Part I. Financial Information

Item 1. Financial Statements

Mesa Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(dollars in thousands, except share amounts)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of OperationsIncome

(unaudited)

(in thousands, except per share data)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

(in thousands) 

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands, except per share data)

*Accumulated Other Comprehensive Income (Loss).

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

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

Description of Business

In this quarterly report on Form 10-Q, Mesa Laboratories, Inc., a Colorado corporation, together with its subsidiaries is collectively referred to as “we,” “us,” “our,” the “Company” or “Mesa Labs.“Mesa.”

We are a multinational manufacturer, developer, and seller of life science tools and critical quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in North Americathe United States and Europe, and our products are marketed by our sales personnel in North America, Europe, China, Japan,and Asia, 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 margins.

As of December 31, 2020September 30, 2021, we managed our operations in 4four reportable segments, or divisions. Our Sterilization and Disinfection Control division manufactures and sells biological, cleaning, and chemical indicators which are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Our Instruments division designs, manufactures, and markets quality control hardware and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. During the year ended March 31, 2020, we added a new reportable segment: Biopharmaceutical Development as a result of our acquisition of Gyros Protein Technologies Holding AB ("GPT" or the "GPT acquisition"), which is discussed further in Note 12. "Significant Transactions". Our Biopharmaceutical Development division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacturing of biotherapeutic drugs. Our Instruments division designs, manufactures, and markets quality control hardware and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. Our Continuous Monitoring division designs, develops, and markets systems which are used to monitor various environmental parameters such as temperature, humidity, and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers,manufacturing facilities, blood banks, pharmacies, and laboratory environments. Non-reportable operating segments (including our Cold Chain Packaging division which ceased operations during the year ended March 31, 2020) and unallocated corporate expenses are reported within Corporate and Other.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of results that may be achieved for the entire year. The year-end condensed consolidated balance sheetCondensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended March 31, 20202021.

Certain prior year amounts have been reclassified in order to conform to the current year presentation.

Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year, references to the first quarter of fiscal year 2022 refer to the period from April 1, 2021 through June 30, 2021, and references to the second quarter of fiscal year 2022 refer to the period from July 1, 2021 through September 30, 2021. References to “fiscal year 2021” refer to the fiscal year ended March 31, 2021, and to “fiscal year 2022” refer to the fiscal year ending March 31, 2022.

Risks and Uncertainties

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and revenues and expenses during the reporting periods. These estimates represent management's judgement about the outcome of future events. The current global business environment continues to be impacted directly and indirectly by the effects of the novel coronavirus ("COVID-19"), and its variations, and it is not possible to accurately predict the future impact of COVID-19. However, we have reviewed the estimates used in preparing the financial statements and have identified the following factors that have a reasonable possibility of being materially affected by the impacts of COVID-19 during the near term: 

Immaterial Error Correction

During the three months ended September 30, 2020, we identified an immaterial error in the design of our Enterprise Resource Planning tool that resulted in a system failure to eliminate intercompany cost of revenues for certain types of transactions. The error resulted in an overstatement of cost of goods sold and an understatement in gross profit for the Continuous Monitoring, Instruments, and Sterilization and Disinfection Control divisions. The issue began during the three months ended June 30, 2019; we have determined that no financial statement prior to April 1, 2019 was misstated as a result of the previously uneliminated balances in cost of revenues. 

In accordance with Staff Accounting Bulletin ("SAB") No.99Materiality, and SAB No.108Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, we evaluated the error quantitatively and qualitatively and determined that the related impact was not material to our financial statements for any prior annual or interim period, but that correcting the cumulative impact of the error would be significant to our results of operations for the three months ended September 30, 2020. In considering the quantitative and qualitative materiality, we concluded that the impact of the error correction is not material in absolute dollar amount especially since our most recent fiscal year results included various new non-cash charges that reduced net income below historical levels. Accordingly, we have revised previously reported financial information for the immaterial error.

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

Recently Issued Accounting Pronouncements

We have reviewed all recently issued accounting pronouncements and have concluded that they are either not applicable to us or are not expected to have a significant impact on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

In August 2020,the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging Accounting for Convertible Instruments and Contracts in an Entity's Own Equity("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of both liabilities and equity, such as our convertible senior notes, due 2025.2025 (the "Notes"). ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted but no earlier thanat the beginning of any fiscal years beginningyear after December 15, 2020. The update permits the use of either the modified retrospective or fullyfull retrospective method of transition.

We intend to adopt theearly adopted ASU2020-06 effective April 1, 2021 but are still evaluating the methodon a modified retrospective basis, and our adoption of this standard had a material effect on our consolidated financial statements. Upon adoption, we derecognized the $22,735 equity conversion feature, net of taxes, that was recorded to common stock, and we derecognized the deferred tax liability of $5,747. We recorded an increase of $22,799 in aggregate to the Note balance as a result of the reversal of the separation of the debt and equity components of the convertible debt. The net effect of these adjustments, which represents $5,683 of historical non-cash interest expense, net of taxes, was recorded as an increase in the balance of beginning retained earnings as of April 1, 2021. The adoption of this standard will utilize. We are continuingsignificantly decrease the amount of non-cash interest expense recognized in future periods as a result of eliminating the discount associated with the equity component. Our statements of cash flows reflect the lower non-cash interest expense in effect after the adoption of ASU 2020-06.

In each period in which the Notes have been outstanding, we have always intended to evaluatesettle the financialNotes in shares of common stock rather than in cash, and therefore, we have applied the if-converted method to calculate the potentially dilutive impact of the Notes on earnings per share. In each reporting period, we have determined that the Notes were antidilutive. Due to decreases in non-cash interest expense that will result from the adoption of ASU 2020-06, on our financial statements but anticipate that subsequent to adoption,it is likely the equity conversion featureNotes will be categorized ashave a liability and there will be a reductiondilutive effect in non-cash interest expense related to the 1.375% convertible senior notes due August 15, 2025 (the "Notes"). Non-cash interest on the equity conversion feature has contributed $3,510 to expense during the nine months ended December 31, 2020, future periods, which would not have been incurred under ASU 2020-06, which we will adopt as of April 1, 2021.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No.2016-13,Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as modified by ASU No.2018-19,Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The ASU was effective for public business entities for fiscal years beginning after December 15, 2019, with early adoption permitted. On April 1, 2020, we adopted the ASU using the modified retrospective transition method. We recorded a net decrease to beginning retainedour diluted earnings of $9 as of April 1, 2020 due to the cumulative effect of adopting Topic 326's requirement to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on our trade receivables. As a result of the adoption of the ASU, our allowance for doubtful accounts as of December 31, 2020 reflects our best estimate of the expected future losses for our accounts receivable based on current economic conditions. We have accounted for the macroeconomic impact of the COVID-19 pandemic in our estimates, but due to the unprecedented nature of the impact of the pandemic, our estimates may change and future actual losses may differ from current estimates. We will continue to monitor economic conditions and will revise our estimate of expected future losses for accounts receivable as necessary.  

We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable was developed using historical collection experience, current and expected future economic and market conditions and a review of the current status of customers’ trade accounts receivables. Customers are pooled based on shared specific risk factors. Due to the short-term nature of trade receivables, the estimated accounts receivable that may not be collected is based on the aging of accounts receivable balances.

Customers are assessed for credit worthiness upfront through a credit review. We evaluate contract terms and conditions, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers with a higher probability of default. We monitor changes to the receivables balance on timely basis, and balances are written off as they are determined to be uncollectable after all collection efforts have been exhausted. Estimates of potential credit losses are used to determine the allowance based on assessment of anticipated payment and all other historical, current and future information reasonably available.per share. 

Note 2. Revenue Recognition

We design, manufacture, market, sell, and maintain quality control instruments and software, consumables, and services driven primarily by the regulatory requirements of niche markets. Our consumables, such as biological indicator test strips are typically used on a standalone basis; however, some such consumables used in protein synthesisSales of hardware and calibration solutions are also critical to the ongoing use of our instruments. Hardware and software, sales, such as medical meters, protein synthesizers, wireless sensor systems, and data loggers, are generally driven by our acquisition of new customers, growth of existing customers, or customers' replacement ofcustomers replacing existing equipment. Hardware sales may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function. Our Biopharmaceutical Development Division designs, manufactures, markets, and sells instruments, such as protein synthesizers that are used to process immunoassay samples, and related software designed to enhance productivity; consumable chemical solutions designed for use in testing; andWe also offer on-demand and long-termannual service contracts to support customers' use of theour equipment. The division generates revenue from the same general categoriesOur consumables, such as those we have identified for the restbiological indicator test strips, are typically used on a standalone basis; however, some of our businesschemical solutions, such as protein synthesis and recognizes revenue consistently withcalibration solutions, are critical to the ongoing use of our policies.instruments. Consumables are typically used on a one-time basis and require frequent replacement in our customers' operating cycles. We evaluate our revenues internally by product line,based on operating segment, the timing of revenue generation, and the nature of goods and services provided. Typically, discrete revenue is recognized at the shipping point or upon completion of the service, while contracted revenue is recognized over a period of time reflective of the performance obligation period in the applicable contract. Consumables are typically single use items requiring frequent replacement in our customers' operating cycles. Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

The following tables present disaggregated revenues for the three and ninesix months ended December 31, 2020September 30, 2021 and three and nine months ended December 31, 20192020, respectively:

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

No foreign country exceeds 10% of total revenues.

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, which are included within other accrued expenses and unearned revenues in the accompanying Condensed Consolidated Balance Sheets. Contract assets would exist when sales are recorded (i.e. the control of the goods or services has been transferred to the customer), but customer payment is contingent on a future event besides the passage of time (such as satisfaction of additional performance obligations). We dodid not have any contract assets. assets as of September 30, 2021 or March 31, 2021. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.

A summary of contract liabilities is as follows:

Note 3. Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable, and trade accounts payable approximate fair value. We measure our cash equivalents at fair value using quoted market prices in an active market, and we classify them within Level 1 of the fair value hierarchy, and we value them using quoted market prices in an active market.  As of December 31, 2020 and March 31, 2020, cashhierarchy. Cash and cash equivalents on our Condensed Consolidated Balance Sheets included $222,819$240,822 and $66,735, respectively,$230,822 in a money market account. The increase in the balance in our money market account is primarily a resultas of our public offering of common stock described in further detail in Note 8.September 30, 2021 "Stockholders' Equity". and March 31, 2021, respectively.

During thefiscal year ended March 31, 2020,, we issued $172,500 aggregate principal of 1.375% convertible senior notes due August 15, 2025. We estimate the fair value of the Notes based on Level 2 inputs of the last actively traded price or market observable input before the end of the reporting period. The estimated fair value and carrying value of the Notes are as follows:

The carrying value of the Notes areincreased as a result of the adoption of ASU 2020-06, discussed in more detailfurther in Note 7.1. "Description of Business and Summary of Significant Accounting Policies" and Note 6. "Indebtedness." 

Assets recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill, and other intangible assets, including those that were part of the GPT Acquisition.assets. These assets are measured at fair value if determined to be impaired. The fair values assigned to the assets and liabilities acquired in the GPT Acquisition were measured using Level 3 inputs, as discussed further in Note 12. "Significant Transactions." There were no transfers between the levels of the fair value hierarchy during the ninethree and six months ended December 31, 2020September 30, 2021 or the ninethree and six months ended December 31, 2019September 30, 2020.

Cash and cash equivalents and accounts receivables are the financial instruments that subject us to the highest concentration of credit risk. It is our policy to invest cash equivalents in highly liquid cash equivalent financial instruments with high credit ratings, and low exposure to anymaintain low single issuer exposure (except U.S. treasuries). Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. We reserve an allowance for potential write-offs of accounts receivable using historical collection experience and current and expected future economic and market conditions, but we have not written off any significant accounts to date. To controlmanage credit risk, we perform regular credit evaluationsconsider the creditworthiness of our customers’ financial condition. new and existing customers, and we regularly review outstanding balances and payment histories. We may require pre-payments from customers under certain circumstances and may limit future purchases until payments are made on past due amounts.

Note 4. Inventories, Net

Inventories consist of the following:

The remaining balance of the adjustment to step upRaw materials inventory to fair value as part of the GPT Acquisition, which was included in finished goods, was $0 and $2,901, respectively,higher as of December 31, 2020September 30, 2021 andcompared to March 31, 20202021, ; see Noteprimarily because we ordered higher than usual quantities of some components during the 12.second "Significant Transactions."quarter of fiscal year 2022 to mitigate supply chain risks. 

Note 5. Goodwill and Intangible Assets, Net

Finite-lived intangible assets consist of the following:

The increase in the carrying amount of intangible assets was attributable to changes in foreign currency and adjustments to the preliminary purchase price of GPT that are discussed further in Note 12. "Significant Transactions". Amortization expense for finite-lived intangible assets acquired in a business combination was $3,828$3,757 and $10,694$7,573 for the three and ninesix months ended December 31, 2020September 30, 2021, respectively, and $2,565$3,512 and $5,895$6,866 for the three and ninesix months ended December 31, 2019September 30, 2020, respectively. The increase in amortization expense was attributable to intangible assets acquired as part ofDuring the GPT acquisition, including a cumulative effect true up recorded during the three monthsquarter ended June 30, 2020, as we made adjustmentsreduced the value of our intangible assets due to a purchase accounting, see Note 12. "Significant Transactions."price adjustment that resulted in a cumulative effect net decrease to amortization expense of $334. 

TheFor the following is estimated amortization expense for thefiscal years ending March 31:31, amortization expense is estimated as follows:

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

Note 6.6 Supplemental Balance Sheets Information. Indebtedness

Accrued payrollCredit Facility

On March 5, 2021, we entered into a four-year senior secured credit agreement that includes 1) a revolving credit facility in an aggregate principal amount of up to $75,000, 2) a swingline loan in an aggregate principal amount not exceeding $5,000, and benefits consist3) letters of credit in an aggregate stated amount not exceeding $2,500 at any time. 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 (together, the available facilities are referred to as the "Credit Facility").

The Credit Facility bears interest at either a base rate or a Eurodollar rate, plus an applicable spread. The balance of unamortized customary lender fees was $567 and $650 as of September 30, 2021 and March 31, 2021, respectively. On our Consolidated Balance Sheets, the short term portion is recorded within prepaid expenses and other, and the long term portion is recorded in other assets. The fees are being expensed on a straight line basis over the life of the following:agreement. 

The most restrictive financial covenants include a maximum leverage ratio of 5.50 to 1.00 for the firstfour testing dates on which the line of credit is outstanding; 5.0 to 1.0 on each of the fifth, sixth, seventh, and eighth testing dates; and 4.5 to 1.0 on each testing date following the eighth testing date, 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. 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 September 30, 2021, we were in compliance with all required covenants.

Other accrued expenses consistAs of and throughout the three and six months ended September 30, 2021, we had 0 outstanding balance under the Credit Facility. On October 18, 2021, we drew $70,000 under our line of credit to provide a portion of the following:cash needed to complete the acquisition of Agena Biosciences, Inc. ("Agena") as further discussed in Note 11. "Significant Transactions." 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. Since the Credit Facility's inception, the rate applied to our unused commitment fees has been 0.15%. We incurred unused commitment fees of $28 and $57 during the three and six months ended September 30, 2021, respectively, and $0 and $0 during the three and six months ended September 30, 2020, respectively.

Note 7. Indebtedness

Convertible Notes 

On August 12, 2019, we issued an aggregate principal amount of $172,500 of convertible senior notes (the "Notes").notes. The Notes mature on August 15, 2025, unless earlier repurchased or converted, and bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 each year beginning on February 15, 2020. The Notes are initially convertible at a conversion rate of 3.5273 shares of the common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $283.50 per share of common stock. Noteholders may convert their Notes at their option only in the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ended on December 31,2019 (and only during such calendar quarter), if the last reported sale price per share of  our common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (ii) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; (iii) upon the occurrence of certain corporate events or distributions on our common stock, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the Notes) or a transaction resulting in the Company’s common stock converting into other securities or property or assets; and (iv)