MESA LABORATORIES INC /CO/ - Quarter Report: 2022 December (Form 10-Q)

Part I. Financial Information

Item 1. Financial Statements

Mesa Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share amounts)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(in thousands) 

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands, except per share data)

*Accumulated Other Comprehensive (Loss) Income.

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

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

Description of Business

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

We are a multinational manufacturer, developer, and seller of life science tools and critical quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia Pacific, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins.

As of December 31, 2022, we managed our operations in four reportable segments, or divisions:

Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for the fair statement of our financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of results that may be achieved for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. We made no material changes to the application of our significant accounting policies that were disclosed in our Form 10-K. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended  March 31, 2022.

Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year, references to the first quarter of fiscal year 2023 refer to the period from April 1, 2022 through June 30, 2022, references to the second quarter of fiscal year 2023 refer to the period from July 1, 2022 through September 30, 2022, and references to the third quarter of fiscal year 2023 refer to the period from October 1, 2022 through December 31, 2022. References to “fiscal year 2022” refer to the fiscal year ended March 31, 2022, and to “fiscal year 2023” refer to the fiscal year ending March 31, 2023.

Prior Period Reclassification

Certain amounts presented for prior periods in Note 3. "Revenue Recognition" have been reclassified. Certain revenues related to the Biopharmaceutical Development division have been reclassified out of revenues from consumables and into revenues from hardware and services. Certain revenues related to the Clinical Genomics division have been reclassified out of revenues from hardware and into revenues from consumables. These reclassifications have not resulted in any change to the Condensed Consolidated Financial Statements for and periods presented in this Form 10-Q.

Risks and Uncertainties

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and revenues and expenses during the reporting periods. These estimates represent management's judgment about the outcome of future events. The business and economic uncertainty resulting from supply chain challenges, cost pressure, the overall effects of the current high inflation environment on customers' purchasing patterns, and the novel coronavirus pandemic ("COVID-19") has made such estimates more difficult to calculate. Accordingly, actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

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

Note 2. Significant Transactions

Belyntic GmbH

During the three months ended December 31, 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 and the remainder will be paid upon approval of patent applications expected in the next 36 months. The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line. During the third quarter of fiscal year 2023, we prepared a preliminary analyses of the valuation of net assets acquired in the Belyntic acquisition. This preliminary purchase price allocation is subject to revision as more detailed analyses are completed

Agena Bioscience, Inc

On October 20, 2021, we completed the acquisition of Agena Bioscience, Inc. (“Agena”) for $300,793, net of cash acquired but inclusive of working capital adjustments (the “Agena Acquisition”). The Agena Acquisition aligned with our overall acquisition strategy, moved our business towards the life sciences tools sector, and expanded our market opportunities, particularly in Asia. Agena is a leading clinical genomics tools company that develops, manufactures, markets, and supports proprietary instruments and related consumables and services that enable genetic analysis for a broad range of diagnostic and research applications. Using Agena's MassARRAY® instruments and chemical reagent solutions, customers can analyze DNA samples for a variety of high volume clinical testing applications, such as inherited genetic disease testing, pharmacogenetics, various oncology tests, infectious disease testing, and other highly differentiated applications.

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

Fair Value of Net Assets Acquired

The allocation of purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date, based on the final valuation of Agena. We have made appropriate adjustments to deferred taxes and tax-related balances during the three months ended December 31. 2022.

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

Acquired Goodwill

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

Unaudited Pro Forma Information

The following unaudited pro forma financial information presents the combined results of operations of Mesa and Agena as if the acquisition had occurred on April 1, 2021 after giving effect to certain pro forma adjustments. 

The pro forma financial information includes adjustments that are directly attributable to the business combinations and are factually supportable. The pro forma adjustments include incremental amortization of intangible assets, additional stock-based compensation expense for key Agena employees, the removal of interest expense attributable to Agena’s external debt that was paid off as part of the acquisition, and the pro forma tax impact for such adjustments. Cost savings or operating synergies expected to result from the acquisition are not included in the pro forma results. For the three and nine months ended December 31, 2022, the pro forma financial information excludes $145 and $768 of non-recurring acquisition-related expenses, respectively. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.

Note 3. Revenue Recognition

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related software, consumables, and services. We evaluate revenues internally based primarily 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 such as reagents used for molecular and genetic analysis or solutions used for protein synthesis are critical to the ongoing use of our instruments. Consumables such as biological indicator test strips are used on a standalone basis.

We offer service and maintenance contracts for our instruments, which may contain performance obligations satisfied: over time, such as an obligation to perform repairs or replace parts as needed over a contractually-specified period of time; upon completion of a discrete service, such as stand-alone maintenance services or discrete services within annual contracts; or, in many cases, both.

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 obligation 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, 2022 and 2021, respectively:

*Revenues in the Clinical Genomics division represent transactions subsequent to the Agena Acquisition on October 20, 2021. 

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 exceeds 10% of total revenues.

Contract Balances

Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within other accrued expenses and 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 over time 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. We measure our cash equivalents at fair value using quoted market prices in an active market, and we classify them within Level 1 of the fair value hierarchy. 

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

We have outstanding $172,500 aggregate principal of 1.375% convertible senior notes due  August 15, 2025 (the "Notes"). We estimate the fair value of the Notes 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 were as follows:

Assets recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired. During the three months ended December 31, 2022, in response to the loss of a significant customer, we used Level 3 inputs to test the recoverability of the Clinical Genomics division’s intangible asset group and evaluate the division’s goodwill for impairment in response to the loss of a significant customer. After considering all information available to us as of the date of testing, we concluded that no impairment is indicated. Fair values preliminarily assigned to assets acquired and liabilities assumed in the Belyntic acquisition were measured using Level 3 inputs, and are subject to change. There were no transfers between the levels of the fair value hierarchy during the three and nine months ended December 31, 2022 or 2021, respectively.

Note 5. Supplemental Balance Sheets Information

Inventories consist of the following:

Prepaid expenses and other consist of the following:

Accrued payroll and benefits consist of the following:

Note 6. Goodwill and Intangible Assets, Net

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

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

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

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

Goodwill acquired in the Biopharmaceutical Development division resulted from the Belyntic acquisition and is tax deductible.

Note 7. Indebtedness

Credit Facility

We maintain a senior credit facility (the “Credit Facility”) that includes 1) a revolving credit facility in an aggregate principal amount of up to $75,000, 2) a swingline loan in an aggregate principal amount not exceeding $5,000, and 3) letters of credit in an aggregate stated amount not exceeding $2,500.  The Credit Facility matures in March 2025. The Credit Facility also provides for an incremental term loan or an increase in revolving commitments in an aggregate principal amount of at a minimum $25,000 and at a maximum $75,000, subject to the satisfaction of certain conditions and lender considerations. As of December 31, 2022, we had $19,000 outstanding under the Credit Facility. 

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

Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate, plus an applicable spread. We are obligated to pay quarterly unused commitment fees of between 0.15% and 0.35% of the Credit Facility’s aggregate principal amount, based on our leverage ratio. 

The financial covenants in the Credit Facility include a maximum leverage ratio of 5.0 to 1.0 for the period ended December 31, 2022, except that we  may have a leverage ratio of 5.75 to 1.0 for a period of four consecutive quarters following a permitted acquisition. The Credit Facility also stipulates a minimum fixed charge coverage ratio of 1.25 to 1.0. Other covenants include restrictions on our ability to incur debt, grant liens, make fundamental changes, engage in certain transactions with affiliates, or conduct asset sales. As of  December 31, 2022, we were in compliance with all covenants.

Convertible Notes 

On August 12, 2019, we issued an aggregate principal amount of $172,500 of Notes. The net proceeds from the Notes, after deducting underwriting discounts and commissions and other related offering expenses payable by us, were approximately $167,056. The Notes mature on August 15, 2025, unless earlier repurchased or converted, and bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 each year. 

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. Our current intent is to settle conversions entirely in shares of common stock. We will reevaluate this policy from time to time as we receive conversion notices from note holders. The circumstances necessary for conversion were not met during the three months ended December 31, 2022. As of December 31, 2022, the Notes are classified as a long-term liability on our Condensed Consolidated Balance Sheets as the circumstances necessary for conversion were not satisfied as of the end of the period. The if-converted value of the Notes did not exceed the principal balance as of  December 31, 2022.

The net carrying amount of the Notes was as follows:

We recognized interest expense on the Notes as follows:

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

Note 8. Stockholders' Equity

Stock-Based Compensation

During the nine months ended December 31, 2022, we issued stock options, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") pursuant to the Mesa Laboratories, Inc. 2021 Equity Incentive Plan (the "2021 Equity Plan"), which authorizes the issuance of 330 shares of common stock to eligible participants.

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

Stock-based compensation expense is included in cost of revenues, selling, general and administrative, and research and development expense in the accompanying unaudited Condensed Consolidated Statements of Operations.

The following is a summary of stock option award activity for the nine months ended December 31, 2022:

The stock options granted during the nine months ended December 31, 2022 vest in equal installments on the first, second, and third anniversary of the grant date.

The following is a summary of RSU award activity for the nine months ended December 31, 2022:

The outstanding time-based RSUs vest and settle in shares of our common stock on a one-for-one basis. Substantially all of the RSUs granted during the nine months ended December 31, 2022 vest in equal installments on the first, second, and third anniversary of the grant date. We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.

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

During the nine months ended December 31, 2022, the Compensation Committee of the Board of Directors created a plan to award 19 PSUs at target (the "FY23 PSUs") that are subject to both service and performance conditions to eligible employees. The performance period for the FY23 PSUs is from April 1, 2022 until March 31, 2023 and the service period is from April 1, 2022 until March 31, 2025. Of the total FY23 PSUs granted, 13 vest based on our achievement of specific performance criteria during fiscal year 2023 and they have a grant date fair value of $185.57. Based on actual performance through the nine months ended December 31, 2022, we reduced the number of awards expected to vest. The remaining 6 awards will be settled in shares of our common stock, but they are subject to performance criteria that are subjective and as such do not have a grant date. The awards will be marked-to-market each reporting period during the performance period and have a fair value of $166.21 per share as of December 31, 2022. The quantity of shares that will be issued upon vesting will range from 0% to 200% of the targeted number of shares; if the defined minimum targets are not met, then no shares will vest.

During fiscal year 2022, we awarded 7 PSUs to key employees of Agena that are subject to both service and performance conditions. Based on actual performance through the period ended December 31, 2022, the awards are not expected to vest. 

During fiscal year 2022, the Compensation Committee of the Board of Directors granted a special long-term equity award consisting of PSUs covering a target of 40 shares that is subject to both performance and service conditions to our Chief Executive Officer. Based on actual performance through the period ended December 31, 2022, the award is estimated to vest at 93%.

During the three months ended December 31, 2022, we adjusted our estimate of PSUs expected to vest under all outstanding plans based on actual results achieved through the performance period. We recorded a cumulative effect release of ($1,427) during the period ($1,127 net of tax as well as $0.21 per basic and diluted share for both the three and nine months ended December 31, 2022), which is recorded in general and administrative and selling expense on our Condensed Consolidated Statements of Operations.

In the future, we expect non-cash stock based compensation expense to decrease approximately $392 per quarter as a result of our new estimate of performance share units expected to vest. 

Note 9. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share (“diluted EPS”) is computed similarly to basic earnings (loss) per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include stock options and both time and performance based RSUs (collectively “stock awards”), as well as common shares underlying the Notes. Stock awards are excluded from the calculation of diluted EPS if they are subject to performance conditions that have not yet been achieved or are antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would then have an antidilutive effect.

The impact of the assumed conversion of the Notes calculated under the if-converted method was antidilutive, and as such, shares underlying the Notes were excluded from the diluted EPS calculation for the three and nine months ended December 31, 2022 and December 31, 2021. 

The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings (loss) per share:

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

Note 10. Income Taxes

For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax income. Each quarter, our estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. There is a potential for volatility in the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.

Our effective income tax rate was 76.5% and 384.8% for the three and nine months ended December 31, 2022, respectively, compared to 12.0% and (1.0%) for the three and nine months ended December 31, 2021. The effective tax rate for both the three and nine months ended December 31, 2022 differed from the statutory federal rate of 21% primarily due to the share-based payment awards for employees and the effect of income generated in foreign jurisdictions.  The effective tax rate for the three and nine months ended December 31, 2022 was higher than the comparable prior year periods primarily due to lower windfall benefits on stock option exercises and the vesting of restricted stock units and the effect of income in foreign jurisdictions.

Note 11. Commitments and Contingencies

We review the adequacy of our legal reserves on a quarterly basis and establish reserves for loss contingencies that are both probable and reasonably estimable. As of December 31, 2022, there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets.

As part of the Belyntic acquisition, we have agreed to pay an additional $1,500 to the sellers if contractually specified patents related to the technology purchased are issued. We believe that it is probable that the patents will be issued and we will pay the sellers in full within the next 36 months. The liability is recorded in other long-term liabilities on the accompanying Condensed Consolidated Balance Sheets.

Note 12. Segment Information

The following tables set forth our segment information:

The following table sets forth inventories by reportable segment. Our chief operating decision maker is not provided with any other segment asset information.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in thousands, except per share amounts)

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position; potential impairment of future earnings; anticipated effects of, and future actions to be taken in response to, the COVID-19 pandemic; results of acquisitions; management’s strategy, plans and objectives for future operations or acquisitions, product development and sales; product research and development; regulatory approvals; selling, general and administrative expenditures; intellectual property; development and manufacturing plans; availability of materials and components; and adequacy of capital resources and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management’s beliefs and assumptions. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company’s behalf. Words such as “seek,” “believe,” “may,” “intend,” “could,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including risks associated with: our ability to successfully grow our business, including as a result of acquisitions; the results that acquisitions have on our operations; our ability to consummate acquisitions at our historical rate and at appropriate prices, and our ability to effectively integrate acquired businesses and achieve desired results; the market acceptance of our products; technological or market viability of our products; reduced demand for our products, including as a result of competitive factors; conditions in the global economy and the particular markets we serve; significant developments or uncertainties stemming from governmental actions, including changes in trade policies and medical device regulations; the timely development and commercialization, and customer acceptance, of enhanced and new products and services; retirement of old products and customer migration to new products; projections of revenues, growth, operating results, profit margins, earnings, expenses, margins, tax rates, tax provisions, liquidity, cash flows, demand, and competition; the effects of additional actions taken to become more efficient or lower costs; supply chain challenges; cost pressures and the overall effects of the current high inflation environment on customers’ purchasing patterns; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; product liability; information security; outstanding claims, legal and regulatory proceedings; international business challenges including anti-corruption and sanctions laws; tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic, industry, and capital markets conditions, including rising interest rates and potential recessionary conditions; the timing of any of the foregoing; and assumptions underlying any of the foregoing. Such risks and uncertainties also include those listed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2022 and in this report. The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Overview

We are a multinational manufacturer, developer, and seller of life science tools and quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia Pacific, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins. 

As of December 31, 2022, we managed our operations in four reportable segments, or divisions: Clinical Genomics, Sterilization and Disinfection Control, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions are described further in "Results of Operations" below. 

Corporate Strategy

We strive to create shareholder value and further our purpose of Protecting the Vulnerable^® by growing our business both organically and through acquisitions, by improving our operating efficiency, and by continuing to hire, develop and retain top talent. As a business, we commit to our purpose of Protecting the Vulnerable^® every day by taking a customer-focused approach to developing, building, and delivering our products. We serve a broad set of industries, in particular the pharmaceutical, healthcare services, and medical device verticals, in which the safety, quality, and efficacy of products is critical.  By delivering the highest quality products possible, we are committed to protecting people, the environment, and end products.

Organic Revenues Growth

Organic revenues growth is driven by the expansion of our customer base, increases in sales volumes, new product offerings, and price increases, and may be affected positively or negatively by changes in foreign currency rates. Our ability to increase organic revenues is affected by general economic conditions, both domestic and international, customer capital spending trends, competition, and the introduction of new products. Our policy is to price our products competitively and, where possible, we pass along cost increases to our customers in order to maintain our margins. We typically evaluate costs and pricing annually with price increases effective January 1; however, as a result of high inflation in recent quarters, we implemented an additional mid-year price increase late in the second quarter of fiscal year 2023.

Inorganic Growth - Acquisitions

During the third quarter of fiscal year 2023, we completed the Belyntic acquisition for an aggregate purchase price of $6,450. The acquisition provided a natural complement to our peptide synthesis business by adding a consumables product line.

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

Over the past decade, we have consummated a number of acquisitions as part of our growth strategy.  These acquisitions have allowed us to expand our product offerings, globalize our company, and increase the scale at which we operate, which in turn affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®.

Improving Our Operating Efficiency

We maximize value in both our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations. We achieve efficiencies using the four pillars that make up The Mesa Way, which is our customer-centric, lean-based system for continuously improving and operating a set of high-margin, niche businesses. The Mesa Way is focused on: Measuring What Matters using our customers' perspective and setting high standards for performance; Empowering Teams to improve operationally and exceed customer expectations; Steadily Improving using lean-based tools designed to help us identify the root cause of opportunities and prioritize the biggest opportunities; and Always Learning so that performance continuously improves. 

Gross profit is affected by many factors including our product mix, manufacturing efficiencies, costs of products and labor, foreign currency rates, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately the mix of sales will continue to impact our overall gross profit.

Hire, Develop, and Retain Top Talent

At the center of our organization are talented people who are capable of taking on new challenges using a team approach. It is our exceptionally talented workforce that works together and uses our lean-based tool set to find ways to continuously improve our products, our services, and ourselves, resulting in long-term value creation for our shareholders. 

General Trends

We are a global company, and a significant portion of our revenues and expenses are denominated in currencies other than the U.S. dollar (“USD”). Exchanges rates have been volatile throughout our fiscal year 2023 and a weakening or strengthening of foreign currencies against the USD increases or decreases our revenues and gross profit margins as well as impacting the comparability of our results between periods. Currency exchange rates negatively impacted our reported revenues for the nine months ended December 31, 2022 as compared to the same period in the previous fiscal year. Any further strengthening of the USD against major currencies would adversely impact our reported revenues, but would, to a lesser extent, positively impact our reported expenses for the remainder of the fiscal year; conversely, any weakening of the U.S. dollar against major currencies would positively impact our reported revenues but would negatively impact our expenses for the remainder of the fiscal year.

We have experienced, and expect to continue to experience, inflation impacting the cost of raw materials, labor, and freight, as a result of global macroeconomic trends, including government mandated actions in response to the Coronavirus pandemic (“COVID-19”) and the conflict between Russia and Ukraine. Our actions to mitigate the impact of supply chain disruptions and inflation, including pre-ordering components in higher than usual quantities, sourcing new vendors and increasing prices have been somewhat successful; however, raw materials shortages have at times impacted our Calibrations Solutions division, in particular.

We experienced disruptions to our business in China resulting from government mandated shut-downs and restrictions during our fiscal year 2023. Additionally, the Chinese government recently revoked many COVID-19 related restrictions and while these policy changes did not significantly impact our results of operations for our third fiscal quarter, it is possible that future quarters may be impacted. The impact of COVID-19 has negatively impacted commercial execution in different ways throughout fiscal year 2023, and in some cases, has limited sales of Clinical Genomics consumables to existing customers and instruments to new customers. Even after the COVID-19 pandemic has largely subsided as a public health matter, we may experience material adverse impacts to our business as a result of the pandemic's adverse impact on the global economy, in-person collaboration and sales efforts, and our customers’ changed purchasing behaviors and confidence.

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

Results of Operations

Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing in Item 1. Financial Statements (in thousands, except percent data).

Revenues from our reportable segments decreased 1% and increased 30% for the three and nine months ended December 31, 2022, respectively, as compared to the same periods in the prior year.  The decrease in revenues for the three months ended December 31, 2022 was attributable to a 2.1% decline in organic revenues which resulted from both unfavorable changes in foreign currency rates and $1,500 of COVID-19 related revenues for the three months ended December 31, 2021. Revenues growth for the nine months ended December 31, 2022 was primarily attributable to the acquisition of Agena, and to a lesser extent, organic revenues growth of 3.5%. 

Gross profit as a percentage of revenues increased seven and two percentage points for the three and nine months ended December 31, 2022, respectively, primarily as a result of the recognition of a $6,062 non-cash inventory step-up charge, as part of purchase accounting for the Agena acquisition during the three months ended December 31, 2021.

Results by reportable segment are as follows:

(*) Revenues in the Clinical Genomics division represent transactions subsequent to the Agena Acquisition on October 20, 2021. 

Our unaudited condensed consolidated results of operations are as follows:

(¤) Not a meaningful comparison

Reportable Segments

Clinical Genomics

The Clinical Genomics division develops, manufactures, and sells highly sensitive, low-cost, high-throughput genetic analysis tools used by clinical labs to perform genomic clinical testing in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics and oncology related applications.

Clinical Genomics revenues decreased 5% for the three months ended December 31, 2022 compared to the relevant prior year period, primarily as a result of a reduction in COVID-related revenues of $1,374 and adverse changes in foreign currency exchange rates, partially offset by a longer period of ownership of Agena in the third quarter of fiscal year 2023. Clinical Genomics revenues increased 194% for the nine months ended December 31, 2022 compared to the relevant prior year period due to a significantly shorter period of ownership of Agena for the nine months ended December 31, 2021. The loss of Sema4 is expected to result in a significant reduction of anticipated revenues for this division in future quarters. However, our distribution partner Guangzhou Darui Biotechnology Co., Ltd. recently received China's National Medical Products Administration approval for a Class III in vitro diagnostics ("IVD") panel covering hereditary deafness. This is the first approved Class III IVD panel in China from our distribution partner program.

Gross profit percentage for the Clinical Genomics division increased 28% and 31% for the three and nine months ended December 31, 2022, respectively, compared to the relevant prior year periods due to the amortization of a $6,062 inventory step-up required by purchase accounting in the third quarter of fiscal year 2022. We have taken actions to reduce our costs in this division which will help offset the loss of revenues from Sema4.  

Sterilization and Disinfection Control

Our Sterilization and Disinfection Control division manufactures and sells biological, cleaning, and chemical indicators which are used to assess the effectiveness of sterilization and disinfection processes in the hospital, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Sterilization and disinfection control products are disposable and are used on a routine basis.