MLAB US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands, unless specified)

Overview

We are a multinational manufacturer, developer, and seller of life sciences tools and critical quality control products and services, many of which are sold into niche markets driven by regulatory requirements. 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, as well as by independent distributors in these areas and 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 March 31, 2023, we managed our operations in four reportable segments, or divisions: Clinical Genomics, Sterilization and Disinfection Control, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions are 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 shareholder 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.

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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; however, as a result of high inflation in recent quarters, we implemented an additional mid-year price increase late in the second quarter of fiscal year 2023.

Inorganic Revenues Growth - Acquisitions

During the third quarter of fiscal year 2023, we completed the Belyntic acquisition. We paid $4,950 on the date of acquisition, and we expect to pay an additional $1,500 of contingent consideration based on the probable approval of pending patent applications expected within 36 months of the acquisition date. The acquisition provided a natural complement to our peptide synthesis business by adding a consumables product line.

During the third quarter of fiscal year 2022, we completed the acquisition of Agena for an aggregate net purchase price of $300,793. Agena is a leading clinical genomics tools company that develops, manufactures, and sells highly sensitive, low-cost, high-throughput genetic analysis tools used by clinical labs to perform genomic clinical testing in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics and oncology related applications. The acquisition of Agena accelerated our strategic trajectory towards higher growth applications within the regulated segments of the life sciences tools market.

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, globalize our company, and increase the scale at which we operate, which in turn 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

We maximize value in both 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 a set of 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 the root cause of opportunities and prioritize the biggest opportunities; and Always Learning so that performance continuously improves.

Gross profit is affected by many factors including our product mix, manufacturing efficiencies, costs of products and labor, foreign currency rates, 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 the mix of sales 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. It is our exceptionally talented workforce that works together and uses our lean-based tool set to find ways to continuously improve our products, our services, and ourselves, resulting in long-term value creation for our shareholders.

General Trends

We are a global company, with multinational operations. During our fiscal year 2023, approximately 46% of our revenues were derived from revenues earned outside of the United States. Since Mesa serves a number of industries across a variety of global markets, we may be affected by world-wide, regional, or industry-specific economic or political factors. However, our diversity in industry, geography, and product and service offerings may limit the impact of changes in specific industry trends or local economic changes to a single geographic area on our consolidated operating results. We actively monitor trends affecting industries that we operate in, including monitoring key competitors and customers, as well as staying abreast of changes to local economies and how they may affect our divisions.

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Exchange rates were volatile throughout fiscal year 2023. A weakening or strengthening of foreign currencies against the United States dollar ("USD") increases or decreases our reported revenues, gross profit margins, and operating expenses, and impacts the comparability of our results between periods. Overall, currency exchange rates negatively impacted our reported revenues for fiscal year 2023 compared to fiscal year 2022. Generally, the USD strengthening against major currencies adversely impacts our reported revenues, but to a lesser extent, positively impacts our reported expenses; conversely, the weakening of the U.S. dollar against major currencies positively impacts our reported revenues but negatively impacts our reported expenses. The ultimate impact to gross profit as a percentage of revenue depends on the magnitude of changes in foreign currencies.

Inflation was significant in the regions that we operate in during fiscal year 2023. Current and future inflationary effects may continue to be impacted by a variety of macroeconomic forces, including, but not limited to: supply chain disruptions, government fiscal policies, changes in interest rates, and changing demand for goods and services. Inflationary pressures have affected our business in a number of ways, including increasing the cost of raw materials, labor, and freight, and the rate of interest we pay on borrowings under our Credit Facility. Our actions to mitigate the impact of supply chain disruptions and inflation, including pre-ordering components in higher than usual quantities, sourcing new vendors and increasing prices have been somewhat successful; however, raw materials shortages impacted our Calibrations Solutions division throughout much of fiscal year 2023.

COVID-19 negatively impacted commercial execution in different ways throughout fiscal year 2023, and in some cases, limited sales of Clinical Genomics consumables to existing customers and instruments to new customers. Specifically, we experienced disruptions to our business in China resulting from government mandated shut-downs and restrictions during fiscal year 2023. Although the COVID-19 pandemic has largely subsided as a public health matter, we may experience material adverse impacts to our business as a result of the pandemic's adverse impact on the global economy, in-person collaboration and sales efforts, and our customers’ changed purchasing behaviors and confidence.

During fiscal year 2023, we were notified by Sema4 Holdings Corp. ("Sema4"), a customer of our Clinical Genomics division, that they are exiting the reproductive health screening business, and as a result, they intend to significantly reduce the quantity of orders they place with us in the future. Revenues from sales to Sema4 were approximately $8,200 during the first twelve months of our ownership of Agena and were approximately $4,600 during fiscal year 2023. Following the notice, we evaluated our business operations and enacted several cost-cutting measures in the Clinical Genomics division, including a reduction-in-force, to preserve our financial model. These actions are expected to generate more than $4,000 in future annualized savings.

Results of Operations

Our results of operations and year-over-year changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Consolidated Financial Statements and the notes thereto appearing in Item 8. Financial Statements and Supplementary Data (in thousands, except percent data). Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2022, filed on May 31, 2022, for a comparison of results of operations for the years ended March 31, 2022 and March 31, 2021.

Revenues from our reportable segments increased 19% for fiscal year 2023 as compared to fiscal year 2022. Revenues growth for fiscal year 2023 was primarily attributable to the acquisition of Agena, and to a lesser extent, organic revenues growth of 0.6%.

Gross profit as a percentage of revenues increased two percentage points for fiscal year 2023 as a result of the recognition of a $7,462 non-cash inventory step-up charge, part of purchase accounting for the Agena Acquisition, during fiscal year 2022, partially offset by unfavorable product mix, increased cost of labor, and adverse changes in foreign currency on our reported revenues.

Results by reportable segment are as follows:

Revenues Organic Revenues Growth Gross Profit as a % of Revenues

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Our condensed consolidated results of operations are as follows:

Year Ended March 31, Percentage Change

Reportable Segments

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 labs to perform genomic testing for a broad range of diagnostic and research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, and oncology related applications.

Year Ended March 31, Percentage Change

Gross profit as a % of revenues 52 % 36 % N/A 16 % N/A

Revenues in the Clinical Genomics division represent revenues from October 20, 2021 until March 31, 2023. Clinical Genomics revenues increased 90% for fiscal year 2023 compared to fiscal year 2022 due to a significantly shorter period of ownership of Agena in fiscal year 2022 compared to fiscal year 2023, partially offset by adverse foreign currency exchange rates. We recognized approximately $4,600 in revenues from sales to Sema4 during fiscal year 2023, and we expect a significant reduction of revenues resulting from the loss of Sema4's business in future quarters. However, two of our distribution partners, Guangzhou Darui Biotechnology Co., Ltd. and Jiangsu Simcere Medical Device Co., Ltd., recently received approval from China's National Medical Products Administration for Class III in vitro diagnostics ("IVD") panels. One of these panels addresses hereditary deafness and the other covers pharmacogenetics with the intended use of guiding personal drug therapy. These are the first approved Class III IVD panels in China from our distribution partner program, and we expect some increase in revenues resulting from these programs beginning in fiscal year 2024.

Gross profit percentage for the Clinical Genomics division increased 16 percentage points for fiscal year 2023 compared to fiscal year 2022 primarily due to the amortization of a $7,462 inventory step-up required under the purchasing accounting standards in the third quarter of fiscal year 2022. Excluding the inventory step-up, gross profit as a percentage of revenue decreased seven percentage points as a result of lower revenues due to unfavorable foreign currency impacts and the loss of Sema4, on a partially fixed cost base.

Sterilization and Disinfection Control

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, including steam, gas, hydrogen peroxide, ethylene oxide, radiation, and other processes in the medical device, pharmaceutical, and hospital industries. The division also provides testing and laboratory services, mainly to the dental industry.

Year Ended March 31, Percentage Change

Gross profit as a % of revenues 72 % 74 % 75 % (2 %) (1 %)

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Sterilization and Disinfection Control revenues increased 9% for fiscal year 2023 compared to fiscal year 2022, despite the USD strengthening against the euro which resulted in lower reported revenues derived from sales in Europe. During fiscal year 2023, we added temporary and permanent manufacturing headcount at our Bozeman Montana facility, which enabled us to fulfill approximately $1,800 of customer orders that were backlogged as of March 31, 2022. Fiscal year 2023 also benefited from favorable product mix and, to a lesser extent, price increases.

Sterilization and Disinfection Control's gross profit percentage decreased two percentage points during the year ended March 31, 2023 primarily due to increased labor and benefit costs, including the cost of temporary headcount, inflation in freight expense, and the result of foreign currency negatively impacting our reported revenues.

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.

Year Ended March 31, Percentage Change

Gross profit as a % of revenues 64 % 63 % 62 % 1 % 1 %

Biopharmaceutical Development's revenues increased 4% for fiscal year 2023 compared to fiscal year 2022. The division's increase in reported revenue was a result of increased product adoption and price increases, partially offset by unfavorable changes in foreign currency exchange rates on our reported revenues.

Biopharmaceutical Development's gross profit percentage increased one percentage point during the year ended March 31, 2023 as a result of higher revenues on a partially-fixed cost base, partially offset by unfavorable product mix and foreign currency fluctuations negatively impacting our reported revenues.

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 hospital, medical device manufacturing, pharmaceutical manufacturing, and laboratory environments.

Year Ended March 31, Percentage Change

Gross profit as a % of revenues 54 % 53 % 56 % 1 % (3 %)

Calibration Solutions' revenues decreased 4% for fiscal year 2023 compared to fiscal year 2022, primarily as a result of supply constraints limiting our ability to manufacture ordered quantities of certain products, partially offset by slightly higher service revenues as our service technicians had access to client facilities for substantially all of fiscal year 2023, and the benefit of modest price increases. Production difficulties resulted in longer lead times for customer orders, which negatively impacted the timing of new orders; however, beginning in the fourth quarter of fiscal year 2023, production difficulties abated somewhat and revenues increased modestly compared to each of the first three quarters of fiscal year 2023.

Calibration Solutions' gross profit percentage increased one percentage point during the year ended March 31, 2023 primarily as a result of favorable product mix.

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Corporate and Other

Corporate and Other consists of unallocated corporate expenses and other business activities.

Year Ended March 31, Percentage Change

Revenues $ - $ - $ - N/A N/A

Gross profit as a % of revenues N/A N/A N/A N/A N/A

Operating Expenses

Operating expenses for the year ended March 31, 2023 increased 25% in total compared to the year ended March 31, 2022 primarily as a result of the increased costs of operations resulting from the Agena Acquisition which was consummated about halfway through fiscal year 2022.

Selling

Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels.

Year Ended March 31, Percentage Change

As a percentage of revenues 17 % 15 % 14 % 2 % 1 %

Selling expense increased 32% for the year ended March 31, 2023. Excluding the impact of Agena, selling expense increased 13% for the year ended March 31, 2023, as we continued to execute on our previously-announced plan to invest in sales and marketing resources in order to increase organic revenues growth. We hired several sales employees, resulting in higher labor-related costs. Further, travel-related costs increased as we continued to resume in-person meetings, tradeshows, and sales events. Increases were partially offset by lower commissions and bonus expense.

General and Administrative

Labor costs, non-cash stock-based compensation, and amortization of intangible assets drive the substantial majority of general and administrative expense.

Year Ended March 31, Percentage Change

As a percentage of revenues 33 % 33 % 34 % - % (1 %)

General and administrative expenses increased 20% for the year ended March 31, 2023. Excluding the impact of Agena, general and administrative expenses increased 1% for the year ended March 31, 2023. The increase was a result of higher personnel costs, including increased stock-based compensation expense as we expanded the number of employee participants in the program. Increases to general and administrative costs were partially offset by lower intangible amortization expense as a result of the strengthening of the USD, lower annual bonus accruals based on our financial results for the year ended March 31, 2023, and decreased acquisition and integration-related costs.

Research and Development

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

Year Ended March 31, Percentage Change

As a percentage of revenues 9 % 9 % 8 % - % 1 %

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Research and development expenses for the year ended March 31, 2023 increased 30%. Excluding the impact of Agena, research and development costs for the year ended March 31, 2023 increased 3% primarily as a result of our purchase of in process research and development technology that we are further developing in order to enhance a product offering in our Sterilization and Disinfection Control division, as well as higher personnel costs as we continue enhancing existing products and developing new products and features.

Nonoperating Expense

Year Ended March 31, Percentage Change

Nonoperating expense for fiscal year 2023 is composed primarily of interest expense and amortization of the debt discount associated with the 2025 Notes and the Credit Facility as well as gains and losses on foreign currency transactions. Nonoperating expense was higher in fiscal year 2023 compared to fiscal year 2022 due to interest expense on the Credit Facility, which had an average interest rate of 4.5% during fiscal year 2023 compared with an average interest rate of 1.7% for the periods during which a balance was outstanding during fiscal year 2022, partially offset by net foreign currency gains.

Interest expense and amortization of debt discount was lower for the year ended March 31, 2022 compared to the year ended March 31, 2021 due to our adoption of Accounting Standards Update No. 2020-06, Debt with Conversion and Other Options and Derivatives and HedgingAccounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which resulted in a $4,090 reduction in non-cash interest expense related to the 2025 Notes.

Income Taxes

Year Ended March 31, Percentage Change

Our income tax rate varies based upon many factors, but in general we anticipate that on a go-forward basis, our effective tax rate will be approximately 26%, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees (please see Note 12. “Income Taxes” within Item 8. Financial Statements and Supplementary Data) and purchase price accounting for any future acquisitions. The change in our effective tax rate during the year ended March 31, 2023 is primarily due to being in a net loss position before taxes, a decrease in the provision for limitations under Section 162(m) of the Internal Revenue Code, partially offset by lower tax benefits associated with stock option exercises in fiscal year 2023. Tax benefits and deficiencies associated with share-based payment awards to our employees have caused and, in the future, may cause large fluctuations in our realized effective tax rate based on timing, volume, and nature of stock options exercised under our share-based payment program.

Net Income

Net income for the year ended March 31, 2023 varied with the changes in revenues, gross profit, and operating expenses (including, respectively, $28,821 and $12,538 of non-cash amortization of intangible assets acquired in a business combination, and stock-based compensation expense).

Non-GAAP reconciliation

Adjusted operating income (which excludes the non-cash impact of amortization of intangible assets acquired in a business combination, stock-based compensation and impairment of goodwill and long-lived assets) is used by management as a supplemental performance measure in order to compare current financial performance to historical performance, assess the ability of our assets to generate cash, and evaluate potential acquisitions.

Adjusted operating income should not be considered an alternative to, or more meaningful than, net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance or liquidity.

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The following table sets forth our reconciliation of adjusted operating income, a non-GAAP measure, to operating income:

Year Ended March 31,

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 the Open Market Sale AgreementSM described below, 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 AgreementSM, when necessary, will be sufficient to meet our ongoing short-term and long-term operating requirements, scheduled interest payments on debt, dividend payments, and anticipated capital expenditures. At our option, we may settle the 2025 Notes in shares of our common stock or in cash, or we may re-finance the debt, depending on conditions in the market and the share price of our common stock.

Our more significant uses of resources have historically included acquisitions, payments on debt and interest obligations, long-term capital expenditures, and quarterly dividends to shareholders. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $75,616 and $76,263 on March 31, 2023 and 2022, respectively. We also had $32,910 and $49,346 of cash and cash equivalents as of March 31, 2023 and 2022, respectively.

As of March 31, 2023, $172,500 was outstanding under the 2025 Notes and $13,000 was outstanding under the Credit Facility. In April 2023, we paid an additional $3,000 on our Credit Facility.

We have evaluated our risk from concentration of cash deposits and taken appropriate steps to mitigate such risk. We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss.

In April 2022, we entered into an Open Market Sale AgreementSM 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 did not sell any shares under this agreement during fiscal year 2023.

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, privately negotiated transactions or otherwise. The amount of debt that may be retired, if any, could be material and 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 declared and paid dividends of $0.16 per share each quarter of the years ended March 31, 2023, 2022, and 2021.

In April 2023, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 15, 2023, to shareholders of record at the close of business on May 31, 2023.

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Cash Flows

Our cash flows from operating, investing, and financing activities were as follows:

Year Ended March 31,

Cash flows from operating activities for the year ended March 31, 2023 provided $27,983. The $11,240 decrease in cash flows from operating activities primarily resulted from changes in our working capital accounts including higher purchases of inventories to mitigate potential supply chain issues as well as lower accrued liabilities, particularly bonus, partially offset by non-cash adjustments to net income including higher stock compensation expense and higher depreciation and amortization expense. Net income and non-cash adjustments totaled $45,095 for the year ended March 31, 2023 compared to $46,415 for the year ended March 31, 2022, while cash provided by operating assets and liabilities decreased by $9,920. Cash used in investing activities was lower during the year ended March 31, 2023 compared to the year ended March 31, 2022 due to cash expended on the Agena Acquisition fiscal year 2022, partially offset by the Belyntic Acquisition in fiscal year 2023. Cash used in financing activities primarily resulted from our repayment of $36,000 on our Credit Facility. The fiscal year 2022 draw on our Credit Facility was used to fund a portion of the purchase price of the Agena Acquisition. Our equity raise completed during the year ended March 31, 2021 provided $145,935.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments, and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We believe that the following are the more critical judgment areas in the application of accounting policies that currently affect our financial condition and results of operations. Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While our estimates and assumptions are based on our knowledge of current events and circumstances and actions we may take in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, see Note 1. “Description of Business and Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data.

Purchase Accounting for Acquisitions

We account for all business combinations in which we obtain control over another entity using the acquisition method of accounting, which requires most assets (both tangible and intangible) and liabilities (including any applicable contingent consideration) to be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets less liabilities is recognized as goodwill. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make and monitor assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow. Certain adjustments to the assessed fair values of acquired assets or liabilities made subsequent to the acquisition date but within a one-year measurement period are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded within earnings. We expense all costs as incurred related to an acquisition in selling, general, and administrative expenses.

Results of operations of the acquired company are included in our Consolidated Financial Statements from the date of the acquisition forward. If actual results are not consistent with our assumptions and estimates, or if our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.

Acquired Intangible Assets

Our business acquisitions typically result in the recognition of goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges we may incur.

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Intangible assets with finite lives are amortized over their useful lives using the straight-line method and amortization expense is recorded within cost of products or selling, general and administrative expense in the Consolidated Statements of Income. Impairment assessments are conducted if events or conditions indicate that asset carrying amounts may not be recoverable, including changes in the competitive landscape, any internal decisions to pursue new or different technology strategies, losses of significant customers, or significant changes in the marketplace, including adverse changes in the prices paid for our products or changes in the size of the market for our products. If impairment indicators are present, we determine whether the carrying value of the underlying intangible asset is recoverable through undiscounted estimated future cash flows. If the asset is not found to be recoverable, we estimate the asset's fair value using Level 3 inputs and record an impairment to write down the asset's carrying value to the estimated fair value. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. We continue to believe that our finite lived intangible assets are recoverable as of March 31, 2023.

We test goodwill and indefinite lived intangible assets for impairment on an annual basis during the fourth quarter of each year, or more frequently if events and circumstances indicate it is more likely than not that the fair value of the respective asset is less than its carrying value. Events that would indicate impairment and trigger interim impairment assessments include but are not limited to: current economic and market conditions, including a decline in market capitalization; a significant adverse change in legal factors; business climate or operational performance of the business; and an adverse action or assessment by a regulator. Our impairment tests for indefinite lived intangible assets other than goodwill are generally conducted at the individual asset level. We accounted for the economic uncertainty caused by the macro-economic environment, including rising interest rates and high inflation, when conducting our impairment analyses of goodwill and other indefinite lived intangible assets during the fourth quarter of our year ended March 31, 2023.

Our impairment tests typically begin with optional qualitative assessments to determine whether it is more likely than not that the carrying value of a goodwill reporting unit or other intangible asset exceeds its fair value, as permitted by the accounting guidance. If, after this qualitative assessment, we determine it is more likely than not that the fair value is greater than the carrying amount, no further quantitative testing is necessary. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment measures whether the carrying amount of a reporting unit or indefinite lived intangible asset exceeds its fair value, in which case an impairment charge is recorded to the extent carrying value exceeds fair value. Fair value is determined using an income approach, which relies heavily on Level 3 inputs. In fiscal year 2023, we performed initial qualitative assessments over reporting units associated with our Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions reportable segments. We supplemented our qualitative analysis over Clinical Genomics with a quantitative assessment as described further below. We also performed a quantitative assessment over the Sterilization and Disinfection Control reportable segment due to the length of time elapsed since our last quantitative assessment. Through our testing, we concluded that no impairment exists as of March 31, 2023.

Due to the loss of a significant customer, in the third quarter of fiscal year 2023 we used Level 3 inputs to quantitatively test the recoverability of the Clinical Genomics division’s intangible asset group and to evaluate the division’s goodwill for impairment. After considering all information available to us as of that testing date, we concluded that no impairment was indicated. As of March 31, 2023, our annual qualitative impairment analyses continued to support the conclusion that Clinical Genomics’ goodwill and intangible assets are not impaired; however, we chose to perform a quantitative impairment test in light of the division’s fourth quarter financial performance compared to original forecasts. We will continue to carefully monitor Clinical Genomics’ goodwill and other intangible assets for impairment in future periods. It is reasonably possible that the division’s goodwill, intangibles, or both, may be impaired in the near term. Impairment would result in non-cash charges, which could have a material adverse effect on our financial condition and results of operations.

The total net carrying values of Clinical Genomics’ intangible assets and goodwill potentially subject to future impairment are $140,700 and $135,811, respectively, as of March 31, 2023. The value of finite-lived intangible assets decreases about $15.5 million each year as we record amortization expense, and the value of goodwill and intangible assets may be affected by future events, including changes in our customer or product mix, market conditions, or our operating performance falling short of current forecasts.

Stock-based Compensation

We recognize compensation expense for equity awards over the vesting period based on the fair value of the awards. We use the Black-Scholes valuation model to estimate the fair value of our stock options. The Black-Scholes model requires assumptions to be made regarding our stock price volatility, the expected life of awards, and expected dividend rates. The volatility assumption and the expected life assumptions are based on our historical data. The compensation expense related to performance share awards is based in part on the estimated probability of achieving performance goals associated with particular levels of payout for performance shares. We determine the probability of achievement of future levels of performance by comparing the relevant performance level with our internal estimates of future performance. Those estimates are based on a number of assumptions, and different assumptions may result in different conclusions regarding the probability of achieving future levels of performance relevant to the payout levels for the awards. Had we arrived at different assumptions of stock price volatility or expected lives of our options, or different assumptions regarding the probability of our achieving future levels of performance with respect to performance share awards, our stock-based compensation expense and results of operations could have been different.

Income Taxes

Our provision for income taxes requires the use of estimates in determining the timing and amounts of deductible and taxable items, including impacts on effective tax rates, deferred tax items and valuation allowances based on management’s interpretation and application of complex tax laws and accounting guidance. We establish reserves for uncertain tax positions for material, known tax exposures relating to deductions, transactions and other matters involving uncertainty as to the measurement and recognition of the item. While we believe that our reserves are adequate, issues raised by a tax authority may be finally resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in the current and/or future periods.

Recent Accounting Standards and Pronouncements

For a discussion of the new accounting standards impacting the Company, refer to Note 1. “Description of Business and Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data.

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Contractual Obligations

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, 2022, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the Securities and Exchange Commission on May 31, 2022.

On a consolidated basis, at March 31, 2023, we had contractual obligations for open purchase orders of approximately $17,270 for routine purchases of supplies and inventory, of which the substantial majority are payable in less than one year.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We have no derivative instruments and minimal exposure to commodity market risks.

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 our functional currency or 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 U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Our Biopharmaceutical Development division is particularly susceptible to currency exposures since it incurs a substantial portion of its expenses in Swedish Krona, while most revenue contracts are in U.S. dollars and euros. Therefore, when the Swedish Krona strengthens or weakens against the U.S. dollar, operating profits are increased or decreased, respectively. 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.

To the extent material, we have discussed the impact of the change in foreign currency within Item 7. "Results of Operations." A hypothetical 10 percent increase in currency exchange rates compared to the U.S. dollar (U.S. dollar strengthening) would result in an estimated $875 after tax reduction in net earnings over a one-year period. Actual changes in market prices or rates may differ from hypothetical changes.

Interest Rates

During our year ended March 31, 2021, we entered into the Credit Facility which bears interest at either a base rate or a SOFR rate, plus an applicable spread. Based on our interest rate and balance outstanding as of March 31, 2023, we estimate that if interest rates increased 1 percentage point, we would incur approximately $130 of additional 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.

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Mesa Laboratories, Inc.

Lakewood, Colorado

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Mesa Laboratories, Inc. (the “Company”) as of March 31, 2023 and 2022, the related consolidated statements of income, comprehensive (loss) income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2023 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated May 30, 2023 expressed an adverse opinion thereon.

Basis for Opinion

The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

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Valuation of Goodwill – Clinical Genomics Reporting Unit - Refer to Notes 1 and 6

Critical Audit Matter Description

As discussed in Note 1 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. This requires management to estimate the fair value of the reporting units with goodwill allocated to them. The Company estimates the fair value based on a discounted cash flow method. As of the annual impairment testing date, the Clinical Genomics reporting unit goodwill balance totaled $135.8 million.

Auditing management's goodwill impairment test of the Clinical Genomics reporting unit involved especially subjective judgments due to the significant estimation required in determining the fair value of the reporting unit. In particular, the estimate of the fair value for the reporting unit is sensitive to changes in assumptions such as the discount rate, the long-term growth rate and expected future net cash flows, including projected revenues and operating expenses, which are affected by expectations about future market and economic conditions.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures performed to address this critical audit matter included the following, among others:

Income Taxes – Refer to Notes 1 and 12

Critical Audit Matter Description

The Company’s income tax expense includes U.S., state, local and international income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting basis and the tax basis of existing assets and liabilities. The tax rate used to determine the deferred tax assets and liabilities is based on the enacted tax rate for the year and the manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

We identified management’s calculation of the provision for income taxes as a critical audit matter because of the significant judgments and estimates management makes to determine these amounts. Performing audit procedures to evaluate the reasonableness of management’s interpretation of tax law in various domestic and foreign jurisdictions, and its estimate of the associated provisions and tax charges required a high degree of auditor judgment and increased effort.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures performed to address this critical audit matter included the following, among others:

● We assessed the Company’s income tax provision by:

/s/ Plante & Moran, PLLC

We have served as the Company’s auditor since 1986.

Denver, Colorado

May 30, 2023

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Mesa Laboratories, Inc.

Adverse Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting as of March 31, 2023 of Mesa Laboratories, Inc. (the “Company”), based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). In our opinion, because of the effect of the material weaknesses described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2023, based on criteria established in the COSO framework.

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2023 financial statements, and this report does not affect our report dated May 30, 2023, on those financial statements.

We also have audited the accompanying consolidated balance sheets of the Company as of March 31, 2023 and 2022, the related consolidated statements of income, comprehensive (loss) income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2023, and the related notes (collectively referred to as the “financial statements”), in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our report dated May 30, 2023, expresses an unqualified opinion.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Plante & Moran, PLLC

We have served as the Company’s auditor since 1986.

Denver, Colorado

May 30, 2023

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Mesa Laboratories, Inc.

Consolidated Balance Sheets

(In thousands, except share amounts)

ASSETS

Current assets

Noncurrent assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Noncurrent liabilities

Stockholders’ equity

Accumulated other comprehensive (loss) income (12,795 ) 3,666

Total liabilities and stockholders’ equity $ 661,832 $ 707,369

See accompanying notes to consolidated financial statements.

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Mesa Laboratories, Inc.

Consolidated Statements of Income

(In thousands, except per share data)

Year Ended March 31,

Revenues

Cost of revenues

Operating expenses

Nonoperating expenses

Interest expense and amortization of debt discount 4,770 3,885 8,024

Earnings per share

Weighted-average common shares outstanding

See accompanying notes to consolidated financial statements.

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Mesa Laboratories, Inc.

Consolidated Statements of Comprehensive (Loss) Income

(In thousands except per share data)

Year Ended March 31,

Other comprehensive (loss) income

See accompanying notes to consolidated financial statements.

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Mesa Laboratories, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

Common Stock

Number of Shares Amount Retained Earnings AOCI* Total

Tax withholding on restricted stock units (2,104 ) (517 ) - - (517 )

Stock-based compensation expense - 9,268 - - 9,268

Adoption of accounting standards, net - - (9 ) - (9 )

Tax withholding on restricted stock units (3,278 ) (875 ) - - (875 )

Stock-based compensation expense - 11,391 - - 11,391

Foreign currency translation - - - (12,450 ) (12,450 )

Tax withholding on restricted stock units (4,898 ) (919 ) - - (919 )

Stock-based compensation expense - 12,538 - - 12,538

Foreign currency translation - - - (16,461 ) (16,461 )

*Accumulated Other Comprehensive (Loss) Income.

See accompanying notes to consolidated financial statements.

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Mesa Laboratories, Inc.

Consolidated Statements of Cash Flows

(In thousands)

Year Ended March 31,

Cash flows from operating activities:

Amortization of step-up in inventory basis - 7,462 (436 )

Changes in operating assets and liabilities:

Cash flows from investing activities:

Acquisitions, net of cash acquired (4,950 ) (300,793 ) -

Purchases of property, plant and equipment (4,544 ) (4,432 ) (1,992 )

Cash flows from financing activities:

Proceeds from the issuance of common stock, net - - 145,935

Proceeds from the issuance of debt - 70,000 -

Proceeds from the exercise of stock options 6,997 8,027 4,943

Payments of contingent consideration - (237 ) (304 )

Payment of debt issuance costs - - (664 )

Cash paid for:

Supplemental non-cash activity:

Contingent consideration from acquisitions $ 1,190 $ - $ 490

See accompanying notes to consolidated financial statements.

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Mesa Laboratories, Inc.

Notes to Consolidated Financial Statements

(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 Annual Report on Form 10-K, 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 manufacturer, developer, and seller of life sciences tools and critical quality control products and services, many of which are sold into niche markets driven by regulatory requirements. 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, as well as by independent distributors in these areas and 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 March 31, 2023, we managed our operations in four reportable segments, or divisions:

Unallocated corporate expenses and other business activities are reported within Corporate and Other.

Principles of Consolidation and Basis of Presentation

Our Consolidated Financial Statements are 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 (“GAAP”), and include our accounts and those of our wholly owned subsidiaries after elimination of all intercompany accounts and transactions.

Prior Period Reclassification

During fiscal year 2022 we combined our historical Instruments and Continuous Monitoring reportable segments to create the Calibration Solutions reportable segment. Prior year amounts from fiscal year 2021 have been recast to conform to current year presentation, consistent with our Annual Report on Form 10-K for the year ended March 31, 2022. Our change in financial reporting segments has not resulted in any change to consolidated amounts reported in the Consolidated Financial Statements for any periods presented in this Annual Report on Form 10-K.

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Certain amounts presented in Note 2. "Revenue" in prior periods of fiscal year 2022 and 2023 have been reclassified. Specifically, we reclassified a portion of the Biopharmaceutical Development division's revenues from consumables into revenues from hardware and services. Certain revenues related to Clinical Genomics division have been reclassified out of revenues from hardware and into revenues from consumables. These reclassifications allow for consistency of presentation across divisions and have not resulted in any change to consolidated or segment amounts reported in the Consolidated Financial Statements for any periods presented in this Annual Report on Form 10-K.

Management Estimates

The preparation of our Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our Consolidated Financial Statements and accompanying notes. Actual results could differ from our estimates under different assumptions or conditions.

Summary of Significant Accounting Policies

Foreign Currency

Exchange rate adjustments resulting from foreign currency transactions are recognized in net earnings, whereas effects resulting from the translation of financial statements are reflected as a component of accumulated other comprehensive income within stockholders’ equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. dollar are translated into U.S. dollars at period end exchange rates, and revenue and expense accounts are translated at weighted average period rates.

Fair Value Measurements

Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following input hierarchy:

Level 1: Quoted prices for identical assets or liabilities in active markets.

Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or that can be corroborated with observable market data.

Level 3: Unobservable inputs supported by little or no market activity. Pricing models, discounted cash flow methodologies, and other similar techniques involving significant management judgment or estimation typically require unobservable inputs.

Assets recognized or disclosed at fair value in the Consolidated Financial Statements on a nonrecurring basis are measured at fair value if determined to be impaired or if purchased pursuant to our acquisition of a business, including items such as inventory, property and equipment, operating lease assets, goodwill, and other intangible assets. Fair values assigned to assets acquired and liabilities assumed in acquisitions, except deferred revenues, are measured using Level 3 inputs.

Revenue Recognition

Our revenues come from product sales, which include consumables and hardware; as well as services, which include discrete and ongoing maintenance, calibration, and testing services. Revenues are recognized when or as we satisfy our performance obligations under the terms of a contract, which occurs when control of the promised products or services transfers to our customers. We recognize the amount of consideration we expect to receive in exchange for transferring products or services to our customers (the transaction price) as revenue. For all revenue contracts, prices are fixed at the time of purchase and no price protections or variables are offered. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

We generally recognize revenues as follows:

Product sales:Our performance obligations related to product sales generally consist of the promise to sell tangible goods and integrated software to distributors or end users. Control of these goods is typically transferred upon shipment, at which time our performance obligation is satisfied and revenue is recognized. Purchase orders typically provide evidence of an arrangement for product sales. Products sold include an assurance-type warranty which is accounted for as part of accrued warranty expense.

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Services: We generate service revenues from discrete and ongoing maintenance, calibration, and testing services performed on our physical products. For discrete services, our performance obligation to complete specified work is satisfied and revenue is recognized upon performance of the service. Performance obligations arising from ongoing service contracts in which we promise to stand ready to provide maintenance or other services on an as-needed basis are satisfied by completing any services that are contractually required during the contract period, if requested by the customer, or simply by the passage of time if no services are requested. For ongoing service contracts, revenue is recognized on a straight-line basis over the life of the contract in a faithful depiction of our obligation to provide services over the contract period. Evidence of a service arrangement may be in the form of a formal contract or a purchase order.

Collectability is reasonably assured through our customer review process, and payment is typically due within 60 days or less.

Upon adoption of Accounting Standards Codification 606, we elected the practical expedients to expense commission costs (typically our only significant incremental cost to obtain a contract) as incurred and to account for shipping and handling costs as fulfillment costs. The substantial majority of our contracts have original durations of one year or less, and we have elected not to disclose the expected timing or allocated transaction prices of future performance obligations such as obligations to perform maintenance and repair services. Additionally, we have elected to not assess whether a significant financing component exists when the period between when we perform our performance obligation and when the customer remits payment is one year or less. None of our contracts contained significant financing components as of or for the fiscal years ended March 31, 2023 or 2022.

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. Standalone selling prices are based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price considering available information such as market conditions and internally approved pricing guidelines. In limited circumstances, for obligations with highly variable or unobservable standalone selling prices, we may assign standalone prices to obligations based on the residual transaction price after all observable standalone selling prices have been determined. Discounts may be approved at the time of purchase and are included within a contract’s fixed transaction price. Discounts are typically allocated to the performance obligations included in the contract based on the standalone values of such obligations. All expected and actual consideration from customers is included in the transaction price.

Shipping and Handling

Payments made by customers to us for shipping and handling costs are included in revenues on the Consolidated Statements of Income, and our expenses are included in cost of revenues. We account for shipping and handling costs arising from contracts with customers as fulfillment costs. Shipping and handling for inventory and materials we purchase is included as a component of inventory on the Consolidated Balance Sheets, and expensed to cost of revenues when products are sold.

Unearned Revenues

Certain of our products may be sold with associated time-based service contracts whereby we provide repairs, technical support, parts, and various analytical or maintenance services. In the event these contracts are paid in advance by the customer, the associated amounts are recorded as an unearned revenue liability and recognized as revenue ratably over the term of the service period, generally one year. Prepayments from customers with respect to other products and services are likewise recorded as unearned revenue liabilities and are recognized to revenue when earned.

Accrued Warranty Expense

We typically provide assurance-type limited product warranties on our products and, accordingly, accrue for estimates of related warranty expenses.

Accounts Receivable and Allowance for Doubtful Accounts

All trade accounts receivable are reported at net realizable value on the accompanying Consolidated Balance Sheets, adjusted for any write-offs and net of allowances for doubtful accounts. Allowances for doubtful accounts represent our best estimate and current expectation of future credit losses from trade accounts. We estimate credit losses based on historical information, current and expected future economic and market conditions, and reviews of the current status of customers’ trade accounts receivable. In circumstances in which we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.

We do not believe our trade accounts receivable represent significant concentrations of credit risk due to our diversified portfolio of individual customers and geographical areas. See Note 3. “Fair Value Measurements” for further discussion and for information on how we manage credit risk.

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Differences may arise between estimated and actual losses, which could materially affect the provision for credit losses and, therefore, net earnings. We recorded $736, $304, and $100 of expense associated with doubtful accounts for the years ended March 31, 2023, 2022, and 2021, respectively. The increase in bad debt expense reflects the uncertainty in market and macro-economic conditions.

Inventories

Inventories are stated at the lower of cost or net realizable value and are relieved to cost of products upon sale using a weighted average costing methodology. Inventories acquired in an acquisition are recorded at fair market value. Our work in process and finished goods inventories include the costs of raw materials, labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product. We evaluate labor and overhead costs annually unless specific circumstances necessitate a mid-year evaluation for specific items.

We monitor inventory costs relative to selling prices and perform physical cycle count procedures on inventories throughout the year to determine if a lower of cost or net realizable value reserve is necessary. We estimate and maintain an inventory reserve as needed for such matters as excess or obsolete inventory, shrinkage, and scrap. This reserve may fluctuate as our assumptions change due to new information, discrete events, or changes in our business, such as entering new markets or discontinuing a specific product; however, once inventory is written down, a new cost basis is established that is not subsequently written back up in future fiscal years.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, less allowances for depreciation, except for assets acquired in acquisitions, which are recorded at fair value. Expenditures for major renewals and improvements that extend the life of the asset are capitalized, while expenditures for minor replacements, maintenance, and repairs are expensed as incurred.

Depreciation is calculated using the straight-line method over the assets’ estimated useful lives. Upon asset retirement or disposal, accounts are relieved of cost and accumulated depreciation, and any related gain or loss is reflected in our results of operations. In some cases, particularly with respect to business consolidation or closure activities, accelerated depreciation may be required for the revised remaining useful lives of assets designated to be abandoned in the future.

At least annually, we evaluate and adjust as necessary the estimated lives of property, plant and equipment. Any changes in estimated useful lives are recorded prospectively. Estimated useful lives of significant classes of depreciable assets are as follows:

Category Useful Lives in Years

Buildings and building improvements 40 (or less)

Manufacturing equipment 7 (or less)

Office, lab and other equipment 7 (or less)

Computer equipment 3 (or less)

Land is not depreciated and construction in progress is not depreciated until placed in service, at which time it is assigned a useful life consistent with the nature of the asset.

Leases

Under ASC 842, we determine whether contractual arrangements contain a lease at the inception of the arrangement. If a lease is identified in an arrangement, we recognize a right-of-use asset ("ROU") and liability on our Consolidated Balance Sheets and determine whether the lease should be classified as a finance or operating lease. We do not have any finance leases. We do not recognize assets or liabilities for leases with terms of less than 12 months, and our short-term leases are not material.

A contract is a lease or contains one when (1) the contract contains an explicitly or implicitly identified asset and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract in exchange for consideration. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments. Adjustments would also be made for accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets, none of which are present in any of our current lease contracts. When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease, otherwise we use our incremental borrowing rate based on the information available at lease commencement. When we acquire a business, we retain the acquiree's classification of its leases. We evaluate the ROU assets and liabilities in accordance with ASC 842.

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Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Lease expense is recorded in cost of products, selling, general and administrative, or research and development on our Consolidated Statements of Income, depending on the nature of use of the underlying asset. Many of our leases include one or more renewal or termination options exercisable at our discretion, which are included in the determination of the lease term if we are reasonably certain to exercise the option. We have also entered into lease agreements that have variable payments related to certain indexes. Variable lease payments are recognized in the period in which those payments are incurred. All non-lease components are readily identifiable in our lease contract. We account for non-lease components separately from the lease component to which it is related.

Acquired Intangible Assets

Our goodwill and other intangible assets result from acquisitions of existing businesses. Upon acquisition, we record the fair values of separately identifiable indefinite and definite lived intangible assets using, among other sources of relevant information, independent appraisals, or actuarial or other valuations. Intangible assets affect the amount of future amortization expense and possible impairment charges we may incur.

Goodwill and indefinite lived intangible assets (certain tradenames we intend to renew and continue using indefinitely) are not subject to amortization and are tested for impairment qualitatively, and if necessary, quantitatively, at least annually during the fourth quarter of our fiscal year, or when events or changes in circumstances indicate it may be more likely than not that carrying value exceeds fair value. We perform impairment tests of goodwill at the reporting unit level and tests for other indefinite lived intangible assets at the asset level.

Intangible assets deemed to have finite lives are amortized on a straight-line basis over their useful lives, generally ranging from five to fifteen years (See Note 6. “Goodwill and Intangible Assets”). We determine the useful lives of finite intangible assets based on the specific facts and circumstances related to each asset, and we evaluate the appropriateness of assigned useful lives at least annually. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and economic factors such as competition or specific market conditions. Finite-lived intangible assets are tested for impairment if events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset group might not be recoverable.

The fair value measurements used in testing intangible asset impairments are typically based on discounted cash flow projection models, using Level 3 inputs. See “Fair Value of Financial Instruments” for a description of input levels. Significant assumptions include, among others, the weighted average cost of capital, net sales growth, and terminal growth rates. In certain cases, management uses other market information when available to estimate fair value. Impairment charges represent the excess carrying amount over estimated fair value. We do not believe our goodwill and other intangible assets are impaired as of March 31, 2023.

Research & Development Costs

We conduct research and development activities for the purpose of developing new products and enhancing the functionality, effectiveness, reliability, and accuracy of existing products. Research and development costs are expensed as incurred. Research and development expense is predominantly comprised of labor costs and third-party consultants, but we may from time to time purchase in-process research and development with the intention of developing a saleable product.

Convertible Debt

Our convertible

1.375% Convertible Senior Notes due

2025 (the

"2025 Notes") do

not have embedded derivatives and are recorded as long-term liabilities in our Consolidated Balance Sheets. When the

2025 Notes are within

one year of maturity, or when

criteria necessary for conversion as described in Note

8. “Indebtedness” have been met, the

2025 Notes will be reclassified as short-term liabilities, depending on the expected timing and likelihood of optional conversions. At our option, we

may settle the

2025 Notes in shares of common stock or in cash. We apply the if-converted method to calculate the potentially dilutive impact of the

2025 Notes on earnings per share. The short-term portion of unamortized fees is recorded within prepaid expenses and other, and the long-term portion is recorded in other assets on our Consolidated Balance Sheets. The fees are being expensed on a straight line basis over the life of the indenture governing the

2025 Notes.

Stock-based Compensation

We issue shares in the form of stock options and full-value awards as part of employee and non-employee director compensation pursuant to the Mesa Laboratories, Inc. 2014 Equity Plan (the "2014 Equity Plan") and the Mesa Laboratories, Inc. 2021 Equity Incentive Plan (the "2021 Equity Plan" or together, "the Equity Plans").

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The Equity Plans are administered by the Compensation Committee of the Board of Directors, which has the authority to grant equity awards, or to delegate its authority under the plan to make grants (subject to certain legal and regulatory restrictions), including the authority to determine the individuals to whom awards will be granted, the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule, and all other terms and conditions of the awards.

For purposes of counting the shares remaining under the 2021 Equity Plan, each share underlying a stock option or a full value award counts as one share used. For purposes of counting the shares remaining available under the 2014 Equity Plan, each share issuable pursuant to outstanding full value awards counts as five shares issued, whereas each share underlying a stock option counts as one share issued. We issue new shares of common stock upon the exercise of stock options and the vesting of time-based restricted stock units ("RSUs") and performance-based RSUs ("PSUs").

Stock options and service-based stock awards generally vest equally over a

three to

five year term and stock options generally expire after

six to

ten years. Awards granted to non-employee directors generally vest

one year from the grant date. We recognize stock-based compensation expense based on the fair value of stock awards at the grant date and recognize the expense over the related service period using a straight-line vesting expense schedule. The

2021 Equity plan includes retiree provisions, which result in the acceleration of stock-based compensation for expense for retiree-eligible participants. Compensation expense related to employees eligible to retire and retain full rights to the awards is recognized over the calculated service period required to earn the award according to the plan provisions.

Expense for PSUs is recognized when it is probable that performance goals will be achieved. Performance goals are determined by the Board of Directors and

may include measures such as revenues growth and profitability targets. Compensation expense on stock awards subject to performance conditions is recognized over the longer of the estimated performance goal attainment period or time vesting period. As of each reporting period, we estimate the number of PSUs expected to vest based on our current estimate of performance compared to the target metrics in the award documents, and if necessary, a cumulative-effect adjustment is recorded.

The fair value of RSUs is based on the closing price of Mesa's common stock on the award date, less the present value of expected dividends

not received during the vesting period. RSUs we issue are equivalent to nonvested shares under the applicable accounting guidance.

The fair value of each granted stock option is estimated on the grant date using the Black-Scholes option valuation model. The assumptions used to calculate the fair value of granted options reflect market conditions and our historical experience. We estimate expected forfeitures using a dynamic forfeiture model based on company specific historical data when determining the amount of stock-based compensation costs to recognize each period. The expected life of options represents the estimated period of time until exercise and is based on historical experience of similar awards for similar subsets of our employee population, giving consideration to the contractual terms, vesting schedules, and expectations of future employee behavior. Expected stock price volatility is based on the historical volatility of our own stock price over the period of time commensurate with the expected life of the award. The risk-free rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option. The dividend yield assumption is based on our anticipated cash dividend payouts.

We allocate stock-based compensation expense to cost of revenues, selling, research and development, and general and administrative expense in the Consolidated Statements of

Income.

EarningsPer Share

Basic earnings per share (“EPS”) 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 it includes the effects of potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include stock options, RSUs and PSUs (collectively “stock awards”), as well as common shares underlying the 2025 Notes. Potentially dilutive securities are excluded from the calculation of diluted EPS in the event they are subject to performance conditions that have not yet been achieved or if they would otherwise be antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss; in such cases the inclusion of the potential common shares would have an antidilutive effect. See Note 10. “Earnings per Share” for EPS calculations for the years ended March 31, 2023, 2022 and 2021.

Income Taxes

Income tax expense includes U.S., state, local and international income taxes. Deferred tax assets and liabilities are recognized and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax basis of existing assets and liabilities used for income tax purposes. The tax rate used to determine the deferred tax assets and liabilities is based on the enacted tax rate for the year and the manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

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From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty, such as acquisitions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax, interest and penalty assessments by these taxing authorities. In determining our income tax provision for financial reporting purposes, we establish a reserve for uncertain tax income positions unless we determine it is not more likely than not that such positions would be sustained upon examination, based on their technical merits.. That is, for financial reporting purposes, we only recognize tax benefits taken on the tax return that we believe are more likely than not of being sustained. There is considerable judgment involved in determining whether positions taken on the tax return are more likely than not of being sustained. We adjust our tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated income tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest. Our policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of general administrative expense. (See Note 12. “Income Taxes”).

Acquisition Related Contingent Consideration Liabilities

Acquisition related contingent consideration liabilities consist of estimated amounts due under various acquisition agreements and may be based on revenues growth, specified profitability growth metrics, or the attainment of milestones such as patent approvals. At each reporting period, we evaluate the expected future payments and any associated discount rate to determine the fair value of the contingent consideration. We re-evaluate the fair value of contingent liabilities at each reporting period and record any necessary adjustments in other expense, net on the Consolidated Statements of Income. See Note 13. “Commitments and Contingencies” for information regarding existing contingent consideration liabilities as of March 31, 2023.

Legal Contingencies

We are party to various claims and legal proceedings that arise in the normal course of business. We record an accrual for legal contingencies when we determine it is probable we have incurred a liability and can reasonably estimate the amount of the loss (See Note 13. “Commitments and Contingencies”).

Purchase Accounting for Acquisitions

We account for all business combinations in which we obtain control over another entity using the acquisition method of accounting, which requires most assets (both tangible and intangible) and liabilities (including any applicable contingent consideration, but excluding deferred revenue, which is measured at book value) to be recorded at fair value at the date of acquisition. The excess of the purchase price over the fair value of acquired assets less liabilities is recognized as goodwill. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses, which rely heavily on Level 3 inputs. These types of analyses require us to make and monitor assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow. Certain adjustments to the assessed fair values of acquired assets or liabilities made subsequent to the acquisition date but within the measurement period are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded within earnings. We expense all acquisition costs as incurred related to an acquisition in selling, general, and administrative expenses.

Results of operations of acquired companies are included in our Consolidated Financial Statements from the date of the acquisition forward. If actual results are not consistent with our assumptions and estimates, or if our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. For the years ended March 31, 2023, 2022 and 2021, our acquisitions of businesses (net of cash acquired and including contingent consideration) totaled $6,140, $300,793, and $0, respectively.

Business Consolidation Costs

We estimate liabilities for business closure activities by gathering detailed estimates of costs and, if applicable, asset sale proceeds, for each business consolidation initiative. For a typical business consolidation initiative, we estimate costs of employee severance, impairment of property and equipment and other assets including estimating net realizable value, if necessary, accelerated depreciation, termination payments for contracts and leases, and any other qualifying costs related to the exit plan. Such charges represent our best estimates; however, they require assumptions about plans that may change over time. The estimated costs are grouped by specific projects within the overall exit plan and are monitored at each reporting period. Any subsequent changes to the original estimates are recorded in current earnings.

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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"), the conflict in Ukraine, and other factors. It is not possible to accurately predict the future impact of such events and circumstances. 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 in the near term:

● Estimates regarding recoverability for customer receivables;

● Estimates of the net realizable value of inventory.

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

There have been no accounting pronouncements applicable to us that we were required to adopt or that we have elected to adopt during fiscal year 2023.

Note 2. Revenue

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related software, consumables, and services.

Hardware sales include physical products such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, and data loggers. Hardware sales may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function.

Consumables are typically used on a one-time basis and require frequent replacement in our customers' operating cycles. Consumables 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 are used on a standalone basis.

We also offer maintenance, calibration, and testing service contracts. These contracts result in revenues recognized over time, for example, when we are obligated to perform labor and replace parts on an as-needed basis over a contractually specified period of time, or at a point in time, upon completion of a specific, discrete service. In many cases, our contracts contain both revenues recognized over time and revenues recognized at a point in time.

We evaluate our revenues internally based on operating segment, the nature of goods and services provided, and the timing of revenue generation.

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The following tables present disaggregated revenues from contracts with customers for the years ended March 31, 2023, 2022 and 2021:

(1) Revenues in the Clinical Genomics division represent transactions subsequent to the acquisition of Agena Bioscience, Inc. on October 20, 2021.

Contract Balances

Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in either unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within other accrued expenses and unearned revenues in the accompanying Consolidated Balance Sheets, and long-term contract liabilities are included within other long-term liabilities in the accompanying Consolidated Balance Sheets. The significant majority of our revenues and related receivables and contract liabilities are generated from contracts with customers with original expected durations of 12 months or less. Contract liabilities will be recognized to revenue as we satisfy our obligations under the terms of the contracts.

A summary of contract liabilities is as follows:

Contract liabilities balance as of March 31, 2023 $ 16,098

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Note 3. Fair Value Measurements

Our financial instruments generally consist of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values of cash and cash equivalents, trade accounts receivable, and trade accounts payable approximate fair value.

The financial instruments that subject us to the highest concentration of credit risk are cash 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. Unusually, one of our distributors accounted for approximately 18% of total trade receivables as of March 31, 2023. Some of this balance was attributable to orders placed in the last months of fiscal year 2023, but a substantial portion was aged from earlier months; we have since collected payments for all aged balances and have continued to collect currently due amounts.

To manage credit risk, we consider the creditworthiness of new and existing customers, establish credit limits, and 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.

We have outstanding $172,500 aggregate principal of 1.375% convertible senior notes due August 15, 2025, which we refer to as our 2025 Notes. We estimate the fair value of the 2025 Notes based on the last actively traded price or observable market input preceding the end of the reporting period. The estimated fair value and carrying value of the 2025 Notes were as follows:

Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2)

There were no transfers between the levels of the fair value hierarchy during the fiscal years ended March 31, 2023 and 2022.

Our financial liabilities based upon Level 3 inputs include a contingent consideration arrangement relating to our acquisition of substantially all the assets and certain liabilities of Belyntic GmbH’s peptide purification business (the "Belyntic acquisition," see Note 4. "Significant Transactions"). We are obligated to pay contingent consideration of $1,500 cash upon approval of pending patent applications, expected within 36 months of the acquisition date. The fair value of the contingent consideration was $1,190 as of March 31, 2023, and was recorded in other long-term liabilities on the accompanying Consolidated Balance Sheets. We estimated the fair value of the contingent consideration at inception using a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input. The amount ultimately paid for the contingency could range from $0 to $1,500.

Note 4. Significant Transactions

Acquisitions

Belyntic, GmbH

On November 17, 2022, we acquired substantially all of the assets and certain liabilities of Belyntic GmbH’s peptide purification business. We paid $4,950 on the date of acquisition, and we expect to pay an additional $1,500 based on the probable approval of pending patent applications expected within 36 months of the acquisition date. The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line. We have prepared a preliminary analysis of the valuation of net assets acquired in the Belyntic acquisition, which is subject to revision as more detailed analyses are completed.

Agena Bioscience, Inc.

On October 20, 2021, we completed the acquisition of Agena Bioscience, Inc. for $300,793, net of cash acquired but inclusive of working capital adjustments. The Agena Acquisition aligned with our overall acquisition strategy, moved our business towards the life sciences tools sector, and expanded our market opportunities, particularly in Asia.

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We funded the acquisition and transactions relating thereto with cash on hand and borrowings under the Credit Facility (as defined below). Of the cash consideration we paid, approximately $267,000 represented cash consideration to holders of Agena’s preferred and common stock, approximately $2,000 represented cash consideration paid for the settlement of Agena’s warrants, and approximately $31,800 represented cash consideration for the settlement of Agena's vested stock options as of the closing date.

Allocation of Purchase Price

The allocation of purchase price is based on the fair value of assets acquired and liabilities assumed, except deferred revenue recorded at book value, as of the acquisition date, based on the final valuation of Agena. The relief from royalty method was used to value our trade names and developed technology, while the multi-period excess earnings method, a form of the income approach, was used to value our customer relationships. These methods involve the use of significant estimates and assumptions depending on the underlying asset being valued, but may include internal rate of return, revenue growth rates, customer attrition rate, and royalty rates, all of which are considered Level 3 inputs. We obtained the information used to prepare the valuation during due diligence and from other sources. These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates. We have made appropriate adjustments to deferred taxes and tax-related balances within the measurement period during the year ended March 31, 2023.

The following table summarizes the allocation of the purchase price as of October 20, 2021:

Life (in years) Amount

Cash and cash equivalents $ 7,544

Accounts receivable 11,100

Other current assets 25,480

Total current assets 44,124

Property, plant and equipment/noncurrent assets 15,832

Deferred tax asset 811

Intangible assets:

Total assets acquired $ 361,395

Accounts payable 2,174

Unearned revenues 2,713

Other current liabilities 11,052

Total current liabilities 15,939

Deferred tax liability 28,856

Other noncurrent liabilities 8,263

Total liabilities assumed $ 53,058

Total purchase price, net of cash acquired $ 300,793

Acquired Goodwill

Acquired goodwill of $135,728 as of the acquisition date, all of which is allocated to the Clinical Genomics reportable segment, represents the value expected to arise from expanded market opportunities, expected synergies, and assembled workforce, none of which qualify as amortizable intangible assets. The goodwill acquired is not deductible for income tax purposes.

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Note 5. Leases

We have operating leases for buildings and office equipment. The following table presents the lease balances within the Consolidated Balance Sheets related to our operating leases:

Operating lease ROU asset Other assets $ 8,693 $ 10,201

Current operating lease liabilities Other accrued expenses 2,868 2,768

Noncurrent operating lease liabilities Other long-term liabilities 5,752 7,436

The components of lease costs, the weighted average remaining lease term and the weighted average discount rate were as follows:

Year Ended March 31,

Weighted average remaining lease term in years 3.3 4.3

Weighted average discount rate 2.0 % 1.7 %

Supplemental cash flow information related to leases was as follows:

Year Ended March 31,

Maturities of lease liabilities are as follows as for the years ending March 31:

Future value of lease liabilities 8,876

Less: imputed interest 256

Present value of lease liabilities $ 8,620

Note 6. Goodwill and IntangibleAssets

Goodwill arises from the excess purchase price of acquired businesses over the fair value of acquired tangible and intangible assets, less assumed liabilities.

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Changes in the carrying amount of goodwill were as follows:

Goodwill related to Belyntic Acquisition - - 2,973 - 2,973

Measurement period adjustment - Agena Acquisition (152 ) - - - (152 )

Other intangible assets were as follows:

The range of useful lives and weighted-average remaining useful lives of amortizable intangible assets as of March 31, 2023 were as follows:

Est. Useful Weighted Avg.

Life Remaining Life

Description (Years) (Years)

Customer relationships 10 - 14 8.8

Intellectual property 8 - 14 6.5

The following is estimated amortization expense for the years ending March 31:

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

Year Ended March 31,

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Note 7. Supplemental Balance Sheets Information

Property, plant and equipment consisted of the following:

Property, plant and equipment, net $ 28,149 $ 28,620

Depreciation expense was as follows:

Year Ended March 31,

Depreciation expense in Cost of revenues $ 3,163 $ 2,243 $ 1,859

Inventories consisted of the following:

Accrued payroll and benefits consisted of the following:

Wages and paid-time-off payable 2,329 3,677

Total accrued payroll and benefits $ 9,433 $ 14,717

Other accrued expenses consisted of the following:

Current operating lease liabilities 2,868 2,768

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Note 8. Indebtedness

Credit 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 3) letters of credit in an aggregate stated amount not exceeding $2,500 at any time. The agreement 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. We refer to the facility and related agreement as the “Credit Facility”.

We borrowed $70,000 under the Credit Facility during fiscal year 2022 to provide a portion of the cash needed to complete the Agena Acquisition. We repaid $36,000 against our outstanding balance during the year ended March 31, 2023. As of March 31, 2023, the outstanding balance under our Credit Facility was $13,000. In April 2023 we repaid $3,000 on our line of credit.

On December 22, 2022, Mesa and the lenders amended the Credit Facility to replace references to the Eurodollar Rate with references to the Secured Overnight Financing Rate ("SOFR").

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 March 31, 2023 was 6.7%. 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. We incurred unused commitment fees of $107 and $78 for the years ended March 31, 2023, and March 31, 2022, respectively. The balance of unamortized customary lender fees was $312 and $484 as of March 31, 2023 and 2022, respectively.

The financial covenants in the Credit Facility 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 March 31, 2023, we were in compliance with all required covenants.

Convertible Notes

On August 12, 2019, we issued an aggregate principal amount of $172,500 of 2025 Notes. The 2025 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 2025 Notes are initially convertible 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. Noteholders may convert their 2025 Notes at their option only in the following circumstances:

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. We will reevaluate this policy from time to time as we receive conversion notices from note holders. The circumstances necessary for conversion were not met during the year ended March 31, 2023. As of March 31, 2023, the 2025 Notes are classified as a long-term liability on our Consolidated Balance Sheets as the circumstances necessary for conversion were not satisfied as of the end of the period. The if-converted value of the 2025 Notes did not exceed the principal balance as of March 31, 2023.

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Debt issuance costs related to the 2025 Notes are comprised of discounts and commissions payable to the initial purchasers of $5,175 and third party offering costs of $255. The debt issuance costs are being amortized to interest expense using the effective interest method over the six-year contractual term of the 2025 Notes.

The net carrying amount of the 2025 Notes was as follows:

Unamortized debt issuance costs (2,228 ) (3,135 )

We recognized interest expense on the 2025 Notes as follows:

Year Ended March 31,

Amortization of debt discounts and issuance costs 907 890 5,397

The effective interest rate of the liability component of the 2025 Notes is approximately 1.9%. Interest expense and amortization of debt discount was lower for the year ended March 31, 2022 compared to the year ended March 31, 2021 due to our adoption of ASU 2020-06.

Note 9. Stock Transactions and Stock-Based Compensation

(dollars and shares in thousands, except per share values)

In November 2005, our Board of Directors approved a program to repurchase up to 300 shares of our outstanding common stock. Under the program, shares of common stock may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market. Shares of common stock repurchased will be cancelled and repurchases of shares of common stock will be funded through existing cash reserves. There were no repurchases of our shares of common stock under this plan during the years ended March 31, 2023, 2022 and 2021. As of March 31, 2023, we have repurchased 162 shares under this plan.

Under applicable law, Colorado corporations are not permitted to retain treasury stock. The price paid for repurchased shares is allocated between common stock and retained earnings based on management’s estimate of the original sales price of the underlying shares.

Public Offerings of Common Stock

On June 12, 2020, we completed the sale and issuance of a total of 600 shares of our common stock, and on June 19, 2020, our underwriters exercised in full their option to purchase an additional 90 shares of our common stock. The offering price to the public was $225.00 per share. The total proceeds we received from the offering, net of underwriting discounts and commissions and other offering expenses we paid, was $145,935.

Stock-Based Compensation

We issue shares in the form of stock options, RSUs and PSUs to employees and non-employee directors pursuant to the 2014 and 2021 Equity Plans. Our shareholders approved the 2021 Equity Plan during fiscal year 2022. The plan authorizes the issuance of 330 shares of common stock to eligible participants. 145 shares were available for future grants as of March 31, 2023. Under the 2014 Equity Plan, 1,100 shares of common stock have been authorized and reserved for eligible participants, all of which have been issued and 95 of which remain outstanding as of March 31, 2023.

Stock-based compensation expense recognized in the Consolidated Financial Statements was as follows:

Year Ended March 31,

Amount of income tax (benefit) recognized in earnings (1,169 ) (4,055 ) (1,816 )

Stock-based compensation expense, net of tax $ 11,369 $ 7,336 $ 7,452

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Stock Options

We use the Black-Scholes option-pricing model to estimate the fair value of stock option awards granted. The weighted average assumptions utilized in the model were as follows:

The amounts shown above for the estimated fair value per option granted are before the estimated effect of forfeitures, which reduces the amount of expense recorded in our Consolidated Statements of Income.

Stock option activity under the 2021 Equity Plan and legacy plans as of March 31, 2023, and changes for the year then ended are presented below (shares and dollars in thousands, except per-share data):

Stock Options

Awards forfeited or expired (9 ) 218.13

Awards exercised or distributed (73 ) 97.34

The total intrinsic value of stock options exercised during the years ended March 31, 2023, 2022 and 2021 was $6,902, $15,209, and $9,559, respectively. Unrecognized stock-based compensation expense for stock options expected to vest as of March 31, 2023 was $2,835 and is expected to be recognized over a weighted average period of 1.7 years. The total fair value of options vested was $2,763, $2,856, and $2,005 during the years ended March 31, 2023, 2022 and 2021, respectively. The weighted-average grant price of awards granted during the years ended March 31, 2022 and 2021 was $268.81 and $226.72, respectively.

Time-Based Restricted Stock Units (RSUs)

RSU activity under the 2014 and 2021 Equity Plans was as follows (shares and dollars in thousands, except per-share data):

Time-Based Restricted Stock Units

Awards forfeited or expired (10 ) 229.52

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For the years ended March 31, 2022 and 2021, the weighted average fair value per RSU granted was $274.55 and $231.61, respectively. Unrecognized stock-based compensation expense for RSUs that we have determined are probable of vesting was $6,893 as of March 31, 2023 and is expected to be recognized over a weighted average period of 1.8 years. The total fair value of RSUs vested was $6,751, $5,320, $1,819 during the years ended March 31, 2023, 2022 and 2021, respectively. The total intrinsic value of time-based RSUs distributed during the years ended March 31, 2023, 2022 and 2021 was $5,004, $5,320, and $2,429, respectively.

Performance-Based Restricted Stock Units (PSUs)

Performance-based RSUs vest upon completion of the service period described in the award agreement and based on achievement of the financial targets described in the award agreements. We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the financial targets on a straight-line basis over the service period.

PSU activity under the 2014 and 2021 Equity Plans was as follows (shares and dollars in thousands, except per-share data):

Performance-Based Restricted Stock Units

Performance adjustment (20 )

For the year ended March 31, 2022, the average fair value per PSU granted was $302.15. Unrecognized stock-based compensation expense for PSUs that we have determined probable of vesting was $7,642 as of March 31, 2023 and is expected to be recognized over a weighted average period of 3.4 years. Total fair value of PSUs vested was $1,926 and $5,671 during the years ended March 31, 2023 and 2022, respectively. The total intrinsic value of PSUs distributed during the years ended March 31, 2023, 2022 and 2021 was $1,776, $7,549, and $0, respectively. There were no PSUs granted or distributed during the year ended March 31, 2021.