development expense $ 4,634 $ 4,993 (7.2 %) $ 9,369 $ 9,804 (4.4 %) As a percentage of revenues 8.0 % 9.4 % (1.4 pt) 8.1 % 9.4 % (1.3 pt) Research and development expenses decreased 7.2% and 4.4% for the three and six months ended September 30, 2024, respectively, versus the comparable prior year periods. We undertook cost containment efforts during fiscal year 2024, which included recording severance. Lower costs in the three and six months ended September 30, 2024 were a result of lower headcount, no severance charges, and reduced research and development supplies purchases. Page 18 Table of Contents Nonoperating (Income) Expense, Net Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Interest expense and amortization of debt issuance costs $ 3,018 $ 905 233.5 % $ 5,860 $ 1,953 200.1 % (Gain) on extinguishment of convertible senior notes - - N/A (3,197 ) - N/A Other (income) expense, net (3,322 ) 360 (1,022.8 %) (1,292 ) (415 ) 211.3 % Nonoperating (income) expense, net $ (304 ) $ 1,265 (124.0 %) $ 1,371 $ 1,538 (10.9 %) Nonoperating expense, net for the six months ended September 30, 2024 is composed primarily of a $3,197 gain recorded related to the partial extinguishment of the Notes during the first quarter of fiscal year 2025. The gain represents the difference between the fair value and the carrying value of the Notes and any unamortized debt issuance costs at the time of settlement. The gain on the extinguishment was offset by the combination of interest expense and debt issuance costs, and gains and losses on foreign currency transactions. We incurred significantly more interest expense during the three and six months ended September 30, 2024 versus the comparable prior year period as we re-financed our Credit Facility during the first quarter of fiscal year 2025 in order to repurchase a portion of the Notes. We had $107,953 outstanding under our Credit Facility as of September 30, 2024, net of discounts on the Term Loan, and $0 outstanding under our Credit Facility as of September 30, 2023. The interest rate on our Credit Facility is variable, but was approximately 7.0 percentage points higher than the fixed-rate interest on the Notes during the first half of fiscal year 2025. During the third quarter of fiscal year, Mesa issued an intercompany loan denominated in USD to our wholly owned subsidiary, Mesa Germany GmbH, to purchase GKE. Nonoperating income increased for the three and six months ended September 30, 2024 as we recorded net unrealized gains on foreign currency resulting from the weakening of the USD against the euro. Income Taxes Three Months Ended September 30, Total Six Months Ended September 30, Total 2024 2023 Change 2024 2023 Change Income tax expense (benefit) $ 384 $ (95 ) (505.3 %) $ 901 $ (483 ) (286.7 %) Effective tax rate 10.1 % 7.2 % 2.9 pt 11.7 % 21.4 % (9.7 pt) Our effective income tax rate was 10.1% for the three months ended September 30, 2024 and 7.2% for the three months ended September 30, 2023. Our effective income tax rate was 11.7% for the six months ended September 30, 2024 and 21.4% for the six months ended September 30, 2023. The change in the effective tax rate for both the three and six months ended September 30, 2024 compared to the prior year periods is primary due to the valuation allowance established on the US deferred taxes during fiscal year 2024. The effective tax rate for both the three and the six months ended September 30, 2024 differed from the statutory federal rate of 21% primarily due to the valuation allowance established on the US deferred taxes during fiscal year 2024. Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly. Net Income Net income varies with changes in revenues, gross profit, and operating expense (and included $8,611, $6,765 and $2,922 of non-cash: amortization of intangible assets acquired in business combinations, stock-based compensation expense, and depreciation expense, respectively, for the six months ended September 30, 2024). Market-Based Awards The performance-based restricted stock awards granted during fiscal year 2025 and fiscal year 2024 included a market-based component. Liquidity and Capital Resources Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, cash available from our Credit Facility and Open Market Sale Agreement SM , working capital, and potential additional equity and debt offerings. We believe that cash flows from operating activities and potential cash provided by borrowings from our Credit Facility or funds from our Open Market Sale Agreement SM , when necessary, will be sufficient to meet our ongoing operating requirements, scheduled interest payments on debt, dividend payments, and anticipated capital expenditures. Our more significant uses of resources have historically included acquisitions, payments of debt and interest obligations, long-term capital expenditures, and quarterly dividends to shareholders. During fiscal year 2024, we acquired GKE for $87,187, net of cash and financial liabilities acquired and inclusive of working capital adjustments. We expect to pay a holdback of approximately $9,700 (at September 30, 2024 exchange rates) from the acquisition in April 2025, pending adjustments for potential indemnification losses. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $(45,252) and $65,040 as of September 30, 2024 and March 31, 2024, respectively. As of September 30, 2024 and March 31, 2024, we had $24,337 and $28,214, respectively, of cash and cash equivalents. Our working capital balance is negative as of September 30, 2024 primarily because of the balance on the Notes is now current, due August 15, 2025, which is within 12 months of September 30, 2024. See further discussion below. Page 19 Table of Contents During the first quarter of fiscal year 2025, we amended and restated our Credit Facility to: ● Allow proceeds from the Credit Facility to be used to redeem some or all of the Notes. ● Add the $75,000 senior secured Term Loan. ● Extend the maturity of the Credit Facility to April 2029. ● Make certain changes to the financial covenants. Under the revised Credit Facility, we maintain access to our Revolver, allowing access to up to $125,000 of borrowings. During the three months ended December 31, 2023, we borrowed a total of $71,000 under the Revolver to fund the majority of the acquisition of GKE. As of September 30, 2024, $35,500 remained outstanding under the Revolver. During October 2024, we repaid $4,500 on our Revolver. We used the $75,000 proceeds from borrowings under the Term Loan to enter into a separate, privately negotiated purchase agreements with a limited number of holders of our Notes. Pursuant to the purchase agreements, we purchased $75,000 aggregate principal amount of the Notes for an aggregate cash purchase price of approximately $71,250. Following these transactions, $97,500 aggregate principal amount of the Notes remains outstanding and is now classified as current on our condensed consolidated balance sheets. At the interest rate effective through October 30, 2024, within the next twelve months we expect to incur cash interest expense of approximately $7,300 (adjusted for required future principal payments) on undiscounted borrowings of $104,125 related to the Credit Facility as of the date of this filing. We have $97,500 due on the Notes in August 2025. Together with the current portion of our Term Loan, the cash needed for principal debt payments is $101,250 within the next 12 months. We plan use cash on hand, draws against our Revolver, which has $94,000 available as of the date of this filing, and cash generated from operating activities over the next three quarters to fund the amount due. In April 2022, we entered into an Open Market Sale Agreement SM pursuant to which we may issue and sell, from time to time, shares of our common stock with an aggregate value of up to $150,000. We have not sold any shares under this agreement. We routinely evaluate opportunities for strategic acquisitions. Future material acquisitions may require that we obtain additional capital, assume additional third-party debt or incur other long-term obligations. We believe that we have the ability to issue more equity or debt in the future in order to finance our acquisition and investment activities; however, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. We may from time to time repurchase or take other steps to reduce our debt. These actions may include retirements or refinancing of outstanding debt through tender offers, privately negotiated transactions, or otherwise. The amount of debt that may be retired, if any, could be material. Retirement would be decided at the sole discretion of our Board of Directors and would depend on market conditions, our cash position, and other considerations. Dividends We have paid regular quarterly dividends since 2003. We paid dividends of $0.16 per share during the three months ended September 30, 2024, as well as each quarter of fiscal years 2025 and 2024. In October 2024, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on December 16, 2024, to shareholders of record at the close of business on November 29, 2024. Goodwill and Intangible Assets We perform analyses at least quarterly to identify potential impairment indicators and to assess whether it is more likely than not that our goodwill reporting units are impaired. We have determined our goodwill reporting units are not impaired as of September 30, 2024; however, impairment losses recorded in the prior fiscal year resulted in a 0% cushion between the fair and carrying values of our Clinical Genomics division and the Immunoassays reporting unit within our Biopharmaceutical Development division as of our most recent annual impairment testing date on January 1, 2024. Revenues related to our Biopharmaceutical Development division were higher than our impairment model indicated; however, our Clinical Genomics reporting unit remains susceptible to future impairment losses if actual results differ significantly from the assumptions used in our most recent impairment tests. While revenues in our Clinical Genomics division have declined somewhat from fiscal year 2024 levels, we deployed cost saving measures late in fiscal year 2024, primarily a reduction in force, and as a result, we believe that our operating cash flows for fiscal year 2025 for Clinical Genomics will approximate the levels used in our recent impairment model. At our last testing date, the fair value of the applicable reporting units was assessed by weighting Gordon Growth and Exit Multiple discounted cash flow models and guideline public company models (one-year forward multiples), relying on unobservable Level 3 inputs, including but not limited to discount rates, expected useful lives, applicable competitors, and anticipated revenues growth and margins. Inputs were established through discussions between management and external valuation specialists, and were based on internal expectations for future performance, market indicators, and reputable valuation research resources. These assumptions required inputs and estimates that are subject to uncertainty such that there is a reasonable possibility that further impairment losses, which could be material to our consolidated financial statements, may occur in the future. Cash Flows Our cash flows from operating, investing, and financing activities were as follows (in thousands): Six Months Ended September 30, 2024 2023 Net cash provided by operating activities $ 15,704 $ 19,715 Net cash (used in) investing activities (2,679 ) (904 ) Net cash (used in) financing activities (17,719 ) (15,079 ) Page 20 Table of Contents Cash flows from operating activities for the six months ended September 30, 2024 provided $15,704, a decrease of $4,011 versus the comparable prior year period. The decrease in cash flows from operating activities for the six months ended September 30, 2024 compared to September 30, 2023 was primarily a result of: ● lower cash collected on accounts receivable, ● higher payments made for income taxes, ● approximately $3,900 more paid for interest as we had more debt outstanding at higher rates; partially offset by ● cash provided by improved operating performance, primarily due to an increase in revenues of $12,193. Cash used in investing activities for the six months ended September 30, 2024 increased compared to the six months ended September 30, 2023 primarily due to spending on property, plant and equipment, including for our new leased facility in Sweden. Cash used in financing activities resulted in a $17,719 use of cash for the six months ended September 30, 2024. Net proceeds from borrowings under the Term Loan in the first quarter of fiscal year 2025 were almost fully offset by payments made to repurchase the Notes. We used $15,000 of cash to repay the Revolver and $1,875 to pay down the Term Loan in the six months ended September 30, 2024, compared to $13,000 to pay down the Revolver in the comparable prior year period. Contractual Obligations and Other Commercial Commitments We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of our contractual obligations and other commercial commitments as of March 31, 2024, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, filed with the Securities and Exchange Commission on June 28, 2024. On a consolidated basis, as of September 30, 2024, we had contractual obligations for open purchase orders of approximately $18,030 for routine purchases of supplies and inventory, the majority of which are payable in less than one year. As part of the GKE acquisition, we have agreed to pay the GKE sellers approximately $9,700 (at September 30, 2024 exchange rates) of the acquisition price in April 2025, pending adjustments for potential indemnification losses that may arise. As part of the Belyntic acquisition, we agreed to pay $1,500 to the sellers if specified patents related to the technology purchased are issued. The estimated fair value of the probable remaining contingent consideration was $650 as of September 30, 2024 . See "Liquidity and Capital Resources" for information related to future required debt payments. Critical Accounting Policies and Estimates Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstances. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 2024, in the Critical Accounting Policies and Estimates section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . Although we believe that our estimates, assumptions, and judgements are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. Non-GAAP Measures In addition to the financial measures prepared in accordance with generally accepted accounting principles, we present organic revenues growth (reported revenues growth excluding revenues from recent acquisitions), as a supplemental non-GAAP financial measure. We believe that presenting supplemental organic revenues growth facilitates comparability between current period and prior period information, and provides insight into Mesa’s short-term and long-term financial trends. We use organic revenue growth internally to forecast and evaluate Mesa’s operating performance and to compare revenues of current periods to prior periods, for financial and operating decision-making and for compensation purposes. A reconciliation of organic revenues growth to total revenues growth is as follows: Total Revenues Growth Impact of Acquisitions Organic Revenues Growth (non-GAAP) Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30, 2024 2023 2024 2023 2024 2023 Sterilization and Disinfection Control 30.0 % 0.7 % (34.3 %) - % (4.3 %) 0.7 % Clinical Genomics (26.0 %) (15.7 %) - % - % (26.0 %) (15.7 %) Biopharmaceutical Development 28.9 % (24.2 %) - % (0.2 %) 28.9 % (24.4 %) Calibration Solutions 8.2 % 1.1 % - % - % 8.2 % 1.1 % Total Company 8.8 % (9.5 %) (11.0 %) (0.1 %) (2.2 %) (9.6 %) Total Revenues Growth Impact of Acquisitions Organic Revenues Growth (non-GAAP) Six Months Ended September 30, Six Months Ended September 30, Six Months Ended September 30, 2024 2023 2024 2023 2024 2023 Sterilization and Disinfection Control 36.8 % 4.0 % (36.7 %) - % 0.1 % 4.0 % Clinical Genomics (20.8 %) (12.2 %) - % - % (20.8 %) (12.2 %) Biopharmaceutical Development 25.0 % (17.4 %) - % (0.4 %) 25.0 % (17.8 %) Calibration Solutions 5.6 % 6.4 % - % - % 5.6 % 6.4 % Total Company 11.7 % (4.9 %) (11.6 %) (0.1 %) 0.1 % (5.0 %) Page 21 Table of Contents I tem 3. Quantitative and Qualitative Disclosures a bout Market Risk Foreign Currency Exchange Rates We face exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than the functional currency of the applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into USD, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into USD using average exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the USD. Our Biopharmaceutical Development division is particularly susceptible to currency exposures since it incurs a substantial portion of its expenses in Swedish Krona, while most of the division's revenue contracts are in USD and euros. Therefore, when the Swedish Krona strengthens or weakens against the USD, operating profits are increased or decreased, respectively. As we continue to consummate acquisitions of companies with foreign operations or with functional currencies other than the USD, our foreign currency exchange rate risk will increase. The effect of a change in currency exchange rates on our international subsidiaries' assets and liabilities is reflected in the accumulated other comprehensive income component of stockholders’ equity. Interest Rates Our Credit Facility bears interest at either a base rate or a SOFR rate plus an applicable spread. Based on the balance outstanding as of the date of this filing and required future principal payments, we estimate that if interest rates increased 1 percentage point, we would incur approximately $920 of additional cash interest expense per year. Inflation Risk Inflation generally impacts us by increasing our costs of labor, materials, and freight. The rates of inflation experienced in recent years have not had a significant impact on our financial statements as inflationary cost increases have been offset by annual price increases. However, any price increases imposed may lead to declines in sales volume if competitors do not similarly adjust prices. We cannot reasonably estimate our ability to successfully recover any impact of inflation cost increases into the future. Other We have no derivative instruments. We have minimal exposure to commodity market risks.