Item 1A. Risk Factors
In addition to the other information set forth in this Annual Report on Form 10-K and other documents we filed with the SEC, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks and uncertainties described below are those that we have identified as material, but these are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as market conditions, economic conditions, geopolitical events, changes in laws, regulations or accounting rules, fluctuations in interest rates, terrorism, wars or conflicts, major health concerns, natural disasters or other disruptions of expected business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.
Business and Strategic Risks
Conditions in the global economy, the markets we serve, and financial markets may adversely affect our business, financial statements, and access to capital markets.
Our business is sensitive to general economic conditions. Slow or disrupted global economic growth, heightened inflation, volatility in the currency and credit markets, labor availability constraints, reduced levels of capital expenditures, changes or anticipation of potential changes in government fiscal, tax, trade and monetary policies (including as a result of upcoming elections in the U.S.), changes in capital requirements for financial institutions, government deficit reduction and budget negotiation dynamics, sequestration or government shut-downs, austerity measures, sovereign debt defaults, continuing elevated interest rates, and other challenges that adversely affect the global economy could adversely affect us and our distributors, customers and suppliers, including by:
● increasing price competition in our served markets;
● supply interruptions, which could disrupt our ability to produce our products;
● adversely impacting market sizes and growth rates.
If growth in the global economy or in any of the markets we serve slows for a significant period, if there is significant deterioration in the global economy or such markets or if improvements in the global economy do not benefit the markets we serve, our business and financial results could be adversely affected. We cannot predict the likelihood, duration or severity of any disruption in financial markets or any adverse economic conditions in the U.S. and other countries.
Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience volatility.
Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited (particularly for markets into which we sell through distribution). Our quarterly revenues and profits depend substantially on the volume and timing of orders received during the quarter, which are difficult to forecast. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which would adversely affect our financial results. Certain of our businesses’ demand depends on customers’ capital spending budgets as well as government funding policies and interest rates, and matters of public policy and government budget dynamics as well as product and economic cycles can affect the spending decisions of these entities. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, marketing or promotional programs, new product introductions, changes in distributor or customer inventory levels, or other factors. Any of these factors could adversely affect our growth and results of operations in any given period.
We face competition and if we are unable to compete effectively, we may experience decreased demand and market share resulting in decreased revenues. Even if we compete effectively, we may be required to reduce prices for our products and services resulting in decreased profit margins.
The markets for our current and potential products are competitive. Because of the range of products and services we sell and the variety of markets we serve, we encounter a wide variety of competitors, including several that possess both larger sales forces and greater capital resources.
In order to compete effectively, we must maintain relationships with key customers, continue to grow our business by establishing relationships with new customers, develop new products and services to maintain and expand our brand recognition, and penetrate new markets, including in high growth markets. Our failure to compete effectively or pricing pressures resulting from competition may adversely impact our results of operations.
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Changing industry trends may affect our results of operations.
Various changes within the industries we serve may limit future demand for our products and may include mergers within key industries we serve, making us more dependent on fewer, larger customers for our sales; decreased product demand driven by changes in customers' regulatory environments or standard industry practices; price competition for key products; and new competitor products that may result in customers discontinuing new orders.
Our growth depends in part on the timely development, commercialization, and customer acceptance of new and enhanced products and services based on technological innovation.
Our growth depends on the acceptance of our products and services in the marketplace, the penetration achieved by the companies to which we sell, and our ability to introduce new and innovative products that meet the needs of the various markets we serve. We can offer no assurance that we will be able to continue to introduce new and enhanced products, that the products we introduce, or have introduced, will be widely accepted by the marketplace, or that our direct sales team or independent distributors will successfully penetrate our various markets. Our failure to introduce new and enhanced products or gain widespread acceptance of our products and services could adversely affect our financial results. If we fail to accurately predict future customer needs and preferences, fail to produce viable technologies, or fail to protect the intellectual property of such technologies, we may invest heavily in research and development of products and services that do not lead to significant revenues, which could adversely affect our profitability. Even if we successfully innovate and develop new and enhanced products and services, we may incur substantial costs in doing so, and our profitability may suffer.
If we are unable to continue to hire and retain skilled personnel, we will have difficulty manufacturing and marketing our products.
Our success depends largely upon the continued service of our employees and our ability to attract, retain and motivate personnel, some of whom work in competitive labor markets, particularly Bozeman, Montana. Loss of key personnel or our inability to hire and retain personnel could materially adversely affect our manufacturing efforts, harm our ability to meet compliance requirements, and increase backlog.
Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, distributors and other channel partners could adversely affect our financial statements.
We sell a significant number of products to distributors and other channel partners that have valuable relationships with customers and end-users. Some of these distributors and other partners also sell our competitors’ products or compete with us directly. Adverse changes in our relationships with these distributors and other partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our business and financial statements.
The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can also negatively impact our results of operations in any given period. In addition, the consolidation of distributors could adversely impact our business and financial statements. We cannot directly control the actions of our distributors. Our distributors may not comply with export laws or follow the terms of the distribution agreements which require compliance with export laws, which could have legal or financial implications for us.
Our international operations subject us to a wide range of risks.
Our operations and sales outside of the United States have increased as a result of our strategic acquisitions and the continued expansion of our commercial organization. Risks related to these increased foreign operations include:
● local product preferences and product requirements;
● difficulty in staffing and managing widespread operations;
● differing labor or employment regulations;
● differing protection of intellectual property; and
International business risks have in the past and may in the future negatively affect our business and financial statements. A deterioration in diplomatic relations between the United States and any country where we conduct business could adversely affect our future operations and lead to a decline in profitability.
Our international operations are governed by the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the United States. Global enforcement of anti-corruption laws has increased in recent years. Our international operations, which often involve customer relationships with foreign governments, create the risk that there may be unauthorized payments or offers of payments made by employees, consultants, or distributors. Any alleged or actual violations of these laws may subject us to government investigations and significant criminal or civil sanctions and other liabilities, and negatively affect our reputation.
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Operational Risks
A significant disruption in, or breach in security of, our information technology systems or data could adversely affect our business, reputation and financial statements.
We rely on information technology systems, some of which are provided or managed by third-parties, to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers, and other business partners), and to manage or support a variety of critical business processes and activities (such as receiving and fulfilling orders, billing, collecting and making payments, shipping products, providing services and support to customers and fulfilling contractual obligations). In addition, some products or software we sell to customers may connect to our systems for maintenance or other purposes. These systems, products and services (including those we acquire through business acquisitions) may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, ransomware, human error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Attacks may also target hardware, software and information installed, stored or transmitted in our products after such products have been purchased and incorporated into third-party products, facilities or infrastructure. Security breaches of systems provided or enabled by us, regardless of whether the breach is attributable to a vulnerability in our products or services, could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers, or suppliers. Our information technology systems have been subject to computer viruses, malicious codes, unauthorized access and other cyber-attacks and we expect the sophistication and frequency of such attacks to continue to increase. Unauthorized tampering, adulteration or interference with our products may also adversely affect product functionality and result in loss of data, risk to product safety and product recalls or field actions.
Any attacks, breaches or other disruptions or damage could interrupt our operations or the operations of our customers and partners, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer, business partner, and employee relationships, and our reputation, or result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws and increased costs for security and remediation, each of which could adversely affect our business, reputation and financial statements.
Further, a significant number of our employees work remotely, which exposes us to greater cybersecurity risks. Any inability to maintain reliable information technology systems and appropriate controls with respect to global data privacy and security requirements and prevent data breaches can result in adverse regulatory consequences, business consequences and litigation.
We face numerous manufacturing and supply chain risks. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies.
We purchase materials, components and equipment from third parties for use in our manufacturing operations. Our results of operations could be adversely impacted if we are unable to adjust our purchases to reflect changes in customer demand and market fluctuations. Suppliers may extend lead times, limit supplies or increase prices. If we cannot purchase sufficient products at competitive prices and of sufficient quality on a timely enough basis to meet demand, product shipments may be delayed, our costs may increase, or we may breach our contractual commitments and incur liabilities.
In addition, some of our businesses purchase certain required products from sole or limited source suppliers for reasons of quality assurance, regulatory requirements, cost effectiveness, availability or uniqueness of design. If these or other suppliers encounter financial, operating or other difficulties or if our relationship with them changes, we might not be able to quickly establish or qualify replacement sources of supply. A shortage of components or key materials that comprise components used in our products could cause a significant disruption to our production schedule and have a substantial adverse effect on our financial condition or results of operations. The supply chains for our businesses could be disrupted in the future by supplier capacity constraints, supplier bankruptcy or exiting of the business for other reasons, decreased availability of key raw materials or commodities and external events such as natural disasters, public health problems, war, terrorist actions, governmental actions and legislative or regulatory changes. Any of these factors could result in production interruptions, delays, extended lead times and inefficiencies.
Our revenues and other operating results depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner. Any interruptions we experience in the manufacture or shipment of our products or changes to the way we manufacture products could delay our ability to recognize revenues in a particular period. In addition, we must maintain sufficient production capacity in order to meet anticipated customer demand, which carries fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we are unable to manufacture our products consistently, in sufficient quantities, and on a timely basis, our revenues, gross margins and our other operating results will be materially and adversely affected.
Because we cannot always immediately adapt our production capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance, and otherwise adversely affect our financial condition.
Our financial results are subject to fluctuations in the cost and availability of components and commodities that we use in our operations.
Our manufacturing operations employ a wide variety of components and raw materials and other commodities, including metallic-based components, electronic components, chemicals, and plastics and other petroleum-based products. Prices for and availability of these components, and raw materials and other commodities have fluctuated significantly in the past, and more recently have increased. Any sustained interruption in the supply of these items could disrupt production, delay customer order fulfillments, and adversely affect our business. If we are unable to fully recover higher costs through price increases or offset these increases through cost reductions, or if there is a time delay between the increase in costs and our ability to recover or offset these costs, our margins and profitability could decline, and our financial results could be adversely affected.
In addition, transportation costs have increased, which may reduce our gross profit margins unless and until we are able to pass the cost increases along to our customers.
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Significant developments or uncertainties stemming from the U.S. administration, including changes in U.S. trade policies, tariffs and the reaction of other countries thereto could have an adverse effect on our business.
Changes, potential changes or uncertainties in U.S. social, political, regulatory and economic conditions or laws and policies governing foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate, or governing the health care system, can adversely affect our business and financial results. For example, trade tensions between the United States and China remain high, and each country has continued to impose significant tariffs on a wide range of goods imported from the other country. China accounted for approximately 12% of our sales during the year ended March 31, 2024. These factors have adversely affected, and in the future could further adversely affect, our business and financial results.
Geopolitical and macroeconomic pressures in the markets in which we operate may adversely affect our financial results.
Geopolitical issues around the world can impact macroeconomic conditions and could have a material adverse impact on our financial results. For example, the ultimate impact of military conflicts (such as the conflict between Russia and Ukraine or the conflict in Israel and the surrounding areas) on fuel prices, inflation, the global supply chain and other macroeconomic conditions is unknown and could materially adversely affect global economic growth, disrupting discretionary spending habits and generally decreasing demand for our products and services. While our sales to Russia, Ukraine and Israel have historically produced an immaterial amount of revenues and profitability compared to the overall company, we cannot predict the impact that the conflict or any other global conflict may have on future financial results.
Violation of data privacy laws could adversely affect our business, reputation and financial statements.
If we are unable to maintain reliable information technology systems and appropriate controls with respect to global data privacy and security requirements and prevent data breaches, we may suffer adverse regulatory consequences, business consequences and litigation. As a multinational organization, we are subject to data privacy and security laws, regulations, and customer-imposed controls in numerous jurisdictions as a result of having access to and processing confidential, personal and/or sensitive data in the course of our business. The EU General Data Protection Regulation imposes strict requirements on how we collect and process personal data, including, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. Data privacy laws in other jurisdictions, such as California and Colorado, also impose data privacy obligations. Government enforcement actions can be costly and interrupt the regular operation of our business, and data breaches or violations of data privacy laws can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our business, reputation and financial statements. In addition, compliance with the varying data privacy regulations around the world may require significant expenditures and may require changes in our products or business models that reduce revenues.
Changes to dialysis methods and equipment capabilities may decrease demand for our dialysis products and negatively impact our financial statements.
Our Dialyguard product line accounts for approximately one-fourth of the revenues and one-third of the gross profit margin associated with our Calibration Solutions division. The majority of revenues in our Dialyguard business are associated with products used in dialysis clinics, while a smaller portion of our sales relate to in-home care. Technological advancements, such as dialysis machines that feature built-in dialysis calibration functionalities, have and may continue to adversely affect demand for our dialysis products.
We may be unable to efficiently manage our growth as a larger and more geographically diverse organization.
Our strategic acquisitions and the organic expansion of our commercial sales operations have increased the scope and complexity of our business. As a result, we face challenges inherent in efficiently managing a more complex business with an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits, and compliance programs. Our inability to manage successfully a substantially larger and geographically more diverse (including from a cultural perspective) organization could materially adversely affect our operating results and financial statements.
If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to a catastrophic event, our operations could be seriously harmed.
Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, pandemics and epidemics and other public health crises, war, terrorism or other natural or human-made disasters. If any of these facilities, supply chains or systems were to experience a catastrophic loss, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. Our insurance coverage with respect to natural disasters is limited and is subject to deductible and coverage limits and may be unavailable or insufficient to protect us against such losses.
The health care industry and related industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs, which could adversely affect our financial results.
Participants in the health care industry and related industries have implemented, and are implementing, significant changes in an effort to reduce costs. Many of the end-users to whom our customers supply products rely on government funding of and reimbursement for health care products and services and research activities. The U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), health care austerity measures in other countries and other potential health care reform changes and government austerity measures have reduced and may further reduce the amount of government funding or reimbursement available to customers or end-users of our products and services and/or the volume of medical procedures using our products and services. For example, the Inflation Reduction Act of 2022 may subject certain products to government-established pricing, potentially impose rebates and subject manufacturers who fail to adhere to the government's interpretation of the law to penalties.
These changes as well as other impacts from market demand, government regulations, third-party coverage and reimbursement policies and societal pressures have started changing the way healthcare is delivered, reimbursed and funded and may cause participants in the health care industry and related industries that we serve to purchase fewer of our products and services, reduce the prices they are willing to pay for our products or services, reduce the amount of reimbursement and funding available for our products and services from governmental agencies or third-party payors, affect the acceptance rate of new technologies and products and increase our compliance and other costs. All of the factors described above could adversely affect our business and financial results.
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The manufacture of many of our products is a highly exacting and complex process, and if we directly or indirectly encounter problems manufacturing products, our reputation, business and financial results could suffer.
The manufacture of many of our products is a highly exacting and complex process, due in part to strict regulatory requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors, and if not discovered before the product is released to market could result in recalls and product liability exposure. Because of the time required to approve and license certain regulated manufacturing facilities and other stringent regulations of the FDA and similar agencies regarding the manufacture of certain of our products, an alternative manufacturer may not be available on a timely basis to replace such production capacity. Any of these manufacturing problems could result in significant costs, liability, lost revenues, and loss of market share, as well as negative publicity and damage to our reputation that could reduce demand for our products.
Climate change, or legal or regulatory measures to address climate change and sustainability, may negatively affect us, and any actions we take or fail to take in response to such matters could damage our reputation.
Climate change resulting from increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere could present risks to our operations. Physical risk resulting from acute changes (such as hurricanes, tornados, wildfires or flooding) or chronic changes (such as droughts, heat waves or sea level changes) in climate patterns can adversely impact our facilities and operations and disrupt our supply chains and distribution systems. Concern over climate change can also result in new or additional legal or regulatory requirements designed to reduce greenhouse gas emissions, mitigate the effects of climate change on the environment (such as taxation of, or caps on the use of, carbon-based energy) and/or increase disclosures with respect thereto. Any such new or additional legal or regulatory requirements may increase the costs associated with, or disrupt, sourcing, manufacturing and distribution of our products, which may adversely affect our business and financial statements.
Acquisition Risks
Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.
Our ability to grow revenues, earnings and cash flows at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. Promising acquisitions are difficult to identify and execute for a number of reasons, including high valuations, competition among prospective buyers, the availability of affordable funding in the capital markets, and the need to satisfy applicable closing conditions and obtain applicable antitrust and other regulatory approvals on acceptable terms. Changes in accounting or regulatory requirements, or instability in the credit markets, or global crises that prevent travelling or other activities necessary for acquisitions could also adversely impact our ability to consummate acquisitions.
Our acquisition of businesses could negatively impact our financial results.
Acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our business and our financial statements:
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities, or we may have acquisition agreements with no indemnification protection at all.
Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the liability of the former owners is limited, and certain former owners may be unable to meet their indemnification responsibilities. We cannot guarantee that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that could adversely impact our financial statements. In addition, we may enter into acquisition agreements that have no indemnification protection at all.
Future strategic transactions or acquisitions may require us to seek additional financing, which we may not be able to secure on favorable terms, or at all.
We actively evaluate various strategic transactions on an ongoing basis, and in order to complete such transactions, we may need to seek additional financing. We may not be able to secure such financing on favorable terms, or at all. In addition, future acquisitions may require the issuance of additional equity securities, which may result in dilution to our stockholders, or the issuance of debt securities, which may subject us to financial risks and limits on our operations.
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Legal, Regulatory, Compliance, and Reputational Risks
We are subject to lawsuits and regulatory proceedings.
We have been a defendant in a number of lawsuits, and in the future may become a party to a variety of litigation and regulatory proceedings, including claims for damages arising out of the use of products or services and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, product liability, marketing matters, insurance coverage, competition and sales and trading practices, environmental matters, product retirement, personal injury, and acquisition or divestiture-related matters, as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Any of these lawsuits may include claims for compensatory damages, punitive and consequential damages or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damages or settlements or become subject to equitable remedies that could adversely affect our operations and financial results. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in proceedings in any given period may require us to adjust loss contingency estimates that we have recorded in our financial statements, record estimates for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or judgments. Any of these developments could adversely affect our financial results in any given period. We cannot make assurances that our liabilities in connection with litigation and other legal regulatory proceedings will not exceed our estimates or adversely affect our financial results and business. Please see Note 13. “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion.
Our reputation, ability to do business and prepare financial statements may be impaired by improper conduct by any of our employees, agents or business partners.
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy.
If we do not or cannot adequately protect our intellectual property, if third parties infringe our intellectual property rights, or if we or our customers are alleged to infringe upon others’ intellectual property rights, we may suffer competitive injury or expend significant resources enforcing or defending our rights.
We own patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual property owned by others, which in the aggregate are important to our business. The intellectual property rights that we obtain, however, may not be sufficiently broad or otherwise may not provide us a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to us. In addition, the steps that we and our licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated, circumvented or designed-around, particularly in countries where intellectual property rights are not highly developed or protected. In some circumstances, enforcement may not be available to us because an infringer has a dominant intellectual property position or for other business reasons, or countries may require compulsory licensing of our intellectual property. We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. There can be no assurance that these agreements will adequately protect our trade secrets and other proprietary rights and will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets or other proprietary rights. In addition, we or our customers may be alleged to infringe upon the intellectual property of third parties. Our failure to obtain or maintain intellectual property rights that convey competitive advantages, adequately protect our intellectual property, detect or prevent circumvention or unauthorized use of such property, and limit the cost of enforcing our intellectual property rights or defending against any allegation of infringement, could adversely impact our competitive position and results of operations.
We are subject to extensive regulation.
The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. We can offer no assurance that delays will not occur in the future that could have a significant adverse effect on our ability to introduce new products on a timely basis. Regulatory agencies periodically inspect our manufacturing facilities to ascertain compliance with “good manufacturing practices” and can subject approved products to additional testing and surveillance programs.
Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal penalties. If we fail to comply with regulatory requirements, it could have an adverse effect on our results of operations and financial condition. We, our representatives and the industries in which we operate may at times be under review and/or investigation by regulatory authorities. Compliance with applicable regulations may affect our returns on investment, require us to incur significant expenses or modify our business model or impair our flexibility in modifying product, marketing, pricing or other strategies. Our products and operations are also often subject to the rules of industrial standards bodies such as the International Standards Organization, and failure to comply with these rules could result in withdrawal of certifications needed to sell our products and services and otherwise adversely impact our business and financial statements.
Certain of our products are medical devices and other products subject to regulation by the U.S. FDA, by other federal and state governmental agencies, or by comparable agencies of other countries and regions. We cannot guarantee that we will be able to obtain regulatory clearance (such as 510(k) clearance) or approvals for new products or modifications to (or additional indications or uses of) existing products within our anticipated timeframe or at all, and if we do obtain such clearance or approval, it may be time-consuming, costly and subject to restrictions. Our ability to obtain such regulatory clearances or approvals will depend on many factors and the process for obtaining such clearances or approvals could change over time and may require the withdrawal of products from the market until such clearances are obtained. The global regulatory environment has become increasingly stringent and unpredictable. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years, and other countries have expanded, or plan to expand, their existing regulations.
Ensuring that our internal operations and business arrangements with third parties comply with applicable laws and regulations involves substantial costs. It is also possible that government authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law. Noncompliance with applicable laws and regulations can result in, among other things, fines, expenses, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, failure to receive 510(k) clearance of devices, withdrawal of marketing approvals, reputational damage, business disruption, loss of customers, disbarment from selling to certain federal agencies, criminal prosecutions and other adverse effects. Further, defending against any such actions can be costly and time-consuming and may require significant personnel resources. Therefore, even if we are successful in defending against any such actions brought against us, our business may be negatively impacted.
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Off-label marketing of our products could result in substantial penalties.
The FDA strictly regulates the promotional claims that may be made about approved or cleared products. In particular, any clearances we may receive only permit us to market our products for the uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for off-label use, we can be subject to fines, injunctions or other penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, substantial monetary penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and/or the curtailment of our operations. Any of these events could significantly harm our business and financial results.
Certain modifications to our products may require new 510(k) clearances or other marketing authorizations and may require us to recall or cease marketing our products.
Once a medical device is permitted to be legally marketed in the United States pursuant to a 510(k) clearance, a manufacturer may be required to notify the FDA of certain modifications to the device. Manufacturers determine in the first instance whether a change to a product requires a new 510(k) clearance or premarket submission, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances are necessary. We have made modifications to our products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or other premarket submissions were not required. We may make similar modifications or add additional features in the future that we believe do not require a new 510(k) clearance. If the FDA disagrees with our determinations and requires us to submit new 510(k) notifications, we may be required to cease marketing or to recall the modified product until we obtain clearance, and we may be subject to significant regulatory fines or penalties.
Changes in governmental regulations may reduce demand for our products or services or increase our expenses.
We compete in markets in which we and our customers must comply with federal, state, and other jurisdictional regulations, such as regulations governing health and safety, food and drugs, privacy and electronic communications. We develop, configure and market our products and services to meet customer needs created by these regulations. These regulations are complex, change frequently, have tended to become more stringent over time and may be inconsistent across jurisdictions. Any significant change in any of these regulations (or in the interpretation or application thereof) could reduce demand for, increase our costs of producing or delay the introduction of new or modified products and services, or could restrict our existing activities, products and services. In addition, in certain of our international markets our growth depends in part upon the introduction of new regulations. In these markets, the delay or failure of governmental and other entities to adopt or enforce new regulations, the adoption of new regulations which our products and services are not positioned to address or the repeal of existing regulations, could adversely affect demand. In addition, regulatory deadlines may result in substantially different levels of demand for our products and services from period-to-period.
Product liability suits against us, product defects or unanticipated use or inadequate disclosure with respect to our products or services could adversely affect our business, reputation and our financial statements.
Manufacturing or design defects in, unanticipated use of, safety or quality issues (or the perception of such issues) with respect to, or inadequate disclosure of risks relating to the use of products and services that we make or sell, including items that we source from third parties, can lead to personal injury, property damage or other liability. These events could lead to recalls or safety alerts, the removal of a product or service from the market and product liability or similar claims being brought against us. Recalls, removals and product liability and similar claims, regardless of their validity or ultimate outcome, can result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and services. Our product liability insurance may not adequately cover our costs arising from defects in our products or otherwise.
We are subject to export and import control laws and regulations that could impair our ability to compete in international markets or subject us to liability if we violate such laws and regulations.
We are subject to U.S. export controls and sanctions regulations that restrict the shipment or provision of certain products and services to certain countries, governments, and persons. While we take precautions to prevent our products and services from being exported in violation of these laws, we cannot guarantee that the precautions we take will prevent violations. If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us. We may also be adversely affected through other penalties, reputational harm, loss of access to certain markets, or otherwise.
Complying with export control and sanctions regulations may be time-consuming and may result in the delay or loss of sales opportunities or impose other costs. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in our decreased ability to export or sell certain products to existing or potential customers in affected jurisdictions.
We are subject to laws and regulations governing government contracts.
We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenues associated with these customers. We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.
Financial and Tax Risks
Foreign currency exchange rates may adversely affect our financial statements.
As a global company with substantial operations outside the U.S., sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, certain of our businesses may invoice customers in a currency other than their functional currency, and movements in the invoiced currency relative to the functional currency could also result in unfavorable translation effects. We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries. We do not enter into hedging arrangements to mitigate any foreign currency exposure.
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We may be required to recognize additional impairment losses for our goodwill and other intangible assets.
As of March 31, 2024, the net carrying value of our goodwill and other intangible assets totaled $293.8 million after recording impairment losses of $274.5 million related to certain goodwill and finite-lived intangible assets in our Clinical Genomics division and related to goodwill in our Biopharmaceutical Development division during the fourth quarter of our fiscal year ended March 31, 2024. In accordance with generally accepted accounting principles, we periodically assess such assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, loss of key customers, strategic shifts in our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of our assets, changes in the structure of our business, divestitures, market capitalization declines, or increases in associated discount rates may further impair our goodwill and other intangible assets in the future. Our Clinical Genomics and Biopharmaceutical Development divisions have a heightened risk of future impairments if actual results differ significantly from our estimates; impairment losses resulted in a 0% cushion between the fair and carrying values of impaired reporting units within our Clinical Genomics and Biopharmaceutical Development divisions as of our January 1, 2024 impairment testing date. The carrying values of our reporting units generally decline over time as we amortize intangibles assets. The goodwill associated with our Clinical Genomics division and our Biopharmaceutical Development division's two reporting units (Immunoassays and Peptides) as of March 31, 2024 was $16.9 million, $32.8 million, and $13.7 million, respectively. Future impairment losses could result from changes in any assumptions, inputs, exchange rates, market factors and/or increases in the weighted average cost of capital in the future. Assumptions used in goodwill and intangible asset impairment tests include unobservable Level 3 inputs that are subject to uncertainty. Any additional losses relating to such impairments would adversely affect our financial statements in the periods recognized.
The loss of key customers, or reductions in their demand for our products and services, could have a significant negative impact on our revenues, results of operations, and financial position.
Certain of our reporting segments sell to customers who individually comprise greater than 10% of segment revenues. Our business, financial condition or results of operations could be adversely affected by the loss of any such customers, or by a reduction in their purchases of our products and services due to downturns in their business, changes in their business strategies, reduced capital spending, unfavorable macroeconomic conditions, or other factors.
Changes in accounting standards could affect our reported financial results.
New accounting standards or pronouncements that may become applicable from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results of operations for the affected periods.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner or prevent fraud, which may adversely affect investor confidence in our financial reporting and adversely affect our business and operating results and the trading price for our common stock.
Under Section 404 of the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC, companies are required to conduct an annual comprehensive evaluation of their internal control over financial reporting. Further, each year our independent registered public accounting firm is required to attest to and report on the effectiveness of our internal control over financial reporting. Management concluded that as of March 31, 2024, our internal control over financial reporting was not effective. As described in "Part II, Item 9A — Controls and Procedures," we identified three material weaknesses in the design and operation of our internal control over financial reporting whereby:
The material weaknesses will only be considered remediated when we design and implement effective controls. See "Part II, Item 9A — Controls and Procedures," for our remediation plans.
We expect our remediation efforts to be effective, however, we can provide no assurance that they will be or that additional material weaknesses will not arise in the future. The existence of these material weaknesses and of any other ineffective controls over our financial reporting could have negative impacts including one or more of the following:
● Restatement of previously filed financial statements;
● Loss of investor confidence;
● Restrictions our ability to access capital markets;
● Expenditure of significant resources to correct the deficiencies;
● Negative impact on the trading price of our common stock.
Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the SEC, the Nasdaq Stock Market or other regulatory authorities. We have previously implemented several significant ERP modules and have acquired businesses that were subsequently required to adopt our systems of internal controls. The implementation of these systems represents a change in our internal control over financial reporting. If we fail to remedy any deficiencies or maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our operating results or financial condition.
Our failure to maintain appropriate environmental, social, and governance ("ESG") practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.
Governments, investors, customers, and employees are enhancing their focus on ESG practices and disclosures, and expectations in this area are rapidly evolving and increasing. While we monitor the various and evolving standards and associated reporting requirements, failure to adequately maintain appropriate ESG practices that meet stakeholder expectations may result in reputational harm, loss of business, reduced market valuation, an inability to attract customers, and an inability to attract and retain top talent.
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Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
We are subject to income taxes in the U.S. and in various non-U.S. jurisdictions. The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities, such as those audits described elsewhere in this report. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial results could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial results.
Our ability to use net operating losses and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and it is possible that certain transactions or a combination of certain transactions may result in material additional limitations on our ability to use our net operating loss and tax credit carryforwards.
Section 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long-term, tax-exempt rate and the value of the company’s stock immediately before the ownership change. We may be unable to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability. Federal net operating losses generated after December 31, 2017 are not subject to expiration and generally may not be carried back to prior taxable years except that, under the Coronavirus Aid, Relief, and Economic Security Act, net operating losses generated in 2018, 2019 and 2020 may be carried back five taxable years. Additionally, for taxable years beginning after March 31, 2021, the deductibility of such deferral net operating losses is limited to 80% of our taxable income in any future taxable year.
Changes in tax law relating to multinational corporations could adversely affect our tax position.
The U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the Organization for Economic Co-operation and Development (“OECD”) have recently focused on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where profits are claimed to be earned for tax purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The OECD has released several components of its comprehensive plan to create an agreed set of international rules for addressing base erosion and profit shifting. As a result, the tax laws in the United States and other countries in which we do business could change on a prospective or retroactive basis, and any such changes could adversely affect our business and financial results.
Our business is subject to sales tax in numerous states.
The application of indirect taxes, such as sales tax, is a complex and evolving issue. A company is required to collect and remit state sales tax from certain of its customers if that company is determined to have “nexus” in a particular state. The determination of nexus varies by state and often requires knowledge of each jurisdiction’s tax case law. The application and implementation of existing, new or future laws could change the states in which we are required to collect and remit sales taxes. If any jurisdiction determines that we have “nexus” in additional locations that we have not contemplated, it could have an adverse effect on our financial results.
If global credit market conditions deteriorate, our financial performance could be adversely affected.
The cost and availability of credit are subject to changes in the global economic environment. If conditions in major credit markets deteriorate, our ability to obtain debt financing or the terms associated with that debt financing may be negatively affected, which could affect our results of operations.
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business or the ability to raise capital to repay the remaining principal amount of our 1.375% convertible senior notes due August 15, 2025 (the “2025 Notes”) at maturity or repurchase the notes in the event of a fundamental change, or to repay borrowings under our revolving credit facility, term loan, swingline loan, and letters of credit (together referred to as the "Credit Facility"), or if we incur more debt.
We incurred significant indebtedness in the amount of $172.5 million in the form of the 2025 Notes which mature on August 15, 2025, unless earlier converted. See Note 15. "Subsequent Events" in Item 8. Financial Statements and Supplementary Data for further information regarding our partial repurchases of the 2025 Notes following our fiscal year ended March 31, 2024. We also have a Credit Facility, under which we have incurred significant indebtedness, and under which we could borrow additional amounts under that at any time, incurring more debt.
At our option, we may settle the 2025 notes in shares of our common stock, cash, or a combination thereof. Holders of the 2025 Notes also have the right to require us to repurchase all or a portion of their 2025 Notes upon the occurrence of a fundamental change (as defined in the applicable indenture governing the 2025 Notes) at a repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, which could adversely affect our liquidity. In addition, if the 2025 Notes have not previously been converted or repurchased due to a decline in our share price, we may elect to repay or we may be required to repay the 2025 Notes in cash upon maturity. Our ability to make required cash payments in connection with conversions of the 2025 Notes, to repurchase the 2025 Notes in the event of a fundamental change, to repay or refinance the 2025 Notes, and/or to make required payments or refinance the Credit Facility at maturity will depend on market conditions and our future performance, which are subject to economic, financial, competitive, and other factors beyond our control. Our debt and related debt service obligations could have negative consequences, including requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, reducing our flexibility in planning for or reacting to changes in our business and market conditions, and exposing us to interest rate risk on variable rate debt. We could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability within the next twelve months, which would result in a material reduction of our net working capital.
In addition, our ability to repurchase or to pay cash upon conversion or at maturity of the 2025 Notes may be limited by law or regulatory authority. Our failure to repurchase Notes following a fundamental change as required by the applicable indenture would constitute a default under the indenture governing the Notes. A default under the indenture or agreements governing our future indebtedness, or failure to make required payments related to any of our indebtedness, could have a material adverse effect on our business, results of operations, and financial condition. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay indebtedness as required.
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Additional stock issuances could result in significant dilution to our stockholders.
We may issue additional equity securities to raise capital, make acquisitions, or for a variety of other purposes. Additional issuances of our stock may be made pursuant to the exercise or conversion of new or existing convertible debt securities, stock options, or other equity incentive awards. We rely on equity-based compensation as an important tool in recruiting and retaining employees. The amount of dilution due to equity-based compensation of our employees and other additional issuances could be substantial. In addition, in March 2022 we entered a sales agreement with Jefferies LLC ("Jefferies") to sell shares of our common stock, from time to time, with aggregate gross sales proceeds up to $150.0 million through an at-the-market equity offering program under which Jefferies acts as our sales agent. Further, we may settle all or a portion of the 2025 Notes in shares or in cash. We include shares of common stock issuable upon conversion of the 2025 Notes in our diluted (loss) earnings per share to the extent such shares are not anti-dilutive. If we issue common stock or securities convertible into common stock for the above reasons, or any other reason, our common stockholders would experience additional dilution and, as a result, our stock price may decline.
Our stock price may be volatile, which may subject us to a securities class action litigation.
The trading price of our common stock price may be volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:
● general economic, industry and market conditions;
● actions by institutional or other large stockholders;
● the depth and liquidity of the market for our common stock;
● volume and timing of orders for our products;
● developments generally affecting life sciences tools companies;
● changes in earnings estimates or recommendations by securities analysts;
● our results of operations and financial performance.
In addition, the stock market in general, and the Nasdaq Stock Market and the market for products and devices sold into the pharmaceutical, medical and healthcare industries in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies, which have resulted in decreased stock prices for many companies notwithstanding the lack of a fundamental change in their underlying business models or prospects. These broad market fluctuations may cause the trading price of our common stock to decline, regardless of our actual operating performance. In the past, securities class action litigation has at times been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expense and the diversion of management’s attention from our business.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Governance Related to Cybersecurity Risks
We recognize the importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data.
Our Board of Directors has delegated its responsibility for oversight of cybersecurity risks to our Audit Committee. In accordance with its charter, our Audit Committee is responsible for governing management’s review and assessment of our cybersecurity and other information technology risks, controls and procedures. Management's Business Information Services team provides the Audit Committee with quarterly updates on our cybersecurity program, detailing our monitoring and mitigation efforts. Mesa’s Audit Committee has two members with prior work experience overseeing or assessing a cybersecurity function. The Audit Committee briefs the full Board on cybersecurity matters regularly. We have established procedures to keep management and the Audit Committee informed about security incidents that could significantly impact the business.
Our information security program is led by our Information Security Manager, who has over ten years of cybersecurity experience, who in turn reports to our Vice President of Information Services, who has over 25 years of experience in the industry. The Information Security Manager regularly meets with our Business Information Services team, and as applicable, appropriate executive and Board of Directors personnel, to review our cybersecurity posture, the broader cybersecurity landscape, any identified cybersecurity incidents, our monitoring of cybersecurity risks through continuous mitigation efforts, and any anticipated enhancements to our policies, procedures and controls.
Cybersecurity Risk Management and Strategy
Our cybersecurity program, guided by industry standards, encompasses processes for the identification, assessment, and management of cybersecurity risks. We carry out regular risk assessments, supported by external vendors, to evaluate our cybersecurity program, pinpoint areas for enhancement, and devise strategies to mitigate cybersecurity risks. We perform ongoing security testing and have implemented a vulnerability management process to address identified security risks based on severity. An external vendor provides us with quarterly vulnerability scans, annual penetration tests, security tabletops, and an enterprise-wide annual security assessment to assess and validate our physical, technical, external, and administrative controls. Third parties that access, process, store or transmit our information or that have access to our systems may have and be subject to additional cybersecurity controls.
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We maintain cybersecurity policies that articulate Mesa’s expectations and requirements with respect to topics such as acceptable use of technology and data, data privacy, risk management, education and awareness and event and incident management. Consistent with our position that cybersecurity is the responsibility of every Mesa team member, we regularly educate and share best practices to raise awareness of cybersecurity threats. Every year, associates in applicable job categories are required to take information security and protection training, and we conduct ongoing simulated testing to educate employees on phishing.
Our Information Security Manager and Business Information Services team oversee the day-to-day prevention, detection, mitigation, and resolution of cybersecurity risks, utilizing third-party security software and services. We also deploy processes and technologies to monitor security alerts from both internal and external sources, including information security research. In case of a confirmed security incident, we have a full incident response plan that includes engaging an incident handling team, guidance for determining materiality, and steps to respond, remediate, and recover from the security incident.
To date, risks from cybersecurity threats have not materially affected our business strategy, results of operations or financial condition. We can provide no assurance that there will not be cybersecurity incidents in the future or that such incidents will not materially affect us; however, based on available information as of the date of this annual report, we do not believe that such threats are reasonably likely to materially affect our business. We maintain a cybersecurity insurance policy and a retainer for third-party incident response services which may mitigate certain financial impacts of a cybersecurity incident, should one occur.
Item 2. Properties
As of March 31, 2024, we owned two facilities and both are material to our business: one in Lakewood, Colorado and the other in Bozeman, Montana. Both facilities are used for manufacturing and distribution, engineering, research and development, sales and marketing, and administration activities. Two of our four segments use the properties: Sterilization and Disinfection Control and Calibration Solutions. We have fourteen leased facilities used by our Sterilization and Disinfection Control (international), Clinical Genomics, and Biopharmaceutical Development divisions. The leased facilities are used for manufacturing, research and development, administration, and all other such business activities.
Item 3. Legal Proceedings
For information regarding legal proceedings, refer to Note 13. “Commitments and Contingencies” in our Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Market (“Nasdaq”) under the symbol “MLAB.”
While we have paid dividends to holders of our common stock on a quarterly basis since 2003, the declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings, financial condition, business development needs and regulatory considerations, and is at the sole discretion of our Board of Directors. At this time, we expect to continue paying dividends commensurate with our historical practice.
As of March 31, 2024, there were 60 holders of record of our common stock. This amount does not include “street name” holders or beneficial holders of our common stock, who hold their shares through banks, brokers or other financial institutions.
During the year ended March 31, 2024, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
On November 7, 2005, our Board of Directors adopted a share repurchase plan which allows for the repurchase of up to 300,000 of our common shares. This plan will continue until the maximum is reached or the plan is terminated by further action of the Board of Directors. We made no repurchases of our common stock during the years ended March 31, 2024, March 31, 2023, or March 31, 2022. As of March 31, 2024, 137,514 shares remained available to repurchase pursuant to the repurchase plan.
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information regarding securities authorized for issuance.
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Set forth below is a line graph comparing, for the period March 31, 2020 through March 31, 2024, the cumulative total shareholder return on our common stock against the cumulative total return of (a) the S&P Composite Stock Index (b) the S&P Small Cap 600, and (c) a self-selected peer group, comprised of the following companies: Danaher Corp., Repligen Corp., Steris Corp., Utah Medical Products, Inc., Fortive Corp., Merit Medical Systems, Inc., Transcat Inc., Electro-Sensors, Inc., Onto Innovation Inc., Metler-Toledo International Inc., and Illumina, Inc. The graph shows the value on March 31 of each year, assuming an original investment of $100 in each on March 31, 2020 and reinvestment of cash dividends.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands, unless specified)
Overview
We are a global leader in the design and manufacture of life sciences tools and critical quality control solutions for regulated applications in the pharmaceutical, healthcare, and medical device industries. We offer products and services to help our customers ensure product integrity, increase patient and worker safety, and improve the quality of life throughout the world. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe and Asia Pacific, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins.
As of March 31, 2024, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions 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 stakeholder value and further our purpose of Protecting the Vulnerable® by growing our business both organically and through acquisitions, by improving our operating efficiency, and by continuing to hire, develop and retain top talent. As a business, we commit to our purpose of Protecting the Vulnerable® every day by taking a customer-focused approach to developing, building, and delivering our products. We serve a broad set of industries, in particular the pharmaceutical, healthcare services, and medical device verticals, in which the safety, quality, and efficacy of products is critical. By delivering the highest quality products possible, we are committed to protecting the communities we serve.
Organic Revenues Growth
Organic revenues growth is driven by the expansion of our customer base, increases in sales volumes, new product offerings, and price increases, and may be affected positively or negatively by changes in foreign currency rates. Our ability to increase organic revenues is affected by general economic conditions, both domestic and international, customer capital spending trends, competition, and the introduction of new products. Our policy is to price our products competitively and, where possible, we pass along cost increases to our customers in order to maintain our margins. We typically evaluate costs and pricing annually with price increases effective January 1.
Inorganic Revenues Growth - Acquisitions
Over the past decade, we have consummated a number of acquisitions as part of our growth strategy. These acquisitions have allowed us to expand our product offerings and the industries we serve, globalize our company, and increase the scale at which we operate. In turn, this growth affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®.
During fiscal year 2024, we completed the acquisition of GKE. GKE develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets.
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Improving Our Operating Efficiency
We maximize value in our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations. We achieve efficiencies using the four pillars that make up the Mesa Way, which is our customer-centric, lean-based system for continuously improving and operating the manufacturing and administrative aspects of our high-margin, niche businesses. The Mesa Way is focused on: Measuring What Matters using our customers' perspective and setting high standards for performance; Empowering Teams to improve operationally and exceed customer expectations; Sustainably Improving using lean-based tools designed to help us identify and prioritize the biggest opportunities; and Always Learning so that performance continuously improves.
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 and sustainably improve our products, our services, and ourselves, resulting in long-term value creation for our stakeholders.
General Trends
We are a global company with multinational operations. During our fiscal year 2024, approximately 51% of our revenues were earned outside of the United States. Since we serve 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, trends and costs associated with a global labor force, and increasing regulation. 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 in our consolidated operating results. We actively monitor trends affecting industries we operate in, including by monitoring key competitors and customers and by staying abreast of changes to local economies and how they may affect our operations.
Overall, supply chain disruptions, labor shortages and resulting manufacturing difficulties that impacted business operations in fiscal year 2023 largely abated during fiscal year 2024, facilitating organic revenues growth in our Sterilization and Disinfection and Calibration Solutions divisions.
During fiscal year 2024, we completed the acquisition of GKE, which develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets. GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain regulatory 510(k) clearance on certain GKE products for sale in the United States, which would further expand organic revenues growth opportunities from the GKE business. We began consolidating the results of GKE's operations into our financial statements in the third quarter of our fiscal year.
Several challenging macroeconomic factors existed during fiscal year 2024:
In response to decreased revenues growth, we took steps to preserve our financial model, implementing reductions in force and other cost savings initiatives in our Clinical Genomics and Biopharmaceutical Development divisions. We expect to realize incremental cost savings of approximately $4,000 from these initiatives in fiscal year 2025, of which approximately $900 will benefit cost of revenues and $3,100 will benefit operating expenses; however, the majority of these savings may be offset by higher performance-based payments such as bonus and sales commissions if we meet internal revenue growth targets. Management's efforts, coupled with the GKE acquisition, have allowed us to slightly increase our consolidated gross profit margin as a percentage of revenues. Overall, excluding impairment, our operating expenses remained flat during fiscal year 2024 compared to fiscal year 2023, despite the acquisition of GKE in fiscal year 2024.
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.
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, 2023, filed on May 30, 2023, for a comparison of results of operations for the years ended March 31, 2023 and March 31, 2022.
During the fourth quarter of fiscal year 2024 we recorded total impairment losses of $274,533 related to goodwill in our Clinical Genomics and Biopharmaceutical Development divisions and related to intangible assets in our Clinical Genomics division as discussed further in "Impairment" below. In fiscal year 2025, we expect a net decrease in non-cash amortization expense of approximately $3,700 within costs of revenues and $6,800 within operating expenses in the Clinical Genomics division due to impairment losses reducing the carrying values of intangible assets.
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Results by reportable segment are as follows:
Revenues Organic Revenues Growth (non-GAAP) (a) Gross Profit as a % of Revenues
Our consolidated results of operations are as follows:
Year Ended March 31, Percentage Change
Reportable Segments
Sterilization and Disinfection Control
Our Sterilization and Disinfection Control division manufactures and sells biological, chemical and cleaning indicators used to assess the effectiveness of sterilization, decontamination, disinfection and cleaning processes in the pharmaceutical, medical device, and healthcare industries. The division also provides testing and laboratory services, mainly to the dental and pharmaceutical industries. Sterilization and Disinfection Control products are disposable and are used on a routine basis.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 71 % 72 % 74 % (1 %) (2 %)
Sterilization and Disinfection Control revenues increased 16% for fiscal year 2024 compared to fiscal year 2023. The acquisition of GKE contributed $9,289 of revenues and $5,357 of gross profit to the Sterilization and Disinfection Control division during the year. GKE's gross profit as a percentage of revenues was 58% during fiscal year 2024, including $1,229 of amortization of the non-cash inventory step-up related to purchase accounting.
Excluding GKE, revenues in the Sterilization and Disinfection control division increased 2% in fiscal year 2024 compared to fiscal year 2023. Excluding $1,229 of amortization of the non-cash inventory step-up related to the GKE acquisition during fiscal year 2024, the Sterilization and Disinfection Control division's gross profit margin percentage was 73%. Fiscal year 2024 benefited from price increases and higher revenues on a partially fixed cost base.
Clinical Genomics
The Clinical Genomics division develops, manufactures and sells highly sensitive, low-cost, high-throughput genetic analysis tools and related consumables and services that enable clinical research labs and contract research organizations to perform genomic testing for a broad range of research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, oncology related applications, and toxicology research.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 51 % 52 % 36 % (1 %) 16 %
Clinical Genomics revenues decreased 16% in fiscal year 2024 compared to fiscal year 2023, largely due to the loss of Sema4 as a customer in the third quarter of fiscal year 2023, as well as China's economic slowdown. Also contributing to the decline was the persistently high cost of capital, which strained our customers' ability to purchase the division's hardware. Excluding the loss of revenues to Sema4, revenues from our Clinical Genomics division would have been 9% lower during fiscal year 2024 compared to fiscal year 2023. We expect revenues in the Clinical Genomics division to remain flat in fiscal year 2025 as we begin executing a new strategy to cultivate sustainable long-term growth.
Gross profit percentage for the Clinical Genomics division decreased one percentage point for fiscal year 2024 compared to fiscal year 2023, primarily due to lower revenues on a partially fixed cost base, and to a lesser extent, unfavorable product mix, particularly decreases in sales of high-margin consumables products, partially offset by a decrease in non-cash amortization expense of $1,227 following the impairment of acquired intangible assets in fiscal 2024. We expect costs of revenues in the Clinical Genomics division to decrease by approximately $3,700 in fiscal year 2025 as a result of lower non-cash amortization expense subsequent to the impairment in fiscal 2024. During the fourth quarter of fiscal 2024, we appointed a new General Manager to oversee the Clinical Genomics division, with a goal of establishing business processes that will support long-term growth.
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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 62 % 64 % 63 % (2 %) 1 %
Biopharmaceutical Development's revenues decreased 14% for fiscal year 2024 compared to fiscal year 2023, primarily due to continued softening demand for capital equipment, including our instruments, in the biopharmaceutical industry, with some abatement during the fourth quarter of fiscal year 2024. The decrease was partially offset by an increase in revenues from consumables and services, as well as price increases. Despite adverse macroeconomic factors, revenues from the division's consumables and services grew 10% compared to the prior year period.
Biopharmaceutical Development's gross profit percentage decreased two percentage points during fiscal year 2024 as a result of lower overall revenues on a partially fixed cost base, partially offset by favorable product mix.
Calibration Solutions
The Calibration Solutions division develops, manufactures and sells quality control products using principles of advanced metrology to enable customers to measure and calibrate critical parameters in applications such as environmental and process monitoring, dialysis, gas flow, air quality and torque testing, primarily in medical device manufacturing, pharmaceutical manufacturing, laboratory, and hospital environments.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 58 % 54 % 53 % 4 % 1 %
Calibration Solutions revenues increased 7% for fiscal year 2024 compared to fiscal year 2023, largely due to the abatement of production difficulties and supply constraints that limited our ability to manufacture ordered quantities of certain products during the first three quarters of fiscal year 2023. This abatement has allowed us to return to normal operations and growth during fiscal year 2024, driving orders growth, along with a reduction of past due backlog.
The Calibration Solutions division's gross profit percentage increased four percentage points in fiscal year 2024 compared to fiscal year 2023, primarily due to increased revenues on a partially fixed cost base.
Corporate and Other
Corporate and Other consists of unallocated corporate expenses and other business activities. Unallocated corporate expenses were $77, $40, and $165 for fiscal years 2024, 2023, and 2022, respectively, and were recorded in cost of revenues in the Consolidated Statements of Operations.
Operating Expense
Excluding impairment losses of $274,533, operating expenses for fiscal year 2024 were approximately flat compared to fiscal year 2023. Lower costs resulting from decreases in intangible asset amortization expense following impairment losses that reduced asset carrying values, lower bonus accruals, and lower stock compensation expense attributable to both performance outcomes and the timing of award grants during the year were partially offset by operating expenses incurred by GKE during fiscal year 2024, acquisition and integration costs related to GKE, and increased marketing efforts.
SellingExpense
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 18 % 17 % 15 % 1 % 2 %
Selling expense increased 3% for fiscal year 2024, primarily as a result of increased marketing efforts and implementation of a new customer management software in certain divisions, partially offset by lower commissions on lower revenues and lower recruiting and training costs in fiscal 2024. Excluding the GKE acquisition, selling expense would have increased 2% in fiscal year 2024 compared to fiscal year 2023.
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General and Administrative Expense
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 34 % 33 % 33 % 1 % - %
General and administrative expense related to GKE operations 3,416 - - NA NA
General and administrative expenses, other than impairment of finite-lived intangible assets and goodwill, increased 1% for the year ended March 31, 2024; excluding amounts impacting comparability as presented in the table above, expense would have decreased approximately 3% in fiscal 2024 compared to fiscal 2023, largely due to the effect of our ongoing cost containment efforts which reduced personnel related costs, as well as lower bonus expense due to performance, and lower stock-based compensation expense attributable to both performance outcomes and the timing of award grants during fiscal year 2024.
Impairment
Year Ended March 31, Percentage Change
Impairment of finite-lived intangible assets $ 117,641 $ - $ - NA NA
Impairment of goodwill 156,892 - - NA NA
Total impairment losses $ 274,533 $ - $ -
As a percentage of revenues 127 % - % - % 127 % 0 %
Impairment losses were recorded in our Clinical Genomics and Biopharmaceutical Development divisions in fiscal year 2024. The impairment losses are primarily the result of higher weighted average cost of capital, which decreases the fair value of businesses, as well as downward revisions of expected future performance compared to the expectations that existed at the time of our most-recent quantitative impairment analyses, specifically due to the effects of:
● persistent economic uncertainty in China throughout our fiscal year 2024;
We also appointed a new general manager to lead the Clinical Genomics division. Immediately, new division management began restructuring the division, eliminating 17 positions, and began to implement an updated business strategy, which resulted in a downward revision of financial expectations for the coming years, particularly the next 1.5 – 2 years as we adjust our business strategy to better support long-term growth. See Note 6. "Goodwill and Intangible Assets, Net" in Item 8. Financial Statements and Supplementary Datafor further information.
Research and Development Expense
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 % 9 % - % - %
Research and development expenses for fiscal year 2024 decreased 6% compared to fiscal year 2023, primarily due to our cost containment efforts in fiscal year 2024, including a reduction in force related to our Biopharmaceutical Development division during the second quarter of fiscal year 2024, lower third-party consulting costs, and lower bonus accruals in fiscal year 2024.
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Nonoperating Expense, Net
Year Ended March 31, Percentage Change
Nonoperating expense, net for fiscal year 2024 is composed primarily of interest expense and amortization of the debt issuance costs associated with the 2025 Notes and the Credit Facility. Interest expense related to the Credit Facility was approximately $909 higher in fiscal year 2024 compared to fiscal year 2023 due to higher outstanding balances for a portion of fiscal year 2024 related to borrowings used to fund the GKE acquisition, as well as higher interest rates. Increases in interest expense were partially offset by net unrealized foreign currency gains of approximately $1,440 resulting from the movement of the euro against the U.S. dollar related to a U.S. dollar denominated intercompany loan we issued to our wholly owned subsidiary, Mesa Germany GmbH, during fiscal year 2024 to fund the purchase of GKE.
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 25%, 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 fiscal year 2024 is primarily due to impairment losses recorded in fiscal year 2024 and the related tax impacts and resulting valuation allowance established. 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 the nature of stock options exercised under our share-based payment program.
Net (Loss) Income
Net (loss) income varies with the changes in revenues, gross profit, and operating expenses. Net loss in fiscal year 2024 reflects, respectively, $274,533, $27,341, $4,233, and $11,936 of non-cash impairment losses on goodwill and finite-lived intangible assets, non-cash amortization of intangible assets acquired in a business combination, non-cash depreciation, and non-cash stock-based compensation expense.
Non-GAAP Reconciliations
Adjusted operating income (which excludes the non-cash impact of amortization of finite-lived intangible assets acquired in a business combination, depreciation, stock-based compensation, and impairment of goodwill and finite-lived intangible assets) and organic revenues growth (reported revenues growth excluding the impact of revenues growth from recent acquisitions) are used by management as supplemental performance measures in order to compare current financial performance to historical performance, to assess the ability of our assets to generate cash, and to evaluate potential acquisitions.
Adjusted operating income and organic revenues growth should not be considered alternatives to, or more meaningful than, net (loss) income, operating (loss) income, reported revenues growth, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance or liquidity.
The following table sets forth our reconciliation of operating (loss) income to adjusted operating income, a non-GAAP measure:
Year Ended March 31,
Impairment losses on goodwill and finite-lived intangible assets 274,533 - -
The following table sets forth our reconciliation of total revenues growth to organic revenues growth, a non-GAAP measure:
Total Revenues Growth Impact of Acquisitions Organic Revenues Growth (non-GAAP)
Sterilization and Disinfection Control 16.3 % 9.4 % (14.4 %) - % 1.9 % 9.4 %
Biopharmaceutical Development (14.3 %) 3.9 % - % (0.1 %) (14.3 %) 3.8 %
Calibration Solutions 6.6 % (4.4 %) - % - % 6.6 % (4.4 %)
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, 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 principal and interest payments on debt, dividend payments, and anticipated capital expenditures.
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Our more significant uses of resources have historically included acquisitions, payments on debt principal and interest obligations, long-term capital expenditures, and quarterly dividends to shareholders. We had $28,214 and $32,910 of cash and cash equivalents as of March 31, 2024 and 2023, respectively. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $65,040 and $75,616 on March 31, 2024 and 2023, respectively.
As of March 31, 2024, aggregate principal of $172,500 was outstanding under our 2025 Notes and $50,500 was outstanding under the Credit Facility. During the third quarter of fiscal year 2024, we borrowed a total of $71,000 under the Credit Facility to fund the majority of the GKE acquisition, and we repaid $20,500 against that outstanding balance during the third and fourth quarters of fiscal year 2024. Subsequent to March 31, 2024, we repaid an additional $7,500.
Subsequent to our fiscal year end, in April 2024 we amended the terms of the Credit Facility. The amended Credit Facility has been modified to:
(i) Extend the maturity of the Credit Facility to April 2029;
(iv) Make certain changes to the financial covenants.
In April 2024, we used the proceeds from the term loan to fund repurchases of $75,000 in aggregate principal amount of the 2025 Notes for an aggregate cash purchase price of $71,410, including accrued and unpaid interest. We expect to settle the remaining $97,500 aggregate principal amount of the 2025 Notes in cash upon maturity using cash from operations and borrowings under the Credit Facility's revolving line of credit.
We will be required to make quarterly principal payments on the $75,000 term loan borrowings as follows: $938 each quarter from June 30, 2024 to March 31, 2026; $1,406 each quarter from June 30, 2026 to March 31, 2028; and $1,875 each quarter from June 30, 2028 to March 31, 2029. The remaining unpaid balance will be due at maturity in April 2029; however, we anticipate that we will have the ability to refinance outstanding debt at that time, if necessary. We believe cash from operations will be sufficient to make all required quarterly principal payments and interest payments on our outstanding debt obligations.
At the interest rate in effect at the time of borrowing under the term loan, we would expect to incur interest expense of approximately $10,500 per year on borrowings of $50,500 under the revolving credit facility and $75,000 under the term loan. We expect to pay annual cash interest of approximately $1,350 related to the remaining 2025 Notes until maturity.
We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss related to concentrations of cash deposits.
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 have not sold any shares under this agreement to date.
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 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, 2024, 2023, and 2022.
In April 2024, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 14, 2024, to shareholders of record at the close of business on May 31, 2024.
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, 2024 provided $44,133. We generated $23,085 more cash from working capital in fiscal year 2024 than in fiscal year 2023, primarily due to lower purchases of inventories in fiscal year 2024 compared to fiscal year 2023 when we were building safety stock to mitigate potential supply chain issues, and due to collections on receivables that were outstanding during the prior fiscal year. Net (loss) income and non-cash adjustments totaled $38,160 for fiscal year 2024 compared to $45,095 for fiscal year 2023. Cash used in investing activities was higher during fiscal year 2024 compared to fiscal year 2023 due to cash expended on the GKE acquisition, partially offset by corresponding costs related to the acquisition of Belyntic in fiscal year 2023. Cash provided by financing activities primarily resulted from a $71,000 draw on the Credit Facility partially offset by $33,500 repaid on previously outstanding balances and on the drawn amount, compared to $36,000 repaid on the Credit Facility in fiscal year 2023.
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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 to be recognized 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. 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 expected cash flow. For all material acquisitions, we engage external valuation specialists to aid management in preparing our fair value models. 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, such as legal and advisory fees, in 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 further impairment losses, as described under "Acquired Intangible Assets, Impairment Testing" below. For the fiscal years ended March 31, 2024, 2023 and 2022, we acquired businesses for total net purchase prices of $87,187, $6,140, and $300,793, respectively.
Acquired Intangible Assets, Impairment Testing
Our business acquisitions typically result in the recognition of goodwill and other intangible assets, which affect the amount of future period amortization expense and impairment losses we may incur. During fiscal year 2024, we recorded impairment losses totaling $274,533 related to goodwill in our Clinical Genomics and Biopharmaceutical Development divisions and to finite-lived intangible assets in our Clinical Genomics division as described in Note 6. "Goodwill and Intangible Assets, Net" in Item 8. Financial Statements and Supplementary Data. Should the fair values of our reporting units or finite-lived intangible assets decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rates, additional charges for impairment may be necessary.
Intangible assets with finite lives are amortized over their useful lives using the straight-line method, and amortization expense is recorded within cost of revenues or general and administrative expense in the Consolidated Statements of Operations. Impairment assessments over finite-lived intangibles are conducted if events or conditions indicate that asset carrying amounts may not be recoverable. Events or conditions indicating potential impairment include but are not limited to changes in the competitive landscape, any internal decisions to pursue new or different technology strategies, losses of significant customers, or significant changes in business performance or in the markets and industries we serve, including adverse changes in the prices paid for our products or changes in the size of the markets for our products. If impairment indicators are present, we determine whether the carrying value of the underlying intangible asset or asset group is recoverable through undiscounted estimated future cash flows. If the asset or asset group is not found to be recoverable, we estimate the asset's fair value using Level 3 inputs and discounted cash flow models and recognize impairment losses as necessary. 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.
Goodwill is not subject to amortization. We test goodwill for impairment on an annual basis during the fourth quarter of each year as of January 1st, or more frequently if events and circumstances indicate it is more likely than not that the fair value of a given goodwill reporting unit is less than its carrying value. Events that would indicate impairment and trigger interim impairment assessments include but are not limited to: adverse current or expected economic, market, or industry-specific conditions, including a decline in our market capitalization; adverse changes or expected changes in business climate or in the operational performance of the business; adverse changes in legal factors; and adverse actions or assessments by a regulator. We monitor for indications of impairment throughout the year and perform qualitative and quantitative impairment tests as necessary based on quarterly preliminary assessments of our performance and any challenging circumstances and events. Our annual impairment tests typically begin with a qualitative assessment, and further quantitative assessments are performed if we determine it is more likely than not that the fair value is greater than the carrying amount. We also perform quantitative assessments of reporting units at least every five years, irrespective of whether any indicators exist that suggest a reporting unit may be impaired. Estimates of fair value require assumptions related to revenue and operating income growth rates, discount rates, weighted average cost of capital, and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill and finite-lived intangible assets for impairment.
As detailed in Note 6, "Goodwill and Intangible Assets, Net" within in Item 8, Financial Statements and Supplementary Data, we performed quantitative impairment tests of the Clinical Genomics division and both reporting units within the Biopharmaceutical Development division during fiscal year 2024. As a result, we recorded impairment losses related to goodwill and finite-lived intangible assets in the Clinical Genomics division and impairment losses related to goodwill in the Immunoassays reporting unit of the Biopharmaceutical Development division. Impaired reporting units were written down to their respective fair values, resulting in approximately zero excess fair value over carrying amount as of our testing date on January 1, 2024. The fair value of the Peptides reporting unit within our Biopharmaceutical Development division exceeded carrying value by approximately 36% as of our testing date, and no impairment losses were recorded for this reporting unit. The Clinical Genomics and Biopharmaceutical Development divisions have a heightened risk of future impairment losses if actual results differ significantly from our estimates, including if any changes in assumptions, inputs, market factors and/or increases in the weighted average cost of capital occur in the future. The Clinical Genomics division had $16,940 of goodwill as of March 31, 2024. The Biopharmaceutical Development division had $46,515 of goodwill as of March 31, 2024. The fair values of the Clinical Genomics and Biopharmaceutical Development divisions as a whole were $58,900 and $119,000, respectively, as of the date of our annual impairment testing.
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Stock-based Compensation
We recognize compensation expense for equity awards over the vesting period based on the fair value of the awards at grant date. We use the Black-Scholes-Merton valuation model ("Black-Scholes") 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. 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. 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. Valuations for awards containing market conditions are prepared using a lattice model. 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.
Contractual Obligations
We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business.
On a consolidated basis, at March 31, 2024, we had contractual obligations for open purchase orders of approximately $18,400 for routine purchases of supplies and inventory, of which the substantial majority are payable in less than one year. See "Liquidity and Capital Resources" for information related to future required debt payments. For a description of our contractual obligations and other commercial commitments as of March 31, 2023, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the Securities and Exchange Commission on May 30, 2023.
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.
A hypothetical 10 percent increase in currency exchange rates compared to the U.S. dollar (U.S. dollar strengthening) would have resulted in an estimated $410 after tax decrease in net loss over a one-year period, excluding the impact of non-recurring impairment losses recorded in the euro, Swedish krona, and Chinese yuan in fiscal year 2024. Actual changes in market prices or rates may differ from hypothetical changes.
Interest Rates
Our Credit Facility bears interest at either a base rate or a SOFR rate, plus an applicable spread. Based on our interest rate and balances outstanding as of March 31, 2024, we estimate that if interest rates increased 1 percentage point, we would incur approximately $505 of additional interest expense per year. Our risk with respect to interest rates has increased subsequent to the end of fiscal year 2024 due to our additional borrowings under the Credit Facility's term loan of $75,000 as of April 5, 2024, with an interest rate of 8.4% as of the date of the borrowing.
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 direct impact on our financial results, 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. Additionally, inflationary pressures may impact our customers' ability to purchase our products and services. We cannot reasonably estimate our ability to successfully recover any inflation cost increases into the future.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Mesa Laboratories, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Mesa Laboratories, Inc. (the Company) as of March 31, 2024, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the year ended March 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024, and the results of its operations and its cash flows for the year ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also 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, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated June 28, 2024 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements 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 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 the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provides 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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Intangible Assets Acquired in the GKE Business Combination
As described in Note 4 to the financial statements, the Company acquired 100% of the outstanding shares of GKE for consideration of $87.2M during the year ended March 31, 2024. The transaction was accounted for as a business combination using the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including intangible assets acquired primarily related to customer relationships and trademarks and trade name. The customer relationships were valued using a multi-period excess earnings income approach (a form of the income approach) that discounted expected future cash flows to fair value which utilize assumptions related to revenue projections, free cash flows and discount rates. The trademarks and trade name were valued using a relief from royalty method which utilizes assumptions related to revenue projections and royalty rates.
We identified the fair value of these intangible assets as a critical audit matter because auditing management's significant assumptions, including revenue projections, free cash flows, royalty rates, attrition rates and discount rates, in developing the estimates required a high degree of auditor judgment and increased audit effort, including the use of valuation specialists to assist in performing related procedures and evaluating the audit evidence obtained.
Our audit procedures related to the significant assumptions used by management in estimating the fair value of certain intangible assets included the following, among others:
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Goodwill and Intangible Asset Impairments
As described in Notes 1 and 6 to the financial statements, the Company recognized impairment losses on goodwill and intangible assets of $156.9M and $117.6M, respectively, during the year ended March 31, 2024.
Management tests for goodwill impairment at the reporting unit level on an annual basis during the last quarter of its fiscal year as of January 1st, or more frequently if facts, events and circumstance indicate it is more likely than not that the fair value of a given reporting unit is less than its carrying value. Management estimates fair values in connection with quantitative impairment evaluations based on discounted cash flow and market multiple models which utilize assumptions related to revenue projections, estimated gross margins, discount rates and market multiples. Based on management’s testing, the Company recognized $118.7M and $38.2M of goodwill impairment within the Company’s Clinical Genomics reporting unit and within reporting units within the Biopharmaceutical Development segment, respectively.
Impairment assessments of finite-lived intangible assets are conducted if events or conditions indicate that the asset groups carrying amounts may not be recoverable. If impairment indicators are present, management determines whether the carrying value of the asset group is recoverable through undiscounted estimated future cash flows. If the asset group is determined not to be recoverable, management estimates the asset groups and individual assets fair value based on discounted cash flow and market multiples which utilize assumptions related to revenue projections, estimated gross margins, discount rates, attrition rates and royalty rates. Based on management’s testing, the Company identified $117.6M of intangible asset impairment within the Clinical Genomics segment.
We identified goodwill and intangible asset impairment assessments as a critical audit matter because auditing management's assessments, including the significant assumptions, involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists to assist in performing related procedures and evaluating the audit evidence obtained.
Our audit procedures related the goodwill and intangible asset impairment assessments included the following, among others:
/s/ RSM US LLP
We have served as the Company’s auditor since 2023.
Los Angeles, California
June 28, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mesa Laboratories, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Mesa Laboratories, Inc.’s (the Company) internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weaknesses described below 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, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheet of Mesa Laboratories, Inc. as of March 31, 2024, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the year ended March 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements) of the Company, and our report dated June 28, 2024, expressed an unqualified opinion.
As described in Management's Annual Report on Internal Control Over Financial Reporting, management has excluded GKE GmbH, SAL GmbH, and Beijing GKE Science & Technology Co. Ltd. (together, “GKE”) from its assessment of internal control over financial reporting as of March 31, 2024 because GKE was acquired by the Company in a business combination in the third quarter of fiscal year 2024. We have also excluded GKE from our audit of internal control over financial reporting. GKE consists of wholly owned subsidiaries whose total assets and net income represent approximately 25% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended March 31, 2024.
A material weakness is a deficiency, or a 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.
Management did not have adequate supervision and review controls over the complex accounting for significant and unusual transactions. Specifically, the supervision and review of the accounting for goodwill impairment and acquisitions, including the work performed by external advisors, was not designed to operate at a sufficient level of precision.
Management did not have adequate supervision and review controls over the determination of the useful lives of recently acquired intangible assets. Specifically, management selected a useful life for an acquired asset that was not consistent with the economic life used to value the asset.
Certain controls regarding user access and change management to the Company’s enterprise resource planning tool, a part of the information technology general controls (“ITGC”), were not operating effectively. This material weakness extended to automated and manual business process controls across the financial reporting and business transaction cycles which rely upon the affected ITGCs.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and this report does not affect our report dated June 28, 2024 on those financial statements.
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 in the accompanying Management’s 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 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 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/ RSM US LLP
Los Angeles, California
June 28, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Mesa Laboratories, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Mesa Laboratories, Inc. (the “Company”) as of March 31, 2023, the related consolidated statements of operations, comprehensive (loss), stockholders' equity, and cash flows for each of the years in the two-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 the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
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.
/s/ Plante & Moran, PLLC
We served as the Company’s auditor from 1986 to 2023.
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
Acquisition-related holdbacks 8,792 1,537
Convertible senior notes, net of debt issuance costs 171,198 170,272
Stockholders’ equity
(Accumulated deficit) retained earnings (183,494 ) 74,199
Accumulated other comprehensive (loss) (14,755 ) (12,795 )
Total liabilities and stockholders’ equity $ 446,796 $ 661,832
See accompanying notes to consolidated financial statements.
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Mesa Laboratories, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended March 31,
Revenues
Cost of revenues
Operating expense
Impairment of finite-lived intangible assets 117,641 - -
Impairment of goodwill 156,892 - -
Nonoperating expense
Interest expense and amortization of debt issuance costs 5,697 4,770 3,885
Net (loss) 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)
(In thousands)
Year Ended March 31,
Other comprehensive (loss)
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 (Accumulated Deficit) Retained Earnings AOCI* Total
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 )
Tax withholding on restricted stock units (5,393 ) (728 ) - - (728 )
Stock-based compensation expense - 11,936 - - 11,936
Foreign currency translation - - - (1,960 ) (1,960 )
*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:
Depreciation of property, plant and equipment 4,233 4,313 3,262
Impairment loss on goodwill and finite-lived intangible assets 274,533 - -
Non-cash interest and debt amortization 926 907 1,029
Amortization of step-up in inventory basis 1,229 - 7,462
Cash from changes in operating assets and liabilities:
Prepaid expenses and other assets 211 (510 ) (3,606 )
Accrued liabilities and taxes payable (1,236 ) (3,360 ) 255
Cash flows from investing activities:
Purchases of property, plant and equipment (2,567 ) (4,544 ) (4,432 )
Cash flows from financing activities:
Proceeds from the exercise of stock options 358 6,997 8,027
Other financing, net (847 ) - (237 )
Cash paid for:
Supplemental non-cash activity:
Contingent consideration from new acquisitions $ - $ 1,190 $ -
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 global leader in the design and manufacture of life sciences tools and critical quality control solutions for regulated applications in the pharmaceutical, healthcare, and medical device industries. We offer products and services to help our customers ensure product integrity, increase patient and worker safety, and improve the quality of life throughout the world. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe and Asia Pacific, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins.
As of March 31, 2024, 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.
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.
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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 and certain other exceptions as defined by applicable accounting guidance, are measured using Level 3 inputs.
Revenue Recognition
Our revenues come from product sales, which include consumables and hardware, and 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 to distributors or end users. Control of these goods is typically transferred upon shipment, at which time our obligation to the customer 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.
Services: We generate service revenues from discrete and ongoing maintenance, calibration, and testing services performed with respect to our physical products. For discrete services, our obligation to complete specified work is satisfied and revenue is recognized upon performance of the service. Obligations arising from ongoing service contracts in which we promise to stand ready to provide maintenance or other services on an as-needed basis for a certain period of time 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.
We 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 financing components as of or for the fiscal years ended March 31, 2024 or 2023.