MLAB Mesa Laboratories Inc

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

Note 2. Significant Transactions

Acquisition of GKE

In accordance with the sale and purchase agreement executed October 14, 2023, we acquired 100% of the outstanding shares of GKE GmbH and SAL GmbH effective October 16, 2023, and upon approval by applicable Chinese regulators, we acquired 100% of the outstanding shares of Beijing GKE Science & Technology Co. Ltd. (“GKE China,” and, together with GKE GmbH and SAL GmbH, “GKE”), effective December 31, 2023 (the "GKE acquisition"). GKE primarily develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets. GKE’s strength in chemical indicators and our Sterilization and Disinfection Control division’s strength in biologic indictors are complementary, as chemical and biologic indicators are used in the same sterility validation workflows. Additionally, GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain 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. 

Total cash consideration for the GKE acquisition was $88,789, net of cash and financial liabilities and subject to customary purchase price adjustments, including working capital adjustments of approximately $1,000 expected to be paid to Mesa from the seller during the fourth quarter of fiscal year 2024. Of the total acquisition price approximately $9,500, will be held back for a period of 18 months from the acquisition closing as security against potential indemnification losses. We funded the acquisition through a combination of cash on-hand and a total of $71,000 borrowed under our line of credit (See Note 7. "Indebtedness"). We began operating GKE GmbH and SAL GmbH on October 16, 2023, and they are included as wholly owned subsidiaries in our consolidated financial statements beginning on that date. GKE China is included as a wholly owned subsidiary in our Condensed Consolidated Balance Sheets as of December 31, 2023, and we began consolidating its results of operations beginning January 1, 2024.

Preliminary Allocation of Purchase Price

We accounted for the GKE acquisition as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the acquiree's identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values and are consolidated with those of Mesa. The relief from royalty method was used to value our trade names and intellectual property, while the multi-period excess earnings method, a form of the income approach, was used to value our customer relationships. The non-compete agreements were valued using a probability-weighted estimate of the expected economic impact that would occur in the absence of the agreements. Significant judgments and estimates are required when performing valuations, including, among other assumptions, internal rates of return, revenue growth rates, customer attrition rates, and royalty rates, all of which are considered Level 3 inputs. We worked with external valuation experts to prepare the preliminary valuation using information obtained during due diligence and from professional valuation databases and other sources. These estimates were based on assumptions that we believe to be reasonable; however, actual results  may differ from these estimates.

This preliminary purchase price allocation is subject to revision as more detailed analyses are completed. If additional information about the fair value of assets acquired and liabilities assumed becomes available, we  may further revise the preliminary purchase price allocation as soon as is practical, but will not do so more than one year from the acquisition date. Only items identified as of the acquisition date are considered for subsequent adjustment. Any such revisions or changes  may be material. The final valuation may include, but may not be limited to: (1) changes in allocations to intangible assets such as customer relationships, trade names, intellectual property, and non-compete agreements, as well as goodwill, (2) changes to inventory, (3) changes to deferred tax balances, (4) changes in our assessment of the purchase price, and (5) other changes to assets and liabilities. 

The following table summarizes the allocation of the preliminary purchase price as of acquisition: 

Acquisition related costs, such as legal and advisory fees, and integration related costs of $770 and $1,275 for the three and nine months ended  December 31, 2023, respectively, are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred and are reflected on the Condensed Consolidated Statements of Income in general and administrative expenses.

GKE's operations contributed $3,837 to revenues and $565 of net income to our consolidated results during the three and nine months ended December 31, 2023. 

It is impracticable for us to disclose interim pro-forma information regarding the combined results of the operations of Mesa and GKE as if the acquisition had occurred at an earlier date. Prior to acquisition, GKE was a privately owned company with requirements to close their accounting records on an annual cadence rather than on an interim basis, and certain interim financial information cannot be recreated for accurate financial results. For example, prior to Mesa's ownership, GKE accounted for costs of goods sold at an unburdened rate and performed only annual inventory accounts. We would be unable to retroactively establish costs of revenues in accordance with U.S. GAAP given the unavailability of sufficient information for ending interim periods. Additionally, all transactions occurring between the three GKE entities, which are substantial, were accounted for at arms-length prior to acquisition. As presentation of pro-forma information would require extensive estimation and could not be sourced from sufficiently factual interim information reasonably aligned with U.S. GAAP, we are unable to disclose pro-forma information.   

Belyntic GmbH

On November 17, 2022, we acquired substantially all of the assets and certain liabilities of Belyntic GmbH’s peptide purification business (“the Belyntic acquisition”) for $6,450, of which $4,950 was paid on the date of acquisition. The remaining $1,500 is due to the Belyntic sellers as patent applications are approved (see Note 11. "Commitments and Contingencies"). The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line that can be used with the instruments we sell. The new PurePep® EasyClean products are an environmentally conscious chemistry solution to purify peptides.

During fiscal year 2023, we prepared an analysis of the valuation of net assets acquired in the Belyntic acquisition. During the nine months ended December 31, 2023, based on a detailed financial analysis of the financial model, we recorded certain measurement period adjustments to reclassify amounts from intangible assets into goodwill. Our preliminary purchase price allocation has been finalized as of December 31, 2023. 

Note 3. Revenue

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related consumables. We evaluate revenues internally primarily based on operating segment and the nature of goods and services provided.

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

Consumables are typically used on a one-time basis and require frequent replacement in our customers' operating cycles. Consumables sold by our Clinical Genomics and Biopharmaceutical Development divisions, such as reagents used for molecular and genetic analysis or solutions used for protein synthesis, are critical to the ongoing use of our instruments. Consumables such as biological indicator test strips sold by our Sterilization and Disinfection Control Division are used on a standalone basis.

We also offer maintenance, calibration, and testing service contracts. Under our service contracts we perform labor and replace parts on an as-needed basis over a contractually specified period of time, or perform specific, discrete services. 

Typically, revenue is recognized upon shipment of a product, upon completion of a discrete service, or over a period of time reflective of the performance period in the applicable contract, depending on when our obligation to the customer is satisfied. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

The following tables present disaggregated revenues for the three and nine months ended December 31, 2023 and December 31, 2022, respectively:

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

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

Other than China, no foreign country exceeded 10% of total revenues for the three and nine months ended December 31, 2023 and 2022.

Contract Balances

Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within unearned revenues in the accompanying Condensed Consolidated Balance Sheets, and long-term contract liabilities are included within Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.

A summary of contract liabilities is as follows:

Contract liabilities primarily relate to service contracts with original expected service durations of 12 months or less and will be recognized to revenue as our performance obligations are satisfied.

Note 4. Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable, and trade accounts payable approximate fair value; they are classified within Level 1 of the fair value hierarchy. 

Historically, the financial instruments that subject us to the highest concentration of credit risk are cash and cash equivalents and accounts receivable. We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss. Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. No customers accounted for more than 10% of total trade receivables as of December 31, 2023.

We have outstanding $172,500 aggregate principal amount of 1.375% convertible senior notes due  August 15, 2025 (the "Notes"). We estimate the fair value of the Notes using Level 2 inputs based on the last actively traded price or observable market input preceding the end of the reporting period, and the fair value is approximately correlated to our stock price.

The estimated fair value and carrying value of the Notes was as follows:

The Belyntic acquisition obligates us to pay contingent consideration of up to $1,500 cash upon regulatory approval of certain patent applications (see Note 11. "Commitments and Contingencies"). We estimate the fair value of the remaining contingent consideration using Level 3 inputs and a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input, and we adjust the estimated fair value at each reporting period through earnings. The fair value of the remaining contingent consideration was $1,067 as of December 31, 2023 and is recorded in other accrued expenses on the accompanying Condensed Consolidated Balance Sheets.

Amounts recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include the initial recognition and disclosure of most assets and liabilities purchased in business acquisitions and any related measurement period adjustments. Additionally, assets such as property and equipment, operating lease assets, goodwill and other intangible assets are adjusted to fair value if determined to be impaired. We recorded no impairments during the three and nine months ended December 31, 2023 or 2022. Fair values of such assets and liabilities require measurement using Level 3 inputs.

There were no transfers between the levels of the fair value hierarchy during the three and nine months ended December 31, 2023 or 2022.

Note 5. Supplemental Balance Sheets Information

Inventories consisted of the following:

Prepaid expenses and other current assets consisted of the following: