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Note 1 - Description of Business and Summary of Significant Accounting Policies | 12 Months Ended
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Mar. 31, 2020
Notes to Financial Statements |
Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block] | 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 Labs.” We pursue a strategy of focusing primarily on quality control products and services which are sold into niche markets that are driven by regulatory requirements. We prefer markets in which we can establish a strong presence and achieve high gross margins. As of March 31, 2020 we are organized into four divisions, each of which represents a reportable segment. Our Sterilization and Disinfection Control Division manufactures and sells biological, cleaning, and chemical indicators. Biological, cleaning, and chemical indicators are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Our Instruments Division designs, manufactures, and markets quality control instruments and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. With the acquisition of Gyros Protein Technologies Holding AB ("GPT" and the "GPT Acquisition") during the third quarter of fiscal year ended March 31, 2020 ( which we refer to as "fiscal year 2020" ), which is discussed further in Note 4. "Significant Transactions," we added a new reportable segment: Biopharmaceutical Development. Our Biopharmaceutical Development Division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immonoassays and peptide synthesis solutions accelerate the discovery, development, and manufacturing of biotherapeutic drugs. Our Continuous Monitoring Division, (formerly Cold Chain Monitoring), designs, develops, and markets systems which are used to monitor various environmental parameters such as temperature, humidity, and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies, and laboratory environments. Our Cold Chain Packaging operating segment has ceased operations and is no longer considered a reportable segment. Cold Chain Packaging results, along with any unallocated corporate expenses, are reported within Corporate and Other. Principals of Consolidation and Basis of Presentation Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include our accounts and our wholly owned subsidiaries after elimination of all intercompany accounts and transactions. GPT results are consolidated with Mesa's financial statements beginning November 1, 2019, the first full day following the acquisition. Prior period results have not been recast and are therefore not comparable with the year ending March 31, 2020. 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 (loss) within stockholders’ equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year end exchange rates and statements of operations accounts are translated at weighted average rates. Fair Value of Financial Instruments 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. For assets and liabilities recorded or disclosed at fair value on a recurring basis, we determine fair value based on the following: Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. 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 can be corroborated with observable market data. Level 3: Unobservable inputs for the asset or liability. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Revenue Recognition Our revenues come from product sales, which include hardware and software, and consumables; as well as services, which include installation, discrete maintenance services, and ongoing maintenance contracts. Revenue is recognized when obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to our customers. We recognize as revenue the amount of consideration we expect to receive in exchange for transferring products or services to our customers (the transaction price). For all revenue arrangements, prices are fixed at the time of purchase and no price protections or variables are offered. Substantially all 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 the sale of instruments and consumable generally consist of the promise to sell tangible goods to distributors or end users. Ownership of these goods is typically transferred at the time of shipment, at which time we have satisfied our performance obligation. Evidence of an arrangement is typically in the form of a purchase order. Revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied, typically by shipping ordered products. Services: We generally generate service revenues from three categories: 1 ) discrete installation or testing of our hardware and software, 2 ) discrete but recurring calibration and maintenance of our hardware or, 3 ) contracted and recurring testing and maintenance services and software license subscriptions. Performance obligations arise from service contracts when discrete services are contracted in advance and performed at a future time, often at the time of the customer's choosing. In this case, the performance obligation is satisfied and revenue is recognized upon the customer's acceptance of the completion of specified work. Alternately, service revenue may be recognized for contracted services or maintenance provided continually over a period of time, and our performance obligations are satisfied by completing any service that is contractually required, if applicable, or simply by the passage of time if no services are required or requested. For contracted services, revenue is recognized on a straight-line basis over the life of the service contract, which is a faithful depiction of these annual service contracts that may or may not be invoked. 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 credit and review process, and payment is typically due within 60 days or less. We elected the practical expedient allowing us to expense commission costs as incurred. For the substantial majority of our contracts that have an original duration of one year or less, we have not disclosed the transaction price for future performance obligations as of the end of each reporting period or when we expect to recognize sales. Additionally, we have elected the practical expedient which permits us to not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. None of our contracts contained a financing component as of March 31, 2020. Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Shipping and handling Payments by customers to us for shipping and handling costs are included in revenues on the consolidated statements of operations, while our expense is included in cost of revenues. Shipping and handling for inventory and materials purchased by us is included as a component of inventory on the consolidated balance sheets, and in cost of revenues when the product is sold. Unearned Revenues Certain of our products have associated annual service contracts whereby we provide repair, technical support, and various other analytical or maintenance services. In the event that these contracts are paid up front by the customer, the associated amounts are deferred and recognized ratably over the term of the service period, generally one year. Accrued Warranty Expense We provide limited product warranty on our products and, accordingly, accrue an estimate of the related warranty expense at the time of sale. Cash and Equivalents We classify all highly liquid investments with a maturity of three months or less at the date of purchase as cash equivalents, including highly liquid investments in money market funds with an original maturity of three months or less. All cash equivalents are carried at cost, which approximates fair value. Accounts Receivable and Allowance for Doubtful Accounts All trade accounts are reported at net realizable value on the accompanying Consolidated Balance Sheets, adjusted for any write-offs and net of allowances for doubtful accounts. The allowance for doubtful accounts represents our best estimate of the credit losses expected from our trade accounts. We use judgment about the timing, frequency, and severity of credit losses to determine the allowances, and a difference from our original judgment could materially affect the provision for credit losses and, therefore, net earnings. We regularly perform detailed reviews of our receivables to determine if an impairment has occurred and we evaluate the collectability of receivables based on a combination of various financial and qualitative factors that may affect customers’ ability to pay, including customers’ financial condition, and history of payment. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected. Additions to the allowances for doubtful accounts are charged to current period earnings, amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously written-off accounts increase the allowances. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves would be required. We do not believe that trade accounts receivable represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographical areas. We recorded $1, $13 and $17 of expense associated with doubtful accounts for the years ended March 31, 2020 , 2019 and 2018 , respectively. Inventories Inventories include the costs of materials, labor, and overhead. Inventories are stated at the lower of cost or net realizable value, using the estimated average cost per unit to determine cost. We evaluate labor and overhead costs annually, unless specific circumstances necessitate a mid-year evaluation. Our work in process and finished goods inventory includes raw materials, labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product. The significant majority of our sterilization and disinfection control inventory is tracked by lot number, thus it is generally based on actual hours. We monitor inventory cost compared to selling price in order to determine if a lower of cost or net realizable value reserve is necessary. Throughout the year, we perform various physical cycle count procedures on our inventories and we estimate and maintain an inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap. Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for major renewals and improvements are capitalized, while expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of our assets. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and any related gain or loss is reflected in other expense, net in the accompanying Consolidated Statements of Operations. At least annually, we evaluate, and adjust when necessary, the estimated lives of property, plant and equipment. Any changes in estimated useful lives are recorded prospectively. Estimated useful lives of depreciable assets are as follows:
Category |  | Useful Lives |
Buildings (years) |  | 40 |
Manufacturing Equipment (years or less) |  | 7 |
Computer equipment (years or less) |  | 3 |
Land is not depreciated and construction in progress is not depreciated until placed in service. Leasehold improvements are depreciated over the lesser of the economic life or the remaining term in the respective lease. Leases We adopted ASU 2016 - 02, “Leases (Topic 842 )” (“ASC 842” ) as of April 1, 2019. Under ASC 842, we determine whether contractual arrangements contain a lease at the inception of the arrangement. If a lease is identified in an arrangement, we recognize a right-of-use asset and liability on our Consolidated Balance Sheets and determine whether the lease should be classified as a finance or operating lease. We do not have any finance leases. We do not recognize assets or liabilities for leases with lease terms of less than 12 months. Under the new lease standard, a contract is a lease or contains one when ( 1 ) the contract contains an explicitly or implicitly identified asset and ( 2 ) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract in exchange for consideration. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments. Adjustments would also be made for accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets, none of which are present in any of our current lease contracts. When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease. Otherwise we use our incremental borrowing rate based on the information available at lease commencement. Our short term leases are not material. Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Lease expense is recorded in cost of products, selling, general and administrative, or research and development on our Statements of Operations, depending on the nature of use of the underlying asset. Many of our leases include one or more renewal or termination options at our discretion, which are included in the determination of the lease term if we are reasonably certain to exercise the option. We have also entered into lease agreements that have variable payments related to certain indexes. Variable lease payments are recognized in the period in which those payments are incurred. All nonlease components are readily identifiable in our lease contract. We account for non-lease components separately from the lease component to which it is related. Goodwill and Intangible Assets Goodwill and other intangible assets result from our acquisition of existing businesses. Goodwill and indefinite-lived intangible assets (trademarks that we intend to renew and continue using indefinitely) are not subject to amortization, but instead are tested for impairment at least annually or when events or changes in circumstances indicate that the carrying amount may not be recoverable, and we are required to record any necessary impairment adjustments. We perform impairment tests of goodwill at our reporting unit level. Upon an acquisition, we record the fair value of identifiable intangible assets using, among other sources of relevant information, independent appraisals, or actuarial or other valuations. We determine the useful lives of our finite intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized on a straight-line basis, over their useful lives, generally ranging from three to 16 years (See Note 8. “Goodwill and Long-Lived Assets”). Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purposes of reviewing finite-lived assets for potential impairment, assets are grouped at the asset group level. The fair value measurement for intangible asset impairment is based on Level 3 inputs. See “Fair Value of Financial Instruments” for a description of level inputs. We first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value. The estimated fair value of the asset is generally determined using a discounted cash flow projection model. In certain cases, management uses other market information, when available, to estimate the fair value of an asset. The impairment charges represent the excess of each asset’s carrying amount over its estimated fair value. We believe that our goodwill and intangible assets are recoverable as of March 31, 2020. Research & Development Costs We conduct research and development activities for the purpose of developing new products and enhancing the functionality, effectiveness, reliability, and accuracy of existing products. Research and development expense is predominantly comprised of labor costs and third -party consultants. Research and development costs are expensed as incurred. Stock-based Compensation We issue shares in the form of stock options and full-value awards as part of employee compensation pursuant to the Mesa Laboratories, Inc. 2014 Equity Plan (the "2014 Equity Plan"). Stock options and service-based stock awards generally vest equally over a four or five year term and stock options generally expire after six years. Awards granted to non-employee directors generally vest one year from the grant date. We record stock-based compensation expense based on the fair value of stock awards at the grant date and recognize the expense over the related service period following a straight line vesting expense schedule. We allocate stock-based compensation expense to cost of revenues, selling, research and development, and general and administrative expense in the Consolidated Statements of Operations. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option valuation model. The assumptions used to calculate the fair value of options granted reflect market conditions and our historical experience. We estimate forfeitures based on historical data when determining the amount of stock-based compensation costs to be recognized in each period using a dynamic forfeiture model. Restricted stock units ("RSUs") issued by us are equivalent to nonvested shares under the applicable accounting guidance. The fair value of RSUs is based on the closing price of Mesa's common stock on the award date, less the present value of expected dividends not received during the vesting period. Expense for performance-based RSUs ("PSUs") is recognized when it is probable the performance goal will be achieved. Performance goals are determined by the Board of Directors and may include measures such as revenues growth and profitability targets. Compensation expense on stock awards subject to performance conditions is recognized over the longer of the estimated performance goal attainment period or time vesting period. Income Taxes Income tax expense includes U.S., state, local and international income taxes, plus a provision for U.S. taxes on undistributed earnings of foreign subsidiaries and other prescribed foreign entities not deemed to be indefinitely reinvested. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting basis and the tax basis of existing assets and liabilities. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. We are involved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: ( 1 ) the tax position is not “more likely than not” to be sustained, ( 2 ) the tax position is “more likely than not” to be sustained, but for a lesser amount, or ( 3 ) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, ( 1 ) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; ( 2 ) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and ( 3 ) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: ( 1 ) the tax position is “more likely than not” to be sustained, ( 2 ) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or ( 3 ) the statute of limitations for the tax position has expired (See Note 14. “Income Taxes”). Acquisition Related Contingent Consideration Liabilit ies Acquisition related contingent consideration liabilities consist of estimated amounts due under various acquisition agreements and is typically based on either revenues growth or specified profitability growth metrics. At each reporting period, we evaluate the expected future payments and the associated discount rate to determine the fair value of the contingent consideration, and record any necessary adjustments in other expense, net on the Consolidated Statements of Operations. Legal Contingencies We are involved in various claims and legal proceedings that arise in the normal course of business. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss (See Note 15. “Commitments and Contingencies”). Acquisitions For the years ended March 31, 2020 , 2019 , and 2018 , our acquisitions of businesses (net of cash acquired) totaled $184,102, $4,840, and $15,518, respectively. Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016 - 13, Financial Instruments -Credit Losses (Topic 316 ): Measurement of Credit Losses on Financial Instruments, as modified by ASU No. 2018 - 19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in earlier recognition of allowances for losses. The ASU is effective for public business entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are in the process of implementing changes to our accounting policies and processes for the new standard. We believe that the most notable impact of this ASU will relate to our processes for assessing the adequacy of our allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses. We are still calculating the impact of expected credit losses on our accounts receivable, including accounting for the change to the macro-economic environment precipitated by the COVID- 19 pandemic. Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU 2016 - 02, Leases (Topic 842 ) . The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheets for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to present financial statement users with the ability to assess the amount, timing, and uncertainty of cash flows arising from leases. On April 1, 2019, we adopted ASU 2016 - 02 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning April 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under topic 840, Leases. The standard had a material impact on our Consolidated Balance Sheets, but did not have a significant impact on our Consolidated Statements of Operations or our Consolidated Statements of Cash Flows. The most significant impact was the recognition of the right-of-use ("ROU") assets and lease liabilities on our Consolidated Balance Sheets. As part of adopting the new lease standard, we have made the following elections:
| ● | To carry forward the historical lease determination and classification conclusions as established under the old standard, and not reassess initial direct costs for existing leases;
| ● | Not to apply the balance sheet recognition requirements of the new lease standard to leases with a term of one year or less (short-term leases); and
| ● | For all classes of underlying assets, to account for non-lease components of a contract separately from the lease component to which they are related.
As a result of the cumulative impact of adopting ASU 2016 - 02, we recorded operating lease ROU assets of $1,461 and operating lease liabilities of $1,411 as of April 1, 2019. Our calculations were based on the present value of the future lease payments on the date of adoption. Refer to Note 7. Leases for additional disclosures required by ASC 842.

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