Mesa Laboratories Inc: Form 10-Q for the period ended Sep 30, 2023

(Dollars in thousands, except per share amounts)

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position; results of acquisitions; management’s strategy, plans and objectives for future operations or acquisitions, product development and sales; product research and development; and adequacy of capital resources and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management’s beliefs and assumptions. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company’s behalf. Words such as “seek,” “believe,” “may,” “intend,” “could,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including risks associated with: our ability to successfully grow our business, including as a result of acquisitions; the effect that acquisitions have on our operations; our ability to consummate acquisitions at our historical rate and at appropriate prices, and our ability to effectively integrate acquired businesses and achieve desired results; the market acceptance of our products; technological or market viability of our products; reduced demand for our products, including as a result of competitive factors; conditions in the global economy and the particular markets we serve; significant developments or uncertainties stemming from governmental actions, including changes in trade policies and medical device regulations; the timely development and commercialization, and customer acceptance, of enhanced and new products and services; retirement of old products and customer migration to new products; projections of revenues, growth, operating results, profit margins, earnings, expenses, margins, tax rates, tax provisions, liquidity, cash flows, demand, and competition; the effects of additional actions taken to become more efficient or lower costs; supply chain challenges; cost pressures and the overall effects of the current high inflation environment on customers’ purchasing patterns; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; product liability; information security; outstanding claims, legal and regulatory proceedings; international business challenges including anti-corruption and sanctions laws and political developments; tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic, industry, and capital markets conditions, including rising interest rates and potential recessionary conditions; the timing of any of the foregoing; and assumptions underlying any of the foregoing. Such risks and uncertainties also include those listed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2023 and in this report. The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Overview

We are a multinational manufacturer, developer, and seller of life science tools and quality control products and services, many of which are sold into niche markets 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 Pacific, as well as by independent distributors in these areas and throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins.

As of September 30, 2023, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions is described further in "Results of Operations" below. Unallocated corporate expenses and other business activities are reported within "Corporate and Other."

Corporate Strategy

We strive to create stakeholder value and further our purpose of Protecting the Vulnerable® by growing our business both organically and through acquisitions, by improving our operating efficiency, and by continuing to hire, develop and retain top talent. As a business, we commit to our purpose of Protecting the Vulnerable® every day by taking a customer-focused approach to developing, building, and delivering our products. We serve a broad set of industries, in particular the pharmaceutical, healthcare services, and medical device verticals, in which the safety, quality, and efficacy of products is critical. By delivering the highest quality products possible, we are committed to protecting the communities we serve.

Organic Revenues Growth

Organic revenues growth is driven by the expansion of our customer base, increases in sales volumes, new product offerings, and price increases, and may be affected positively or negatively by changes in foreign currency rates. Our ability to increase organic revenues is affected by general economic conditions, both domestic and international, customer capital spending trends, competition, and the introduction of new products. Our policy is to price our products competitively and, where possible, we pass along cost increases to our customers in order to maintain our margins. We typically evaluate costs and pricing annually with price increases effective January 1.

Inorganic Growth - Acquisitions

Over the past decade, we have consummated a number of acquisitions as part of our growth strategy. These acquisitions have allowed us to expand our product offerings, globalize our company, and increase the scale at which we operate, which in turn affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®.

Improving Our Operating Efficiency

We maximize value in our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations. We achieve efficiencies using the four pillars that make up the Mesa Way, which is our customer-centric, lean-based system for continuously improving and operating our high-margin, niche businesses. The Mesa Way is focused on: Measuring What Matters using our customers' perspective and setting high standards for performance; Empowering Teams to improve operationally and exceed customer expectations; Sustainably Improving using lean-based tools designed to help us identify and prioritize the biggest opportunities; and Always Learning so that performance continuously improves.

Gross profit is affected by many factors including our product mix, manufacturing efficiencies, costs of products and labor, foreign currency rates, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately the mix of sales will continue to impact our overall gross profit.

Hire, Develop, and Retain Top Talent

At the center of our organization are talented people who are capable of taking on new challenges using a team approach. It is our exceptionally talented workforce that works together and uses our lean-based tool set to find ways to continuously and sustainably improve our products, our services, and ourselves, resulting in long-term value creation for our stakeholders.

General Trends

We are a global company, with multinational operations. During the three and six months ended September 30, 2023, approximately 49% and 48% of our revenues, respectively, were earned outside of the United States. Since we serve a number of industries across a variety of global markets, we may be affected by world-wide, regional, or industry-specific economic or political factors, trends and costs associated with a global labor force, and increasing regulation. However, our diversity in industry, geography, and product and service offerings may limit the impact of changes in specific industry trends or local economic changes in our consolidated operating results. We actively monitor trends affecting industries we operate in, including by monitoring key competitors and customers and by staying abreast of changes to local economies and how they may affect our operations.

Several challenging macroeconomic factors persisted during the second quarter of fiscal year 2024, including continued softening of discretionary capital asset purchases across the life sciences tools market, high interest rates, and high inflation, all of which contributed to the decline in our organic revenues growth year to date. On the other hand, supply chain disruptions, labor shortages and resulting manufacturing difficulties that impacted business operations in fiscal year 2023 largely abated during the six months ended September 30, 2023, which allowed us to largely maintain our gross profit margins as a percentage of revenues. Additionally, in response to weaker revenues, we worked to reduce operating expenses, taking steps to preserve our financial model. For example, we incurred approximately $350 in costs related to a reduction in force during the six months ended September 30, 2023; however, the reduction in force is expected to result in annual savings of approximately $2,000 starting in our fiscal third quarter. We continue to invest in growing the company organically and through further acquisitions, which helps us address the rapid pace of technological change in our served markets, further globalize our business, and be responsive to customers throughout the world. To that end, we completed the acquisition of GKE in October 2023. The results of GKE's operations and the benefits of the acquisition will be consolidated into our financial statements beginning in the third quarter of fiscal year 2024. Overall, our operating expenses, which include approximately $505 of one-time GKE acquisition costs, decreased during the three and six months ended September 30, 2023 compared to the same periods in the prior year, demonstrating that adjustments to our operations allowed us to largely preserve our financial model despite challenges in the macroeconomic environment.

A weakening or strengthening of foreign currencies against the United States dollar ("USD") increases or decreases our reported revenues, gross profit margins, and operating expenses, and impacts the comparability of our results between periods. Generally, the USD strengthening against major currencies adversely impacts our reported revenues, but to a lesser extent, positively impacts our reported expenses; conversely, the weakening of the U.S. dollar against major currencies positively impacts our reported revenues but negatively impacts our reported expenses. The ultimate impact to gross profit as a percentage of revenue depends on the magnitude of changes in foreign currencies.

Results of Operations

Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing in Item 1. Financial Statements (in thousands, except percent data).

Revenues from our reportable segments for the three and six months ended September 30, 2023 decreased 10% and 5%, respectively, largely due to softening demand for new capital equipment in the pharmaceutical markets, including lower demand for hardware sold by our Biopharmaceutical Development. Revenues also decreased compared to the corresponding prior year periods due to the fiscal year 2023 loss of Sema4, a significant customer in our Clinical Genomics business.

Although revenues were lower in the first two quarters of fiscal year 2024 compared to the prior year periods, gross profit as a percentage of revenues did not fall significantly due to our proactive cost containment efforts and favorable product mix. Modest gross profit percentage declines of 2% and 1%, respectively, for the three and six months ended September 30, 2023 compared to the same periods in the prior year are primarily due to lower revenues on a partially fixed cost base, offset by our efforts to preserve our financial model.

Results by reportable segment are as follows:

Our unaudited condensed consolidated results of operations are as follows:

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Reportable Segments

Sterilization and Disinfection Control

The Sterilization and Disinfection Control Division manufactures and sells biological, cleaning, and chemical indicators used to assess the effectiveness of sterilization and disinfection processes in the pharmaceutical, medical device, hospital, and dental industries. The division also provides testing and laboratory services, mainly to the dental industry. Sterilization and disinfection control products are disposable and are used on a routine basis.

Sterilization and Disinfection Control's revenues increased 1% and 4%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods. The modest revenue increases for the three and six months ended September 30, 2023 are attributable primarily to price, and to a lesser extent, volume increases against a difficult prior period comparison.

Sterilization and Disinfection Control's gross profit percentage increased 1% for the three and six months ended September 30, 2023 compared to the prior year periods primarily due to higher revenues on a partially fixed cost base.

Clinical Genomics

The Clinical Genomics division develops, manufactures and sells highly sensitive, low-cost, high-throughput genetic analysis tools and related consumables and services that enable clinical labs to perform genomic testing for a broad range of diagnostic and research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, and oncology related applications.

Clinical Genomics revenues decreased 16% and 12%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily as a result of the loss of revenues from Sema4 at the beginning of the third quarter of fiscal year 2023. Excluding the loss of Sema4, revenues from our Clinical Genomics division would have been 3% lower during the three months ended September 30, 2023 compared to the prior year period, primarily due to the fact that China earned unusually high revenues during the three months ended September 30, 2022 upon reopening from COVID lockdowns. Revenues would have been flat for the six months ended September 30, 2023 compared to the prior year period, excluding the loss of Sema4.

Gross profit percentage for the Clinical Genomics division decreased 8% for the three months ended September 30, 2023 and 6% for the six months ended September 30, 2023 compared to the prior year periods, primarily due to lower revenues on a partially fixed cost base, and to a lesser extent, unfavorable product mix, particularly due to the loss of high-margin consumables revenues from Sema4.

Although orders and revenues in China have been fairly strong in the first half of fiscal year 2024, we believe that ongoing macroeconomic slowdowns beginning in China may negatively affect our reported revenues and new orders in the second half of fiscal year 2024.

Biopharmaceutical Development

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 manufacture of biotherapeutic therapies, among other applications.

Biopharmaceutical Development revenues decreased 24% and 17% for the three and months ended September 30, 2023 compared to the prior year period, primarily due to softening demand for capital equipment, partially offset by an increase in revenues from consumables and services as well as price increases. Given the current economic landscape, we cannot predict whether hardware sales will increase substantially during the third quarter of our fiscal year, as we have seen in the past, as our customers approach the end of their annual budget cycles. Despite adverse macroeconomic factors, revenues from consumables and services have continued to grow during fiscal year 2024.

Gross profit percentage for the three and six months ended September 30, 2023 decreased 2% and remained flat, respectively, compared to the prior year periods. Revenues from consumables, which have slightly higher gross profit percentages than hardware in our Biopharmaceutical Division, have increased for both the three and six months ended September 30, 2023, and along with favorable product mix, this partially mitigated the impact of decreased hardware revenues.

Calibration Solutions

The Calibration Solutions division develops, manufactures and sells quality control products using principles of advanced metrology to measure or calibrate critical chemical or physical parameters in various dialysis, process monitoring, instrument monitoring, environmental monitoring, gas flow, environmental air quality, and torque applications, primarily in medical device manufacturing, pharmaceutical manufacturing, laboratory, and hospital environments.

Calibration Solutions revenues increased 1% and 6%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily due to the abatement of production difficulties and supply constraints that had limited our ability to manufacture ordered quantities of certain products during the first six months of fiscal year 2023. This abatement has allowed us to return to normal operations during fiscal year 2024, driving increased orders along with a modest reduction of past due backlog.

The Calibration Solutions division's gross profit percentage increased 3% and 1% for the three and six months ended September 30, 2023, respectively, compared to the prior year periods, primarily due to favorable product mix and increased revenues on a partially fixed cost base.

Operating Expense

Operating expense decreased 1% and 6%, respectively for the three and months ended September 30, 2023 compared to the prior year periods, primarily as a result of lower stock-based compensation expense as the performance-based restricted stock units associated with the fiscal year 2022 acquisition of Agena Bioscience, Inc. were no longer amortizing in fiscal year 2024, along with the timing of award grants in fiscal year 2024. Cost savings from our strategic cost containment activities following the loss of Sema4 also contributed to the decrease in operating expenses, partially offset by regular annual wage increases.

Selling

Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels.

Selling expense for the three months ended September 30, 2023 increased 5% compared to the prior year period, primarily as a result of our implementation of Salesforce in our Biopharmaceutical Development division and backfilling select open positions in our Biopharmaceutical Division. Selling expense for the six months ended September 30, 2023 decreased 3% compared to the prior year period, primarily as a result of lower commissions on lower revenues in fiscal year 2024, as well as other decreases in personnel costs realized from our proactive cost savings efforts initiated after the loss of Sema4.

General and Administrative

Labor costs, non-cash stock-based compensation and non-cash amortization of intangible assets drive the substantial majority of our general and administrative expense.

General and administrative expenses decreased 4% and 7%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily as a result lower stock-based compensation expense, as well as lower professional services costs, partially offset by higher legal and other expenses related to the acquisition of GKE.

Research and Development

Research and development expense is predominantly comprised of labor costs and costs of third-party consultants.

Research and development expenses were flat for the three months ended September 30, 2023 compared to the prior year period. Research and development expenses decreased 8% for the six months ended September 30, 2023 compared to the prior year period, primarily due to our cost containment efforts in fiscal year 2024 and the purchase of in-process research and development technology used to enhance an existing Sterilization and Disinfection Control division product offering during the first quarter of fiscal year 2023.

Nonoperating Expense, Net

Nonoperating expense, net for the three months ended September 30, 2023 is composed primarily of interest expense and amortization of the debt issuance costs associated with the Notes and the Credit Facility as well as gains and losses on foreign currency transactions.

Income Taxes

Our effective income tax rate was 7.2% and 21.4% for the three and six months ended September 30, 2023, respectively, and 61.4% and 93.5% for the three and six months ended September 30, 2022, respectively. The effective tax rate for both the three and six months ended September 30, 2023 differed from the statutory federal rate of 21% primarily due to share-based payment awards for employees and the effect of income generated in foreign jurisdictions. The change in our effective tax rate for the three and six months ended September 30, 2023 compared to the prior year periods is primarily due to lower windfall benefits on stock option exercises.

Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.

Net (Loss) Income

Net (loss) income varies with changes in revenues, gross profit, and operating expense (and included $14,405 and $6,151 of non-cash amortization of intangible assets acquired in business combinations and stock-based compensation expense, respectively, for the six months ended September 30, 2023).

Market-Based Awards

The performance-based restricted stock awards granted during the three and six months ended September 30, 2023 included a market-based component.

Liquidity and Capital Resources

Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, cash available from our Credit Facility and Open Market Sale AgreementSM, working capital, and potential additional equity and debt offerings. We believe that cash flows from operating activities and potential cash provided by borrowings from our Credit Facility or funds from our Open Market Sale AgreementSM, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled interest payments on debt, dividend payments, and anticipated capital expenditures. At our option, we may settle the Notes in shares of our common stock or in cash, depending on conditions in the market and the share price of our common stock.

Our more significant uses of resources have historically included acquisitions, payments of debt and interest obligations, long-term capital expenditures, and quarterly dividends to shareholders. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $77,846 and $75,616 as of September 30, 2023 and March 31, 2023, respectively. As of September 30, 2023, and March 31, 2023, we had $35,617 and $32,910, respectively, of cash and cash equivalents.

As of September 30, 2023, Notes with an aggregate principal amount of $172,500 were outstanding and there was no outstanding balance under the Credit Facility. During the third quarter of fiscal year 2024, we amended our Credit Facility to increase the total principal amount available to us from $75,000 to $125,000. In October 2023, we borrowed $65,000 under our Credit Facility to partially fund the acquisition of GKE. At our current interest rate, we expect to incur interest expense of approximately $4,485 per year on borrowings of $65,000 under the Credit Facility.

In April 2022, we entered into an Open Market Sale AgreementSM pursuant to which we may issue and sell, from time to time, shares of our common stock with an aggregate value of up to $150,000. We have not sold any shares under this agreement.

We routinely evaluate opportunities for strategic acquisitions. Future material acquisitions may require that we obtain additional capital, assume additional third-party debt or incur other long-term obligations. We believe that we have the ability to issue more equity or debt in the future in order to finance our acquisition and investment activities; however, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all.

We may from time to time repurchase or take other steps to reduce our debt. These actions may include retirements or refinancing of outstanding debt, pursuing privately negotiated transactions, or otherwise. The amount of debt that may be retired, if any, could be material. Retirement would be decided at the sole discretion of our Board of Directors and would depend on market conditions, our cash position, and other considerations.

Dividends

We have paid regular quarterly dividends since 2003. We declared and paid dividends of $0.16 per share during each of the quarters ended June 30, 2023 and September 30, 2023, as well as each quarter of fiscal year 2023.

In October 2023, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on December 15, 2023, to shareholders of record at the close of business on November 30, 2023.

Cash Flows

Our cash flows from operating, investing, and financing activities were as follows (in thousands):

Cash flows from operating activities for the six months ended September 30, 2023 provided $19,715. Net loss and non-cash adjustments totaled $22,200 for the six months ended September 30, 2023 compared to $22,768 for the six months ended September 30, 2022. We generated $12,537 more cash from working capital in the six months ended September 30, 2023 compared to the six months ended September 30, 2022, primarily due to higher collections on trade receivables and lower inventory purchases, as we were building safety stock during the six months ended September 30, 2023 to mitigate supply chain risks. Cash used in investing activities for the six months ended September 30, 2023 decreased compared to the six months ended September 30, 2022 as we purchased less capital equipment. Cash used by financing activities primarily resulted from $13,000 repaid on our Credit Facility during the six months ended September 30, 2023 compared to $22,000 for the six months ended September 30, 2022.

Contractual Obligations and Other Commercial Commitments

We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of our contractual obligations and other commercial commitments as of March 31, 2023, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the Securities and Exchange Commission on May 30, 2023.

On a consolidated basis, as of September 30, 2023, we had contractual obligations for open purchase orders of approximately $12,419 for routine purchases of supplies and inventory, which are payable in less than one year.

As part of the Belyntic acquisition, we agreed to pay $1,500 to the sellers if contractually specified patents related to the technology purchased are issued. One subset of the patents was approved by the European patent office effective October 18, 2023, and we believe it is probable the remaining patents will be issued and that we will pay the sellers in full within the next 12 months.

As part of the GKE acquisition consummated on October 14, 2023, we will pay the sellers €8,500 of the acquisition price 18 months following the acquisition date, pending adjustments for potential indemnification losses that may arise. We will pay the sellers an additional €5,000 of the acquisition price, net of cash and debt and subject to customary adjustments, upon satisfaction of applicable Chinese regulatory approvals for the Beijing GKE Science & Technology Co. Ltd. portion of the acquisition.

Critical Accounting Policies and Estimates

Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstances. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 2023, in the Critical Accounting Policies and Estimates section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Although we believe that our estimates, assumptions, and judgements are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Foreign Currency Exchange Rates

We face exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than the functional currency of the applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using average exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Our Biopharmaceutical Development division is particularly susceptible to currency exposures since it incurs a substantial portion of its expenses in Swedish Krona, while most of the division's revenue contracts are in U.S. dollars and euros. Therefore, when the Swedish Krona strengthens or weakens against the U.S. dollar, operating profits are increased or decreased, respectively. The effect of a change in currency exchange rates on our international subsidiaries' assets and liabilities is reflected in the accumulated other comprehensive income component of stockholders’ equity.

Interest Rates

Our Credit Facility bears interest at either a base rate or a SOFR rate plus an applicable spread. We had no balance outstanding as of September 30, 2023; however, based on the most recently available interest rate and borrowings used to fund the GKE acquisition, we estimate that if interest rates increased 1 percentage point, we would incur approximately $650 of additional interest expense per year.

Inflation Risk

Inflation generally impacts us by increasing our costs of labor, materials, and freight. The rates of inflation experienced in recent years have not had a significant impact on our financial statements as inflationary cost increases have been offset by annual price increases. However, any price increases imposed may lead to declines in sales volume if competitors do not similarly adjust prices. We cannot reasonably estimate our ability to successfully recover any impact of inflation cost increases into the future.

Other

We have no derivative instruments. We have minimal exposure to commodity market risks.

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Prior Year Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in Part II Item 9A. "Controls and Procedures" in our annual report on Form 10-K for the year ended March 31, 2023, during fiscal year 2023 we identified two material weaknesses in internal controls:

• Fair Value Calculations - Management's review controls over fair value calculations including Management's preliminary valuation of the Belyntic Acquisition were insufficient. Specifically, Management failed to utilize resources with an appropriate level of knowledge and expertise in performing and reviewing the fair value calculations including the preliminary Belyntic valuation.
• Goodwill Impairment Assessment - Management's review controls over the qualitative assessment of goodwill impairment were insufficient to identify potential impairment triggers.

Remediation Status for Material Weaknesses in Internal Control Over Financial Reporting

During the six months ended September 30, 2023 we implemented our previously-disclosed remediation plans:

• Fair Value Calculations - We obtained the services of a knowledgeable third-party valuation specialist to perform the fair value calculations for the Belyntic acquisition.
• Goodwill Impairment Assessment - Members of Management with requisite knowledge performed a formal quarterly analysis of potential impairment triggers.

As a result of our control activities, we have concluded that the material weaknesses above have been remediated as of September 30, 2023. We will continue to perform formal quarterly impairment trigger analyses in future periods. We will likewise continue to utilize a valuation specialist with the requisite knowledge to perform valuations for all future acquisitions of businesses, as such acquisitions occur.

Changes in Internal Control Over Financial Reporting

Other than the remediation measures discussed above, during the three and six months ended September 30, 2023 there were no changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

During the six months ended September 30, 2023, there were no material changes from the risk factors described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended March 31, 2023.