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Note 4 - Significant Transactions | 12 Months Ended
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Mar. 31, 2021
Notes to Financial Statements |
Significant Transactions [Text Block] | Note 4. Significant Transactions Business Consolidation Costs Butler, New Jersey During the year ended March 31, 2021, we made the decision to close our facility located in Butler, New Jersey during the quarter ending June 30, 2021. The facility is primarily used in the production of our gas flow calibration and air sampling equipment, which is part of our Instruments division. Our manufacturing facility in Lakewood, Colorado is currently undergoing renovations that will allow it to accommodate the production of the gas flow calibration and air sampling equipment. Consolidating the production of these products is expected to reduce facilities costs and streamline our use of lean manufacturing tools under central management to further encourage production efficiencies. As a result of the facility consolidation, we incurred a total of $588 of business consolidation costs during the year ended March 31, 2021, which were recorded to cost of revenues, selling, and general and administrative expense on the Consolidated Statements of Income. Of the total expense, $335 related to severance, and $248 related to other costs, including accelerated depreciation. As of March 31, 2021, a total of $317 remained outstanding and accrued, which primarily relates to severance costs. We do not expect to incur any material expenses related to the Butler, New Jersey consolidation in future periods. Dissolution of Packaging Division We exited the packaging business (formerly the Cold Chain Packaging Reportable Segment) during the year ended March 31, 2020 because it has historically been our least profitable segment and was no longer aligned with our long-term strategic goals. During the year ended March 31, 2020, we assisted our customers in transitioning their business to other packaging vendors and we stopped purchasing new inventory. As a result of completing our final sales in the division, we wrote off the remaining value of intangibles and goodwill, resulting in a charge to impairment of goodwill and long-lived assets of $276 during the year ended March 31, 2020. During the year ended March 31, 2019 we recorded an impairment of goodwill and long-lived assets of $4,774 due to the decline of the packaging division. We incurred $51 and $150 of severance and facility closure expenses during the years ended March 31, 2020 and March 31, 2019, respectively. All amounts have been paid and no further exit costs are expected to be incurred. We have stopped presenting Cold Chain Packaging as a reportable segment, instead presenting the results of its operations as part of Corporate and Other, which aligns with Management's approach in evaluating the business. GPT Acquisition On October 31, 2019, we completed the acquisition of 100% of the outstanding shares of GPT, which comprises our newest 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 manufacture of biotherapeutic drugs. GPT systems include laboratory instruments, consumables, kits, and software that maximize laboratory productivity by miniaturizing and automating immunoassays at the 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. Fair Value of Net Assets Acquired We accounted for the GPT Acquisition as the purchase of a business, and GPT's results of operations have been included in our consolidated statements of operations and cash flows from the date of acquisition. Under the acquisition method of accounting, the net assets of GPT were initially recorded as of the acquisition date at their respective estimated fair values using information obtained during due diligence and from other sources. Subsequent to the closing of the transaction, we obtained additional information related to the facts and circumstances that existed at the acquisition date, and we refined our valuation models, assumptions, and inputs accordingly in order to more accurately estimate fair value for the purchase price allocation. 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 applicable discount rates. During the year ended March 31, 2021, we finalized the valuation of net assets acquired. The significant purchase price allocation changes during the year ended March 31, 2021 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; an increase of $878 in the value of property, plant and equipment, net; and increases of $1,899 to other accrued expenses and $500 to accounts receivable, net related to GPT's sales tax obligations that were partially indemnified in our sale and purchase agreement. See Note 15. "Commitments and Contingencies" for more information on the sales tax liability. We also made adjustments to deferred tax assets and deferred tax liabilities primarily due to the tax effect of the aforementioned changes to the purchase price allocation. During year ended March 31, 2021, the cumulative net decrease to amortization expense recorded as a result of the decrease to intangible assets was $344, which is comprised of a benefit of $522 recorded in general and administrative costs and $178 of expense recorded in cost of revenues. Additionally, a $207 cumulative increase to depreciation expense was recorded to general and administrative costs as a result of the increase in the fair value of property, plant and equipment. The cumulative impacts of all adjustments have been reflected in the consolidated financial statements as of and for the year ended March 31, 2021. The components and allocation of the purchase price consist of the following amounts:
| Note |  | Fair Value |
Cash and cash equivalents |  | $ | 4,654 |
Accounts receivable | (a) |  |  | 6,663 |
Inventories | (b) |  |  | 12,522 |
Prepaid income taxes |  |  | 477 |
Prepaid expenses and other |  |  | 14,149 |
Property, plant and equipment |  |  | 1,523 |
Other assets |  |  | 1,469 |
Intangible assets: |  |  |  |  |
Customer relationships | (c) |  |  | 77,500 |
Trade names | (c) |  |  | 4,600 |
Non-compete agreements | (c) |  |  | - |
Acquired technology | (c) |  |  | 11,800 |
Goodwill | (d) |  |  | 85,130 |
Total Assets acquired |  | $ | 220,487 |
Accounts payable |  |  | 599 |
Accrued salaries and payroll taxes |  |  | 10,735 |
Other short-term liabilities |  |  | 157 |
Unearned revenues |  |  | 2,089 |
Other accrued expenses |  |  | 6,967 |
Deferred taxes |  |  | 12,774 |
Other long-term liabilities |  |  | 965 |
Total liabilities assumed |  | $ | 34,286 |
Total closing amount, net of cash acquired |  | $ | 181,547 |
| (a) | Accounts receivable is composed of trade accounts receivable, which is expected to be collected.
| (b) | GPT's finished goods inventory includes $8,066 of inventory-step up, which is required to be reported 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 through March 31, 2020, we recorded $8,502 of amortization of inventory step-up costs in cost of revenues on the Consolidated Statements of Income. The final inventory valuation was completed during the year ended March 31, 2021 and was lower than our preliminary valuation, resulting in a cumulative effect decrease of $436 in amortization of inventory step-up costs.
| (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 year ended March 31, 2021, $7,487 of amortization expense related to the GPT intangible assets was recorded to general and administrative costs, and $1,430 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 expected future cash flows associated with the identified intangible assets.
| (d) | Acquired goodwill of $85,130, all of which is allocated to the Biopharmaceutical Development reportable segment, represents the value expected to arise from projected organic revenues growth that is expected to exceed that of our legacy divisions, and the value expected to arise from the opportunity to expand into a new market with well-established market share. The goodwill acquired is not deductible for income tax purposes.
Acquisition related costs of $1,399 for the year ended March 31, 2020 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 Consolidated Statements of Income in general and administrative expenses. Unaudited Pro Forma Information GPT's operations contributed $33,892 to revenues and ($9,006) of net loss to our consolidated results during the year ended March 31, 2021, including cumulative-effect adjustments. The loss includes over $8,900 in amortization of intangibles acquired in a business combination and over $3,000 of realized and unrealized losses on foreign currency. We included the operating results of GPT in our Consolidated Statements of Income beginning November 1, 2019, immediately 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, 2018, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected include only those adjustments that are factually supportable and directly attributable to the GPT Acquisition and that 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.
|  | Year Ended March 31, |
|  | 2020 |  |  | 2019 |
Pro forma total revenues (1) |  | $ | 136,792 |  |  | $ | 134,843 |
Pro forma net income (2) |  |  | 18,953 |  |  |  | (3,822 | )
(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 acquisition-related transaction costs incurred in the year ended March 31, 2020.
| ● | Excludes interest expense attributable to GPT's external debt that was paid off as part of the acquisition.
| ● | Total GPT amortization expense of $8,930 for each of the years ended March 31, 2020 and March 31, 2019 based on the adjusted fair value of amortizable intangible assets acquired.
| ● | Additional charge to cost of revenues of $8,066 included in the year ended March 31, 2019 based on the step-up value of inventory. $8,596 was excluded from the year ended March 31, 2020 based on the step-up value of inventory which would have been included and fully amortized within the first year of the acquisition.
| ● | 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%).
IBP Acquisition On April 1, 2019, we completed a business combination (the “IBP Acquisition”) whereby we acquired all of the common stock of IBP Medical GmbH, a company whose business manufactures medical meters used to test various parameters of dialysis fluid (dialysate) and the proper calibration and operation of dialysis machines. During the year ended March 31, 2020, we allocated the purchase price according to the fair value of assets acquired and liabilities assumed using information obtained during due diligence and through the use of financial and other information available to us. Fair value of the assets and liabilities acquired was determined using Level 3 inputs (unobservable inputs) based on a discounted cash flow method. Under the terms of the IBP agreement, as amended, we are required to pay contingent consideration if the company is able to achieve certain development and regulatory milestones. During the year ended March 31, 2021, we paid $296 in conjunction with IBP's attainment of two of the milestones. We expect that IBP will achieve its final two milestones during the three months ending June 30, 2021, and we will pay approximately $237 to fulfill our obligation under the contingent consideration arrangement.

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