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Note 12 - Significant Transactions | 6 Months Ended
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Sep. 30, 2020
Notes to Financial Statements |
Significant Transactions [Text Block] | Note 12. Significant Transactions GPT Acquisition On October 31, 2019, we completed the acquisition of 100% of the outstanding shares of GPT, which comprises our new reportable segment - Biopharmaceutical Development. The acquisition of GPT expanded our presence into a new market--immunoassays and peptide synthesis solutions--that accelerate the discovery, development, and manufacturing of biotherapeutic drugs. GPT systems include laboratory instruments, consumables, kits, and software that maximize laboratory productivity by miniaturizing and automating immunoassays at nanoliter scale. GPT's protein detection is used most frequently by pharmaceutical and biotech companies that are developing protein-based drugs. This division also provides instruments, consumables, and software for the chemical synthesis of peptides from amino acids which are used in the discovery of new peptide-based drug therapies. After adjustments, we paid cash consideration of $181,547 to the sellers in the transaction. The acquisition was considered a stock purchase for tax purposes. Preliminary Allocation of Purchase Price We accounted for the GPT Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of GPT were recorded as of the acquisition date, at their respective estimated fair values, and consolidated with those of Mesa Labs. During the three months ended September 30, 2020, we finalized the valuation of net assets acquired. We obtained the information used to prepare the preliminary valuation during due diligence and from other sources. In the months after closing, we obtained additional information about these assets and liabilities as we learned more about GPT. We refined the estimates of fair value to more accurately allocate the purchase price. Only items identified as of the acquisition date were considered for subsequent adjustment. The preparation of the valuation required the use of Level 3 inputs, which are subject to significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates. During the six months ended September 30, 2020, we finalized the valuation of the inventory step-up, intangible assets acquired, and property, plant, and equipment; however we have not finalized the valuation of certain tax related items, including deferred taxes. The final purchase price allocation will be completed within one year of the closing of the transaction, and may be refined further in the coming months as we learn more about GPT and therefore we can more accurately allocate the purchase price. The measurement period adjustments to the acquisition fair values of the assets were due to the refinement of our valuation models, assumptions and inputs. The updated assumptions and inputs incorporated additional information obtained subsequent to the closing of the transaction related to facts and circumstances that existed as of the acquisition date. The significant purchase price allocation changes during the six months ended September 30, 2020 included a net decrease of $6,002 in the value of intangible assets, a decrease of $3,752 in the value of the inventory step-up, and an increase of $878 in the value of property, plant and equipment, net. Long-term deferred tax liabilities also decreased by a net amount of $2,010, primarily due to the tax effect of these changes to the purchase price allocation. During the six months ended September 30, 2020, the cumulative net decrease to amortization expense recorded as a result of the decrease to intangible assets was $344, of which $178 of expense was recorded to cost of revenues and a benefit of $522 was recorded in general and administrative costs. Additionally, a $207 cumulative increase to depreciation expense was recorded to general and administrative costs during the three months ended September 30, 2020 as a result of the increase in the fair value of property, plant and equipment. The cumulative impacts of all adjustments to date have been reflected in the Unaudited Condensed Consolidated Financial Statements as of and for the six months ended September 30, 2020. The components and allocation of the purchase price consist of the following amounts:
| Note |  | Fair Value |
Cash and cash equivalents |  |  | $ | 4,654 |
Accounts receivable, net | (a) |  |  | 6,663 |
Inventories, net | (b) |  |  | 12,522 |
Prepaid income taxes |  |  |  | 477 |
Prepaid expenses and other |  |  |  | 13,649 |
Property, plant and equipment, net |  |  |  | 1,523 |
Other assets |  |  |  | 1,469 |
Deferred taxes |  |  |  | 10,340 |
Intangible assets: |  |  |  |  |
Customer relationships | (c) |  |  | 77,500 |
Trade name | (c) |  |  | 4,600 |
Non-compete agreements | (c) |  |  | - |
Acquired technology | (c) |  |  | 11,800 |
Goodwill | (d) |  |  | 84,028 |
Total Assets acquired |  |  | $ | 229,225 |
Accounts payable |  |  |  | 599 |
Accrued salaries and payroll taxes |  |  |  | 10,735 |
Other short-term liabilities |  |  |  | 157 |
Unearned revenues |  |  |  | 2,089 |
Other accrued expenses |  |  |  | 5,068 |
Deferred taxes |  |  |  | 23,411 |
Other long-term liabilities |  |  |  | 965 |
Total liabilities assumed |  |  | $ | 43,024 |
Total closing amount, net of cash acquired |  |  | $ | 181,547 |
| (a) | Accounts receivable is composed of trade accounts receivable, net which is expected to be collected.
| (b) | Finished goods inventory of GPT includes $8,066 of inventory-step up, which is required to report inventory at fair value at the time of acquisition. The inventory step-up was amortized to cost of revenues over approximately eight months following the acquisition date, which resulted in a temporary reduction in gross profit for the business. During the period from November 1, 2019 until March 31, 2020, we recorded $8,502 of amortization of inventory step-up costs in cost of revenues on the Condensed Consolidated Statement of Income. The final inventory valuation was completed during the six months ended September 30, 2020 and was lower than our preliminary valuation, resulting in a cumulative effect decrease of $436 in amortization of inventory step up costs. We do not expect further adjustments to the inventory step-up valuation, nor do we expect changes in the amortization to be recorded.
| (c) | Customer relationships and acquired technology are being amortized on a straight-line basis over a 10 year period. Amortization expense for customer relationships is recorded to general and administrative expenses; amortization expense for acquired technology is recorded to cost of revenues. During the six months ended September 30, 2020, $1,409 of amortization expense related to the GPT intangible assets was recorded to general and administrative costs and $473 of amortization expense was recorded to cost of goods sold and allocated to the Biopharmaceutical Development division, including the cumulative-effect benefit to amortization expense discussed above. Trademarks associated with this acquisition are considered indefinite-lived intangibles. The estimated fair value of identifiable intangible assets was determined primarily using the income approach, which requires a forecast of all the expected future cash flows associated with the identified intangible assets.
| (d) | Acquired goodwill of $84,028, all of which is allocated to the Biopharmaceutical Development reportable segment, represents the value expected to arise from organic revenues growth projections that are expected to exceed that of our legacy divisions, and the opportunity to expand into a new market with well-established market share. The goodwill acquired is not deductible for income tax purposes.
Unaudited Pro Forma Information GPT's operations contributed $15,080 to revenues and ($2,083) of net loss to our consolidated results during the six months ended September 30, 2020 including cumulative-effect adjustments. We included the operating results of GPT in our Condensed Consolidated Statements of Income beginning on November 1, 2019, subsequent to the acquisition date. The following pro forma financial information presents the combined results of operations of Mesa Labs and GPT as if the acquisition had occurred on April 1, 2019 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected only include those adjustments that are directly attributable to the GPT Acquisition, factually supportable and have a recurring impact; they do not reflect any adjustments for anticipated expense savings resulting from the acquisition and are not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on April 1, 2019 or of future results. Prior to the GPT Acquisition, GPT did not generate monthly or quarterly financial statements that were prepared in accordance with GAAP.
|  | Six Months Ended September 30, |
|  | 2019 |
Pro forma total revenues (1) |  | $ | 67,907 |
Pro forma net income (2) |  |  | 6,435 |
(1) Net revenues were adjusted to include net revenues of GPT. (2) Pro forma adjustments to net earnings attributable to Mesa Labs include the following:
| ● | Excludes interest expense attributable to GPT's external debt that was paid off as part of the acquisition.
| ● | Additional amortization expense of $4,057 for the six months ended September 30, 2019 based on the increased fair value of amortizable intangible assets acquired.
| ● | For the six months ended September 30, 2019, $351 additional stock based compensation expense representing expense for performance share units awarded to certain key GPT employees.
| ● | Income tax effect of the adjustments made at a blended federal and state statutory rate (approximately 25%).

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