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Note 12 - Significant Transactions | 9 Months Ended
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Dec. 31, 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. 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, and consolidated with those of Mesa Labs. We refined our valuation models, assumptions, and inputs based on additional information obtained subsequent to the closing of the transaction related to facts and circumstances that existed at the acquisition date in order to estimate fair value more accurately 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 the applicable discount rates. During the three months ended December 31, 2020, we finalized the valuation of net assets acquired. The significant purchase price allocation changes during the nine months ended December 31, 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; an increase of $878 in the value of property, plant and equipment, net; and an increase of $1,899 to other accrued expenses and $500 to accounts receivable, net related to sales tax obligations of GPT that were partially indemnified in our sale and purchase agreement. See Note 11. "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 these changes to the purchase price allocation. During the nine months ended December 31, 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 have been reflected in the unaudited condensed consolidated financial statements as of and for the nine months ended December 31, 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 | (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 |
Deferred taxes |  |  |  | 10,576 |
Intangible assets: |  |  |  |  |
Customer relationships | (c) |  |  | 77,500 |
Trade name | (c) |  |  | 4,600 |
Non-compete agreements | (c) |  |  | - |
Acquired technology | (c) |  |  | 11,800 |
Goodwill | (d) |  |  | 85,130 |
Total Assets acquired |  |  | $ | 231,063 |
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 |  |  |  | 23,350 |
Other long-term liabilities |  |  |  | 965 |
Total liabilities assumed |  |  | $ | 44,862 |
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 Statements of Operations. The final inventory valuation was completed during the nine months ended December 31, 2020 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 nine months ended December 31, 2020, $5,328 of amortization expense related to the GPT intangible assets was recorded to general and administrative costs and $1,101 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 $85,130, 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 $23,863 to revenues and ($7,370) of net loss to our consolidated results during the nine months ended December 31, 2020 including cumulative-effect adjustments. The loss includes over $6,000 in amortization of intangibles acquired in a business combination and over $4,000 of realized and unrealized losses on foreign currency. We included the operating results of GPT in our Condensed Consolidated Statements of Operations 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.
|  | Three Months Ended December 31, |  |  | Nine Months Ended December 31, |
|  | 2019 |  |  | 2019 |
Pro forma total revenues (1) |  | $ | 35,190 |  |  | $ | 103,097 |
Pro forma net income (2) |  |  | 2,226 |  |  |  | 8,661 |
(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 depreciation expense of $66 based on the increased fair value of property, plant and equipment.
| ● | Additional amortization expense of $4,801 for the nine months ended December 31, 2019 based on the increased fair value of amortizable intangible assets acquired, net of adjustments.
| ● | For the nine months ended December 31, 2019, $358 additional stock based compensation expense representing expense for performance share units awarded to certain key GPT employees net of actual forfeitures.
| ● | Income tax effect of the adjustments made at a blended federal and state statutory rate (approximately 25%).

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