MESA LABORATORIES INC CO

Mesa**** Laboratories, Inc.**

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Note*1***.Description of Business andSummary ofSignificantAccounting Policies**

Description of Business

In this quarterly report on Form10-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 infour reportable segments, or divisions:

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 arenot necessarily indicative of results that* maybe achieved for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but doesnot* 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 madeno material changes to the application of our significant accounting policies disclosed in our annual report on Form10-K. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form10-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 havenot resulted in any changes to consolidated or segment amounts reported in the Consolidated Financial Statements for any periods presented in this Form10-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 isnot 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 (Topic280*): Improvements to Reportable Segment Disclosures." ASUNo. 2023-07 requires all annual disclosures currently required by Topic280 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 year2025*), with early adoption permitted. We are currently assessing the effect the adoption of this standard will have on our financial statements.

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In* December 2023,the FASB issued ASUNo.* 2023-09, "Income Taxes (Topic740): Improvements to Income Tax Disclosures." ASUNo. 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 year2026*), 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 eithernot applicable to us or arenot 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 regulatory510*(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 thefourth quarter of fiscal year2024. Of the total acquisition price approximately $9,500, will be held back for a period of18 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 Note7. "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 Level3 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* mayfurther revise the preliminary purchase price allocation as soon as is practical, but willnot* do so more thanone year from the acquisition date. Only items identified as of the acquisition date are considered for subsequent adjustment. Any such revisions or changes* maybe material. The final valuation mayinclude, 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:

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Acquisition related costs, such as legal and advisory fees, and integration related costs of $770 and $1,275 for thethree andnine months ended* December 31, 2023,respectively, arenot* 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 thethree andnine 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 thethree 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 couldnot 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 Note11.* "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 year2023**, we prepared an analysis of the valuation of net assets acquired in the Belyntic acquisition. During thenine 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.*

Note3. 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 aone-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 are12 months or less in duration.

The following tables present disaggregated revenues for thethree andnine months ended* December 31, 2023* and* December**31,* 2022, respectively:

(1) Revenues from GKE GmbH and SAL GmbH are included in the Sterilization and Disinfection Control division beginning upon acquisition on October 16, 2023.

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(1) Revenues from GKE GmbH and SAL GmbH are included in the Sterilization and Disinfection Control division beginning upon acquisition on* October 16, 2023.*

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:

Other than China,no foreign country exceeded10% of total revenues for thethree andnine months ended* December 31, 2023* and2022.

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 primarily relate to service contracts with original expected service durations of12 months or less and will be recognized to revenue as our performance obligations are satisfied.

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Note4. 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 Level1 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 than10% 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 Level2* 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:

The Belyntic acquisition obligates us to pay contingent consideration of up to $1,500 cash upon regulatory approval of certain patent applications (see Note11. "Commitments and Contingencies"). We estimate the fair value of the remaining contingent consideration using Level3 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 recordedno impairments during thethree andnine months ended* December 31, 2023* or2022. Fair values of such assets and liabilities require measurement using Level3 inputs.

There wereno transfers between the levels of the fair value hierarchy during thethree andnine months ended* December 31, 2023* or2022.

Note5. Supplemental Balance Sheets Information

Inventories consisted of the following:

Prepaid expenses and other current assets consisted of the following:

Accrued payroll and benefits consisted of the following:

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Other accrued expenses consisted of the following:

Note6. Goodwill and Intangible Assets, Net

Intangible assets, the significant majority of which are finite-lived, consisted of the following:

Amortization expense for finite-lived intangible assets acquired in a business combination was as follows:

For the following fiscal years ending* March 31,*amortization expense is estimated as follows:

The change in the carrying amount of goodwill was as follows:

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 ourfour*-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 includes1) a revolving credit facility in an amended aggregate principal amount of up to $125,000,2) a swingline loan in an aggregate principal amountnot exceeding $5,000, and3) letters of credit in an aggregate stated amountnot 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 to1.0 for the period ended* December 31, 2023*, except that we* mayhave a leverage ratio of 5.75 to1.0* for a period offour consecutive quarters following a permitted acquisition, including the permitted GKE acquisition consummated during thethree months ended* December 31, 2023.The Credit Facility also stipulates a minimum fixed charge coverage ratio of 1.25 to1.0.* 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.

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During thethree 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 Note2.* "Significant Transactions" for further information. We paid $9,000 against the Credit Facility during ourthird 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 15and August 15each 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* maybe, cash, shares of our common stock, or a combination of cash and shares of our common stock. The circumstances necessary for conversion werenot* met during thethree andnine 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 didnot exceed the principal balance as of* December 31, 2023*.

The net carrying amount of the Notes was as follows:

We recognized interest expense on the Notes as follows:

The effective interest rate on the Notes is approximately 1.9%.

Note*8***.**** Stockholders' Equity**

Stock-Based Compensation

During thenine 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 Restated2021 Equity Incentive Plan, which authorizes the issuance of660 shares of common stock to eligible participants.

Expense recognized related to stock-based compensation is as follows:

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 thenine months ended* December 31, 2023*:

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The stock options granted during thenine months ended* December 31, 2023* vest in equal installments on the first, second, andthird anniversary of the grant date.

The following is a summary of RSU and PSU award activity for thenine months ended* December 31, 2023*:

Outstanding time-based RSUs vest and settle in shares of our common stock on aone-for-one basis. The majority of the RSUs granted to employees during thenine months ended* December 31, 2023* vest in equal installments on the first, second, andthird anniversary of the grant date. RSUs granted to certain executives during thenine months ended* December 31, 2023vest in equal installments on September 1, 2024,** June 21, 2025and June 21, 2026.RSUs granted to non-employee directors during thenine* months ended* December 31, 2023vestone* 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 thenine 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, 2023through 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 arenot* met, thenno 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, 2023until March 31, 2026.*

Note*9***.**** Earnings PerShare**

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 havenot yet been achieved or if they are antidilutive. Diluted EPS doesnot 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 thethree andnine 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:

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

Note*10***.**** Income Taxes**

For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax income. Each quarter, our estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. 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 thethree andnine months ended* December 31, 2023,respectively, compared to 76.5% and 384.8% for thethree* andnine months ended* December 31, 2022,respectively. The effective tax rate for thethree* andnine months ended* December 31, 2023differed 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 thethree* andnine months ended* December 31, 2023*compared to the prior periods is primarily due to lower windfall benefits on stock option exercises.

Note*11***.**** Commitments andContingencies**

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 wereno 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 thethree 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 thefourth* quarter of fiscal year2024. We believe it is probable the remaining patents will be issued and we will pay the sellers in full within the next12 months.

As part of the GKE acquisition consummated during thethree months ended* December 31, 2023,we have agreed to pay the GKE sellers approximately $9,500 of the acquisition price approximately18* months following the acquisition date, pending adjustments for potential indemnification losses that* mayarise. The liability is recorded as in Other long-term liabilities in our Condensed Consolidated Balance Sheets as of December 31, 2023.*

Note12**.**** Segment Information**

The following tables set forth our segment information:

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The following table sets forth inventories by reportable segment. Our chief operating decision maker isnot provided with any other segment asset information.

Inventories from GKE total $4,077 as of* December 31, 2023,net of $412 fair value amortization step-up recorded during thethree* months ended* December 31, 2023.*GKE inventories are included in our Sterilization and Disinfection Control division.