mlab20210630

mlab20210630_10q.htm

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United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No: 0-11740

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

	Colorado		84-0872291
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification number)

	12100 West Sixth Avenue
	Lakewood, Colorado		80228
	(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (303) 987-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name on each exchange on which registered
Common Stock, no par value	MLAB	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:

There were 5,203,412 shares of the Issuer’s common stock, no par value, outstanding as of July 29, 2021.

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Table of Contents

Part I. Financial Information		1

	Item 1. Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statements of Cash Flows	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Notes to Condensed Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4. Controls and Procedures	25

Part II. Other Information		26

	Item 1. Legal Proceedings	26
	Item 1A. Risk factors	26
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 5. Other Information	26
	Item 6. Exhibits	27
	Signatures	28
	Exhibit 31.1 Certifications Pursuant to Rule 13a-14(a)
	Exhibit 31.2 Certifications Pursuant to Rule 13a-14(a)
	Exhibit 32.1 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350
	Exhibit 32.2 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350

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Part I. Financial Information

Item 1. Financial Statements

Mesa Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(dollars in thousands, except share amounts)

	*June 30,*		*March 31,*
	*2021*		*2021*
ASSETS
Current assets:
Cash and cash equivalents	$	275,710	$	263,865
Accounts receivable, less allowances of $232 and $218, respectively		20,578		23,787
Inventories, net		12,122		11,178
Prepaid expenses and other		6,901		4,919
Total current assets		315,311		303,749
Property, plant and equipment, net		21,951		21,998
Deferred tax asset		623		616
Other assets		2,200		2,530
Intangibles, net		109,680		111,741
Goodwill		162,725		160,841
Total assets	$	612,490	$	601,475

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,045	$	4,473
Accrued payroll and benefits		10,540		9,388
Unearned revenues		8,941		8,777
Other accrued expenses		9,922		9,945
Total current liabilities		33,448		32,583
Deferred tax liability		10,814		16,275
Other long-term liabilities		530		715
Convertible senior notes, net of discounts and debt issuance costs		168,695		145,675
Total liabilities		213,487		195,248
Stockholders’ equity:
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 5,198,892 and 5,140,568 shares, respectively		298,203		317,652
Retained earnings		79,313		72,459
Accumulated other comprehensive income		21,487		16,116
Total stockholders’ equity		399,003		406,227
Total liabilities and stockholders’ equity	$	612,490	$	601,475

See accompanying notes to Condensed Consolidated Financial Statements.

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Mesa Laboratories, Inc.

Condensed Consolidated Statements of Income

(unaudited)

(in thousands, except per share data)

	*Three Months Ended June 30,*
	*2021*			*2020*

Revenues	$	34,920		$	29,941
Cost of revenues		12,709			9,601
Gross profit		22,211			20,340
Operating expenses:
Selling		4,858			4,075
General and administrative		11,419			10,099
Research and development		2,811			2,596
Total operating expenses		19,088			16,770
Operating income		3,123			3,570
Nonoperating expenses
Interest expense and amortization of debt discount		874			1,919
Other expense, net		831			897
Total nonoperating expense		1,705			2,816
Earnings before income taxes		1,418			754
Income tax (benefit)		(577	)		(463	)
Net income	$	1,995		$	1,217

Earnings per share:
Basic	$	0.39		$	0.27
Diluted	$	0.38		$	0.26

Weighted-average common shares outstanding:
Basic		5,152			4,528
Diluted		5,301			4,669

See accompanying notes to Condensed Consolidated Financial Statements.

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Mesa Laboratories, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(in thousands)

	*Three Months Ended June 30,*
	*2021*		*2020*

Net income	$	1,995	$	1,217
Other comprehensive income:
Foreign currency translation adjustments		5,371		12,860
Comprehensive income	$	7,366	$	14,077

See accompanying notes to Condensed Consolidated Financial Statements.

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Mesa Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	*Three Months Ended June 30,*
	*2021*			*2020*
Cash flows from operating activities:
Net income	$	1,995		$	1,217
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,572			3,908
Stock-based compensation		2,197			1,268
Non-cash interest and debt amortization		221			1,326
Other		(826	)		55
Cash provided by changes in operating assets and liabilities:
Accounts receivable, net		3,285			4,251
Inventories, net		(753	)		(1,194	)
Prepaid expenses and other assets		(1,631	)		(1,982	)
Accounts payable		(476	)		(913	)
Accrued liabilities and taxes payable		867			(4,377	)
Unearned revenues		138			(1,299	)
Net cash provided by operating activities		9,589			2,260
Cash flows from investing activities:
Purchases of property, plant and equipment		(653	)		(216	)
Net cash (used in) investing activities		(653	)		(216	)
Cash flows from financing activities:
Proceeds from the issuance of common stock, net		-			145,935
Dividends		(824	)		(704	)
Proceeds from the exercise of stock options		1,089			1,654
Net cash provided by financing activities		265			146,885
Effect of exchange rate changes on cash and cash equivalents		2,644			642
Net increase in cash and cash equivalents		11,845			149,571
Cash and cash equivalents at beginning of period		263,865			81,380
Cash and cash equivalents at end of period	$	275,710		$	230,951

See accompanying notes to Condensed Consolidated Financial Statements.

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Mesa Laboratories, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands, except per share data)

	*Common Stock*
	*Number of Shares*		*Amount*			*Retained Earnings*			AOCI*		*Total*
March 31, 2021		5,140,568	$	317,652		$	72,459		$	16,116	$	406,227
Exercise of stock options and vesting of restricted stock units		58,324		1,089			-			-		1,089
Dividends paid, $0.16 per share		-		-			(824	)		-		(824	)
Stock-based compensation expense		-		2,197			-			-		2,197
Foreign currency translation		-		-			-			5,371		5,371
Cumulative adjustment due to adoption of ASU No. 2020-06		-		(22,735	)		5,683			-		(17,052	)
Net income		-		-			1,995			-		1,995
June 30, 2021		5,198,892	$	298,203		$	79,313		$	21,487	$	399,003

	*Common Stock*
	*Number of Shares*		*Amount*		*Retained Earnings*			AOCI*			*Total*
March 31, 2020		4,387,140	$	158,023	$	72,359		$	(10,369	)	$	220,013
Proceeds from the issuance of common stock, net of issuance costs of $9,315		690,000		145,935		-			-			145,935
Exercise of stock options and vesting of restricted stock units		25,799		1,654		-			-			1,654
Dividends paid, $0.16 per share		-		-		(704	)		-			(704	)
Stock-based compensation expense		-		1,268		-			-			1,268
Foreign currency translation		-		-		-			12,860			12,860
Adoption of accounting standards, net		-		-		(9	)		-			(9	)
Net income		-		-		1,217			-			1,217
June 30, 2020		5,102,939		306,880		72,863			2,491			382,234

*Accumulated Other Comprehensive Income (Loss).

See accompanying notes to Condensed Consolidated Financial Statements.

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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 Labs.”

We are a multinational manufacturer, developer, and seller of 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, 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 margins.

As of June 30, 2021, we managed our operations in four reportable segments, or divisions. 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, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Our Biopharmaceutical Development division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacturing of biotherapeutic drugs. Our Instruments division designs, manufactures, and markets quality control hardware and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. Our Continuous Monitoring division 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 manufacturing facilities, blood banks, pharmacies, and laboratory environments. 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 accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation 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. 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, 2021.

Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year, and references to the first quarter of fiscal year 2022 refers to the period from April 1, 2021 through June 30, 2021.

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 judgement about the outcome of future events. The current global business environment continues to be impacted directly and indirectly by the effects of the novel coronavirus ("COVID-19"), and it is not possible to accurately predict the future impact of COVID-19. However, we have reviewed the estimates used in preparing the financial statements and have identified the following factors that have a reasonable possibility of being materially affected by the impacts of COVID-19 during the near term:

●	Estimates regarding the future financial performance of the business used in the impairment tests for goodwill and long-lived assets acquired in a business combination; however, we identified no triggering events since our impairment analysis was completed during the quarter ended March 31, 2021;

●	Estimates regarding the recoverability of deferred tax assets and estimates regarding cash needs and associated indefinite reinvestment assertions;

●	Estimates regarding recoverability for customer receivables;

●	Estimates of the net realizable value of inventory.

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Recently Issued Accounting Pronouncements

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

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of both liabilities and equity, such as our convertible senior notes, due 2025 (the "Notes"). ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted at the beginning of any fiscal year after December 15, 2020. The update permits the use of either the modified retrospective or full retrospective method of transition.

We early adopted ASU 2020-06 effective April 1, 2021 on a modified retrospective basis, and our adoption of this standard had a material effect on our consolidated financial statements. Upon adoption, we derecognized the $22,735 equity conversion feature, net of taxes, that was recorded to common stock, and we derecognized the deferred tax liability of $5,747. We recorded an increase to the Note balance of an aggregate $22,799 as a result of the reversal of the separation of the debt and equity components of the convertible debt. The net effect of these adjustments, which represents historical non-cash interest expense, net of taxes of $5,683, was recorded as an increase in the balance of beginning retained earnings as of April 1, 2021. The adoption of this standard will significantly decrease the amount of non-cash interest expense recognized in future periods as a result of eliminating the discount associated with the equity component. Our statements of cash flows reflect the lower non-cash interest expense in effect after the adoption of ASU No. 2020-06.

We have always intended to settle the Notes in shares of common stock rather than in cash, in each period in which the Notes have been outstanding, and therefore, we have applied the if-converted method to calculate the potentially dilutive impact of the Notes on earnings per share. In each reporting period, we have determined that the Notes were antidilutive. Due to decreases in non-cash interest expense that will result from the adoption of ASU 2020-06, it is likely the Notes will have a dilutive effect in future periods, which would decrease our diluted earnings per share.

Note 2. Revenue Recognition

We design, manufacture, market, sell, and maintain quality control instruments and software, consumables, and services driven primarily by the regulatory requirements of niche markets. Our consumables, such as biological indicator test strips are typically used on a standalone basis; however, some of our chemical solutions, such as protein synthesis and calibration solutions are critical to the ongoing use of our instruments. Hardware and software sales, such as medical meters, protein synthesizers, wireless sensor systems, and data loggers are generally driven by our acquisition of new customers, growth of existing customers, or customer replacement of existing equipment. Hardware sales may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function. We also offer on-demand and annual service contracts to support customers' use of our equipment. We evaluate our revenues internally based on product line, the timing of revenue generation, and the nature of goods and services provided. Typically, discrete revenue is recognized at the shipping point or upon completion of the service, while contracted revenue is recognized over a period of time reflective of the performance obligation period in the applicable contract. Consumables are typically used on a one-time basis requiring frequent replacement in our customers' operating cycles. Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

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The following tables present disaggregated revenues for the quarters ended June 30, 2021 and 2020, respectively:

	*Three Months Ended June 30, 2021*
	*Sterilization and Disinfection Control*		*Biopharmaceutical Development*		*Instruments*		*Continuous Monitoring*		*Total*
Discrete Revenues
Consumables	$	12,876	$	3,608	$	942	$	10	$	17,436
Hardware and Software		160		3,557		5,238		1,844		10,799
Services		701		582		1,382		853		3,518
Contracted Revenues
Services		1,413		1,130				624		3,167
Total Revenues	$	15,150	$	8,877	$	7,562	$	3,331	$	34,920

	*Three Months Ended June 30, 2020*
	*Sterilization and Disinfection Control*		*Biopharmaceutical Development*		*Instruments*		*Continuous Monitoring*		*Total*
Discrete Revenues
Consumables	$	11,484	$	1,939	$	808	$	30	$	14,261
Hardware and Software		129		2,556		5,020		1,955		9,660
Services		250		782		1,852		531		3,415
Contracted Revenues
Services		1,204		672		-		729		2,605
Total Revenues	$	13,067	$	5,949	$	7,680	$	3,245	$	29,941

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Revenues from external customers are attributed to individual countries based upon locations to which the products are shipped or exported, as follows:

	*Three Months Ended June 30,*
	*2021*		*2020*
United States	$	18,455	$	16,372
Foreign		16,465		13,569
Total revenues	$	34,920	$	29,941

No foreign country exceeds 10% of total revenues.

Contract Balances

Our contracts have varying payment terms and conditions. Some customers prepay for services, resulting in unearned revenues or customer deposits, called contract liabilities, which are included within other accrued expenses and unearned revenues in the accompanying Condensed Consolidated Balance Sheets. We did not have any contract assets as of June 30, 2021 or March 31, 2021. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.

A summary of contract liabilities is as follows:

Contract liabilities as of March 31, 2021	$	8,994
Prior year liabilities recognized in revenues during the quarter ended June 30, 2021		(2,448	)
Contract liabilities added during the quarter ended June 30, 2021, net of revenues recognized		3,144
Contract liabilities balance as of June 30, 2021	$	9,690

Note 3. 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 and classify them within Level 1 of the fair value hierarchy, and we value them using quoted market prices in an active market. Cash and cash equivalents on our Condensed Consolidated Balance Sheets included $230,822 in a money market account at both June 20, 2021 and March 31, 2021.

During fiscal year 2020, we issued $172,500 aggregate principal of 1.375% convertible senior notes due August 15, 2025. We estimate the fair value of the Notes based on level 2 inputs of the last actively traded price or market observable input before the end of the reporting period. The estimated fair value and carrying value of the Notes are as follows:

	*June 30, 2021*				*March 31, 2021*
	*Carrying Value*		*Fair Value (Level 2)*		*Carrying Value*		*Fair Value (Level 2)*
Notes	$	168,695	$	198,806	$	145,675	$	188,780

The carrying value of the Notes increased as a result of the adoption of ASU 2020-06, discussed further in Note 1. "Description of Business and Summary of Significant Accounting Policies" and Note 6. "Indebtedness."

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. There were no transfers between the levels of the fair value hierarchy during the quarter ended June 30, 2021 or the quarter ended June 30, 2020.

Cash and cash equivalents and accounts receivables are the financial instruments that subject us to the highest concentration of credit risk. 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 whom we make significant sales. We reserve an allowance for potential write-offs of accounts receivable using historical collection experience, 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.

Note 4. Inventories, Net

Inventories consist of the following:

	*June 30, 2021*		*March 31, 2021*
Raw materials	$	6,375	$	5,755
Work in process		447		426
Finished goods		5,300		4,997
Inventories, net	$	12,122	$	11,178

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Note 5. Goodwill and Intangible Assets, Net

Finite-lived intangible assets consist of the following:

	*June 30, 2021*							*March 31, 2021*
	*Gross Carrying Amount*		*Accumulated Amortization*			*Net Carrying Amount*		*Gross Carrying Amount*		*Accumulated Amortization*			*Net Carrying Amount*
Intellectual property	$	21,440	$	(9,053	)	$	12,387	$	21,201	$	(8,595	)	$	12,606
Trade names		8,702		(3,197	)		5,505		8,612		(3,129	)		5,483
Customer relationships		147,504		(55,810	)		91,694		145,754		(52,206	)		93,548
Non-compete agreements		1,299		(1,205	)		94		1,299		(1,195	)		104
Total	$	178,945	$	(69,265	)	$	109,680	$	176,866	$	(65,125	)	$	111,741

Amortization expense for finite-lived intangible assets acquired in a business combination was $3,816 and $3,354 for the quarters ended June 30, 2021 and 2020, respectively. During the quarter ended June 30, 2020, we reduced the value of our intangible assets due to a purchase price adjustment that resulted in a cumulative effect net decrease to amortization expense of $334.

The following is estimated amortization expense for the fiscal years ending March 31,:

Remainder of 2022			11,338
2023			14,920
2024			14,405
2025			12,808
2026			12,017

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

	Sterilization and Disinfection Control		Biopharmaceutical Development		Instruments		Continuous Monitoring		Total
March 31, 2021		30,153	$	93,399		19,186	$	18,103	$	160,841
Effect of foreign currency translation		99		1,774		11		-		1,884
June 30, 2021	$	30,252	$	95,173	$	19,197	$	18,103	$	162,725

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Note 6. Indebtedness

Credit Facility

On March 5, 2021, we entered into a four-year senior secured credit agreement 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 at any time. 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 (together, the available facilities are referred to as the "Credit Facility").

The Credit Facility bears interest at either a base rate or a Eurodollar rate, plus an applicable spread. The balance of unamortized customary lender fees of $609 and $650 as of June 30, 2021 and March 31, 2021, respectively, are recorded within prepaid expenses and other assets on our Condensed Consolidated Balance Sheets. The fees are being expensed on a straight line basis over the life of the agreement.

The most restrictive financial covenants include a maximum leverage ratio of 5.50 to 1.00 for the first four testing dates on which the line of credit is outstanding; 5.0 to 1.0 on each of the fifth, sixth, seventh, and eighth testing dates; and 4.5 to 1.0 on each testing date following the eighth testing date, 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 June 30, 2021, we were in compliance with all required covenants.

As of and throughout the quarter ended June 30, 2021, we had no outstanding balance under the Credit Facility. We are obligated to pay unused commitment fees of between 0.15% and 0.35% of the Credit Facility’s aggregate principal amount, based on our leverage ratio. Since the Credit Facility's inception, the rate applied to our unused commitment fees has been 0.15%. We incurred $37 and $0 in unused commitment fees during the quarters ended June 30, 2021 and 2020, respectively.

Convertible Notes

We issued the Notes on August 12, 2019, and they mature on August 15, 2025, unless earlier repurchased or converted. The Notes bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 each year beginning on February 15, 2020. They are initially convertible at a conversion rate of 3.5273 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $283.50 per share of common stock. Noteholders may convert their Notes at their option only in the following circumstances:

(i)			during any calendar quarter commencing after the calendar quarter ended on December 31, 2019 (and only during such calendar quarter), if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(ii)			during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
(iii)			upon the occurrence of certain corporate events or distributions on our common stock, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the Notes) or a transaction resulting in the Company’s common stock converting into other securities or property or assets; and
(iv)			at any time from, and including, April 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.

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 quarter ended June 30, 2021. As of June 30, 2021, 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 quarter. The if-converted value of the Notes did not exceed the principal balance as of June 30, 2021.

Debt issuance costs related to the Notes are comprised of discounts and commissions payable to the initial purchasers of $5,175 and third party offering costs of $255. The debt issuance costs are being amortized to interest expense using the effective interest method over the six-year contractual term of the Notes.

Due to our adoption of ASU No. 2020-06 on April 1, 2021, we no longer bifurcate the Notes into a liability and an equity component in our Condensed Consolidated Balance Sheets (see Note 1. "Description of Business and Summary of Significant Accounting Policies"). The Notes are accounted for entirely as a liability, and the issuance costs of the Notes are accounted for wholly as debt issuance costs. The equity conversion feature that was recorded to common stock, as well as the unamortized debt discount and amortization expense attributable to equity, have been derecognized.

The net carrying amount of the Notes were as follows:

	*June 30, 2021*			*March 31, 2021*
Principal outstanding	$	172,500		$	172,500
Unamortized debt discount attributable to equity		-			(23,497	)
Unamortized debt issuance costs		(3,805	)		(3,328	)
Net carrying value	$	168,695		$	145,675

We recognized interest expense on the Notes as follows:

	*Three Months Ended June 30,*
	*2021*		*2020*
Coupon interest expense at 1.375%	$	593	$	593
Amortization of debt discounts and issuance costs		221		1,326
Total	$	814	$	1,919

The effective interest rate on the notes is approximately 1.9%. Prior to the adoption of ASU 2020-06, the effective interest rate was approximately 5.5%.

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Note 7. Stockholders' Equity

Stock-Based Compensation

Amounts recognized related to stock-based compensation are as follows:

	*Three Months Ended June 30,*
	*2021*			*2020*
Stock-based compensation expense	$	2,197		$	1,268
Amount of income tax (benefit) recognized in earnings		(2,785	)		(925	)
Stock-based compensation expense, net of tax	$	(588	)	$	343

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 Income.

The following is a summary of stock option award activity for the quarter ended June 30, 2021:

	*Stock Options*
	*Shares Subject to Options*		*Weighted- Average Exercise Price per Share*		*Weighted-Average Remaining Contractual Life (Years)*		*Aggregate Intrinsic Value*
Outstanding as of March 31, 2021		253	$	129.55		2.7	$	28,856
Awards granted		-		-
Awards forfeited or expired		(

SEC Form 10-Q filed by Mesa Laboratories, Inc.