**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark  one)**

 

**x****     ****ANNUAL REPORT UNDER SECTION 13OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended March 31,2010**

 

**o****        ****TRANSITIONREPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITES EXCHANGE ACT OF1934**

 

**For the transition period from                 to                  **

 

**Commission File No: 0-11740**

 

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**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’stelephone number, including area code: **(303) 987-8000**

 

Securitiesregistered under Section 12(b) of the Act:

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| Common  Stock, no par value            |       | NASDAQ                                                                      |

 

Securitiesregistered under Section 12(g) of the Act: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. YES o NO x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. YES o NO x

 

Indicateby check mark whether the registrant (1) has filed all reports to be filedby Section13 or 15(d) of the Securities Exchange Act of 1934 during theproceeding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  YES x NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405of the chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES o NO o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-K or anyamendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, andaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinitions of  “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (check one):

 

| Large  accelerated filer o                     |       | Accelerated  filer o         |
|------------------------------------------------|------------|------------------------------|
| ** **                                     | ** ** | ** **                   |
| Non-accelerated  filer o                       |       | Smaller  reporting company x |
| (Do  not check if a smaller reporting company) | ** ** | ** **                   |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES o NO x

 

        The aggregate market value, as of September 30, 2009,(the last business day of the registrant’s second quarter) of the common stockof Mesa Laboratories Inc. held by non-affiliates (assuming, for this purpose,that all directors, officers and owners of 5% or more of the registrant’scommon stock are deemed affiliates) was approximately $41,478,763.

 

Thenumber of outstanding shares of the common stock as of May 31, 2010 was3,210,155.

 

DOCUMENTSINCORPORATED BY REFERENCE

ProxyStatement for the 2010 Annual Meeting of Shareholders

Part IIIinformation is incorporated by reference from the Proxy Statement

 

 

 

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**Cautionary Statement**

 

Allstatements other than statements of historical fact included in this annualreport regarding the Company’s financial position and operating and strategicinitiatives and addressing industry developments are forward-lookingstatements.  Where, in any forward-lookingstatement, the Company, or its management, expresses an expectation or beliefas to future results, such expectation or belief is expressed in good faith andbelieved to have a reasonable basis, but there can be no assurance that thestatement of expectation or belief will result or be achieved oraccomplished.  Factors which could causeactual results to differ materially from those anticipated, include but are notlimited to general economic, financial and business conditions; competition inthe Company’s markets; the business abilities and judgment of personnel; theimpacts of unusual items resulting from ongoing evaluations of businessstrategies; and changes in business strategy.

 

Mesa’sexecutive offices are located at 12100 West Sixth Avenue, Lakewood, Colorado80228, telephone (303) 987-8000.

 

**PART I**

 

**ITEM1.  DESCRIPTION OF BUSINESS**

 

Introduction

 

MesaLaboratories, Inc. (hereinafter referred to as the “Company” or “Mesa”)was incorporated as a Colorado corporation on March 26, 1982.  The Company designs, manufactures and marketsinstruments and disposable products utilized in connection with industrialapplications and healthcare.  Forindustrial applications, which includes pharmaceutical, food and beverage,medical devices, and petrochemical, the Company presently markets theDATATRACE® data logging systems, NUSONICS® Concentration Analyzers, PipelineInterface Detectors and Flow Meter products, TORQO motorized torque testingsystem and RAVEN and SGM BIOTECH Biological Indicators. For healthcareapplications, the Company markets Dialysate Meters used in kidney dialysis andRAVEN and SGM BIOTECH Biological Indicators, which are used by hospitals anddental offices to assure sterility.  TheCompany is continually performing research and development to expand theapplication of its technology.

 

On April, 27, 2010, theCompany completed the purchase of SGM BIOTECH, Inc. located in Bozeman,MT.  Under the terms of this acquisitionthe Company acquired all of the stock of SGM BIOTECH for a cash payment of$11,722,000.  After the completion of theacquisition the Company repaid $278,000 of loans owed to the shareholders ofSGM BIOTECH.  On April 30, 2010, theCompany also completed the acquisition of the facility that houses the SGMBIOTECH operations for $2,150,000.  Tofinance these acquisitions, the Company entered into a credit facilityconsisting of a 36 month reducing line of credit for $3,000,000 which was fullyutilized at April 30, 2010, and a revolving line of credit for $4,000,000of which $1,521,000 was utilized at April 30, 2010.

 

DATATRACE® Data Loggers

 

The DATATRACE products areself-contained, wireless, high precision, data loggers that are used incritical manufacturing, quality control, and transportation applications.  They are used to measure temperature,humidity and pressure inside a process or inside a product duringmanufacturing.  In addition, theDATATRACE products can be used to validate the proper operation of laboratoryor manufacturing equipment, either during its installation or for annualre-certifications.  The product lineconsists of individual data loggers, PC interface and software and variousaccessories.  A customer typically purchasesa large number of data loggers along with a single PC interface and the softwarepackage. Specifically, the customer can purchase either the wireless MicropackIII (MPIII) data loggers or the

 

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Micropack Radio Frequency (MPRF) transmitting dataloggers. Both DataTrace models work with the Data Trace Radio Frequency (DTRF)software package.

 

In practice, using the PCinterface, the user programs the loggers to collect environmental data at apre-determined interval, places the data loggers in the product or process, andthen in the case of the MPIII model retrieves the data loggers and reads thedata into a PC after placing them in the interface or with the MPRF models iscontinuously collecting the data via radio frequency transmissions.  After this, the user can prepare tabular andgraphical reports using the DTRF software.

 

The MPIII line is muchsmaller, has improved hardware compared to previous DataTrace loggers, hasembedded software, includes a rapid read optical interface, and operates over awide temperature range. The MPRF models include all the features andperformance improvements of the MPIII version and adds the capability totransmit data to a PC in real time through the proprietary DTLinc RFnetwork.  The ability to view process orvalidation data instantly saves valuable time, and it can prevent costlyprocessing mistakes. The DataTrace RF system allows the user to see resultsimmediately and make appropriate decisions as necessary.

 

While there are a variety ofdifferent types of wireless data loggers available on the market, there areonly a few that are rated as “intrinsically safe” and can operate at elevatedtemperatures, like the DATATRACE products. These are important differentiating factors for the DATATRACE productsin the marketplace, and consequently, they are used by companies to controltheir most critical processes.  Due totheir higher accuracy and precision, along with the importance of the processesthey are used to control, an important component of the DATATRACE product lineis the calibration service that is provided by Mesa.  Typically, each DATATRACE data logger iscalibrated by Mesa’s calibration laboratory prior to shipment and thenannually, for a re-certification fee, to verify its accuracy.  For instance, the MPIII/MPRF temperature dataloggers have an operating range of -80 oC to+400 oC and can be calibrated to an accuracy of +/-0.1oC over a portion of this range.  This allows the DATATRACE loggers to be usedto conduct quality control on critical processes, such as sterilization, one ofthe most important applications.

 

RAVEN Biological Indicators

 

In May 2006,the Company acquired Raven Biological Laboratories, Inc. of Omaha,Nebraska.  The RAVEN product lineconsists of Biological Indicators (BI) and Chemical Indicators (CI) used to assessthe effectiveness of sterilization processes, including steam, gas (such asethylene oxide), and radiation.  BI’sconsist of resistant spores of certain microorganisms which are applied on aconvenient substrate.  The spores arewell characterized in terms of numbers and resistance to sterilization.  In use, the BI is exposed to a sterilizationprocess and then tested to determine the presence of surviving organisms.  RAVEN’s line of BI’s includes both sporestrips, which require post-processing transfer to a growth media,self-contained products which have the growth media already pre-packaged incrushable ampoules, industrial use BI’s, and culture media.  CI’s are similar to BI’s, except that achemical change (generally determined by color) is used to assess the exposureto sterilization conditions.  BI’s and CI’sare often used together to monitor processes. RAVEN products are used to validate equipment and monitor theeffectiveness of a process in any industrial or healthcare setting which usessterilization.  Key markets for RAVENinclude healthcare such as dental offices and hospitals, and industrial such asmedical device and pharmaceutical manufacturing.

 

Inaddition to Biological and Chemical Indicators, the Company offers Contract andTesting Services to industrial companies for the development of sterilizationprocesses.  These testing servicesinclude organism identification, population verification, sterilization processdevelopment and custom BI production.

 

TheRAVEN Biological Indicators are distinguished in the marketplace by their highlevel of quality, consistency and flexibility. A variety of different formats allows the RAVEN BI to be used in manydifferent types of processes and products. For instance, the simple spore strips are used most often in the smalltable-top steam sterilizers in dental offices,

 

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while a more complexself-contained BI such as the ProTest, may be used by a medical devicemanufacturer to assure the sterility in a complex ethylene oxide sterilizationprocess.  In either case, the number ofspores contained on the carrier and the resistance of the spores to thesterilization process must be well characterized in order to accurately assessthe effectiveness of sterilization. During manufacturing, extensive quality control steps are used to insurethat the microorganism spores are well characterized and their resistance isknown following placement on the target carrier.  The RAVEN products are registered medical devicesmanufactured under ISO 13485 controlled processes.  They are developed and used according to theguidelines developed under the auspices of the Association for the Advancementof Medical Instrumentation (AAMI), which are adopted as the worldwide standardunder the International Standards Organization (ISO).

 

Raven has expanded itsindustrial product line by adding a biological indicator product for ChlorineDioxide (ClO2) gas decontamination/sterilization. This increasinglypopular process is often used with biological safety cabinets, medicaldevices and animal cages among other uses. Raven has also made someimprovements in its existing products. ProTest, Raven’s self-containedbiological indicator for steam, is now cleared to be used in flash cycles (3minutes and 10 minutes at 132° flash gravity displacement cycles) which areextremely important in healthcare and clinical settings for the immediatesterilization of instruments. This change makes Raven more competitive in thehealthcare industry.

 

SGM BIOTECH BiologicalIndicators

 

In April 2010,the Company acquired SGM Biotech, Inc. of Bozeman, Montana.  The SGM BIOTECH product line consists ofBiological Indicators (BI) used to assess the effectiveness of sterilizationprocesses, including steam, gas (such as ethylene oxide), and radiation.  BI’s consist of resistant spores of certainmicroorganisms which are applied on a convenient substrate.  The spores are well characterized in terms ofnumbers and resistance to sterilization. In use, the BI is exposed to a sterilization process and then tested todetermine the presence of surviving organisms. SGM BIOTECH’s line of BI’s includes both spore strips, which requirepost-processing transfer to a growth media, self-contained products which havethe growth media already pre-packaged in crushable ampoules, industrial use BI’s,and culture media.  SGM BIOTECH productsare used to validate equipment and monitor the effectiveness of a process inany industrial or healthcare setting which uses sterilization.  Key markets for SGM BIOTECH includehealthcare such as dental offices and hospitals, and industrial such as medicaldevice and pharmaceutical manufacturing.

 

Inaddition to Biological Indicators, the Company offers Contract and TestingServices to industrial companies for the development of sterilizationprocesses.  These testing servicesinclude organism identification, population verification, sterilization processdevelopment and custom BI production.

 

TheSGM BIOTECH line of Biological Indicators is very similar to the RAVENBiological Indicator line, and are distinguished in the marketplace by theirhigh level of quality, consistency and flexibility.  The number of spores contained on the carrierand the resistance of the spores to the sterilization process must be wellcharacterized in order to accurately assess the effectiveness ofsterilization.  During manufacturing,extensive quality control steps are used to insure that the microorganismspores are well characterized and their resistance is known following placementon the target carrier.  The SGM BIOTECHproducts are registered medical devices manufactured under ISO 13485 controlledprocesses.  They are developed and usedaccording to the guidelines developed under the auspices of the Association forthe Advancement of Medical Instrumentation (AAMI), which are adopted as theworldwide standard under the International Standards Organization (ISO).

 

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MEDICAL HemodialysisProducts

 

Patientswith kidney failure (known as end stage renal disease, or ESRD) require theremoval of toxic waste products and excess water through artificial means.  This process is generally performed threetimes per week and is most often accomplished through the use of hemodialysis.

 

Hemodialysisrequires the treatment to be conducted on a dialysis machine through the use ofa disposable cartridge known as a dialyzer. Blood is brought extra corporally to the dialysis machine for controland monitoring and passes through the dialyzer where waste products and excesswater are removed.  This treatmentgenerally lasts three to four hours. While these hemodialysis procedures can be conducted in home, the bulkof the treatments are conducted in over 4,500 clinics and hospital centers inthe U.S.  Currently, there are over300,000 patients in the U.S. undergoing dialysis therapy.

 

Dialysate Meters

 

Mesa’sDialysate Meters are instruments that are used to test various parameters ofthe dialysis fluid (dialysate), and the proper calibration and operation of thedialysis machine.  Each measures somecombination of temperature, pressure, pH and conductivity to ensure that thedialysate has the proper composition to promote the transfer of waste productsfrom the blood to the dialysate. The meters provide a digital readout that thepatient, physician or technician uses to verify that the dialysis machine isworking within prescribed limits and delivering the properly prepareddialysate.

 

TheCompany manufactures two styles of Dialysate Meters; those designed for use bydialysis machine manufacturers and biomedical technicians and those usedprimarily by dialysis nurses or patient care technicians.  The meters for technicians include the ModelsNEO-2 and the newer 90XL.  These metersare characterized by exceptional accuracy, stability, and flexibility and areused by the industry as the primary standard for the calibration of dialysismachines. The newest 90XL meter has four independent measurement channels,allowing the user to easily perform testing and calibration of multipledialysis machines in a clinic or on the manufacturing floor.

 

Thedialysis meters designed for use by dialysis nurses are known primarily fortheir ease of use and include the pHoenix, Hydra, and NEO-STAT+ models.  Incorporating a patented, built-in syringesampling system, these meters are used as the final quality control check onthe dialysate just prior to starting a treatment.  Their design allows the nurse to quickly andeasily draw a small sample of the dialysate into the meter for measurement, andmanagement believes that they have become the most popular meter in thepoint-of care testing in dialysis clinics. The pHoenix meter is the newestsyringe sampling meter Mesa has introduced to the marketplace and is theleading seller by far of the three (3) hand held meter choices.

 

Inaddition to the dialysate meters, the Company markets a line of calibrationstandard solutions for use in dialysis clinics for calibration andtesting.  These standard solutions areregularly consumed by the dialysis clinics and this, along with calibrationservices, represents a recurring revenue stream for the Medical product line.

 

TORQO Products

 

Thecompany’s torque testing system is a durable and reliable computerized captorque analyzer, which is setting a new standard for torque measurementthroughout the packaging industry. With its on-board microprocessor, the TORQOmakes torque testing simple, accurate and affordable. It is easy to use, easyto set up, easy to move and mostly maintenance free. Tooling is available forany threaded closure - including child resistant caps - and the TORQO’s compactsize delivers and stores precise results at the touch of a button.

 

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TheTORQO’s appeal is high accuracy and consistency of measurement. Differentoperators will apply different forces to manual torque measuring devices, andthe force applied directly relates to the torque measured. When torque is measuredby using a manual torque meter, an operator’s hand is responsible for applyingthe twisting force to the cap in order for the cap to rotate to the removalpoint or application point. At this point, torque data is recorded anddisplayed on the torque measurement device. During this process, an increase inthe force applied by the operator to the cap, or an increase in the speed atwhich the force is applied, will result in an increase in the measured torqueof the cap, and vice-versa. In order for accurate and reliable data to beobtained, each operator must apply precisely the same amount of force to thecap, testing cycle after testing cycle. With a motorized torque testing systemlike the TORQO, the force applied to a cap is precisely the same in eachtesting cycle, regardless of who may be operating the machine, or how strongthey may be.

 

TheTORQO system provides the information that helps the operator track events -and potential problems - during the manufacturing process. TORQO stores data bycapping head number, making trends easily recognizable, so that corrections canbe performed in a timely fashion. Because the test results are automaticallystored, manual recording errors are eliminated and verification of the testingprocess becomes easy.

 

NUSONICS Products

 

TheCompany’s sonic fluid measurement product line consists of two majorcomponents: Sonic Flow Meters and Concentration Monitors.  While the total market for flow meters isvery large, the NUSONICS® Sonic Flow Meters best serve applications wherecleanliness and resistance to corrosives are required.  Specific applications where the NUSONICS®products are particularly well suited include water treatment, chemicalprocessing and heating, ventilation and air conditioning (HVAC) applications.  The Concentration Monitor component of theproduct line consists of Pipeline Interface Detectors and ConcentrationAnalyzers.  The Pipeline InterfaceDetector serves a smaller market niche while the Concentration Analyzers servea wider variety of industry application, such as chemical, food, pharmaceuticaland polymerization processes.

 

TheNUSONICS products have been subject to strong competition in the marketplace inrecent years primarily from larger, well established process controlcompanies.  Consequently, sales ofNUSONICS products have decreased and currently represent less than 3% of theCompany’s total revenue.  Today, mostsales are made to existing NUSONICS customers who are replacing or adding totheir current infrastructure.

 

Manufacturing

 

TheCompany assembles the MEDICAL, RAVEN, SGM BIOTECH and DATATRACE products at itsfacilities in Lakewood, Colorado, Bozeman, Montana and Omaha, Nebraska.  Currently the TORQO product line ismanufactured in Amherst, New Hampshire but we plan to move all TORQOmanufacturing to the Lakewood facility by approximately December, 2010. TheCompany’s electronic products are manufactured primarily by assembling productsfrom purchased components and testing the final products prior to release.  The RAVEN and SGM BIOTECH products aremanufactured by growing microbiological spores from raw materials, assemblingthe finished products through a series of process steps, and testing thefinished Biological Indicators using established quality control tests.

 

Mostof the materials and components used in the Company’s product lines areavailable from a number of different suppliers. Mesa generally maintains multiple sources of suppliers for most itemsbut is dependent on a single source for certain items.  Mesa believes that alternative sources couldbe developed, if required, for present single supply sources.  Although the Company’s dependence on thesesingle supply sources may involve a degree of risk, to date, Mesa has been ableto acquire sufficient stock to meet its production requirements.

 

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Marketing and Distribution

 

The Company’s domestic sales of its MEDICAL andDATATRACE products are generated by its direct sales and marketing staff, whileoutside the U.S., a number of distributors are utilized.  The Company’s TORQO, SGM BIOTECH and RAVENproducts are distributed both directly, through a sales and marketing staff toend users and through a series of distributors both domestically and outsidethe U.S.  International sales for allproducts are conducted through over 100 distributors.  During the fiscal year ended March 31,2010, approximately 73% of sales have been domestic and 27% have beeninternational to countries throughout Europe, Africa, Australia, Asia and SouthAmerica, as well as Canada and Mexico.

 

Sales promotions include attendance by Mesarepresentatives at trade shows, direct mail campaigns, internet advertising andother digital forms of advertising.

 

Customers of Mesa’s MEDICAL products primarilyinclude dialysis centers and dialysis equipment manufacturers.  The primary emphasis of the Company’smarketing effort is to offer quality products to the healthcare market whichwill aid in cost containment and improved patient well-being.

 

DATATRACE® customers include numerousindustrial users in the food, pharmaceutical and medical device markets whoutilize the products within a variety of manufacturing, quality control andvalidation applications. The emphasis of the Company’s marketing effort is tooffer a quality product that provides a unique and flexible solution tomonitoring temperature, pressure or humidity without interfering with theprocessing of the product.

 

RAVEN and SGM BIOTECH customers include variouscompanies providing sterility assurance testing to the dental office market,hospitals, contract sterilizing services and various industrial users involvedin pharmaceutical and medical device manufacturing.  The Company’s marketing focuses on providinghigh quality test products in a variety of different formats, which minimizeincubation and test result time.

 

TORQO customers include numerous users in thefood, beverage and pharmaceutical bottling markets who utilize the productprimarily on their high speed filling lines for torque testing the caps as aquality control verification. The emphasis of the Company’s marketing effort isto offer a quality product and demonstrate an ROI that provides anon-destructible cap torque test so as to allow for the products being testedto be put back on the production line and therefore incur no loss of productvalue.

 

NUSONICS® customers include various industriessuch as water treatment, manufacturing, HVAC and petroleum producttransportation.  The Company’s marketingefforts are focused on offering flow measurement and concentration monitoringin difficult environments where noninvasive monitoring techniques are required.

 

During the fiscal year ended March 31,2010, one customer represented approximately 14% of the Company’s revenues andapproximately 10% of the Company’s accounts receivable balance.  During the fiscal year ended March 31,2009, one customer represented approximately 14% of the Company’s revenues andapproximately 12% of the Company’s accounts receivable balance.

 

Competition

 

Mesa competes with major medical andinstrumentation companies as well as a number of smaller companies, many ofwhich are well established, with substantially greater capital resources andlarger research and development capabilities. Furthermore, many of these companies have an established product lineand a significant operating history.

 

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Accordingly, the Company may be at a competitivedisadvantage due to such factors as its limited resources and limited marketingand distribution network.

 

Companies with which Mesa’s dialysis productscompete include Myron L Company and IBP Medical GmbH.  Companies with which Mesa’s DATATRACE® datalogger products compete include GE Kaye, Ellab and TMI Orion.  Companies with which RAVEN’s and SGM BIOTECH’sbiological indicator products compete include 3M and Steris.  Companies with which Mesa’s NUSONICS®products compete include Controlotron, Badger Meter, Rosemount, and GEPanametrics. Companies with which Mesa’a Torqo torque testing product competeswith include SureTorque, Mecmesin and Steinfurth.

 

Government Regulation

 

Medical devices marketed by Mesa are subject tothe provisions of the Federal Food, Drug and Cosmetic Act, as amended by theMedical Device Amendments of 1976 (hereinafter referred to as the “Act”).  A medical device which was not marketed priorto May 28, 1976, or is not substantially equivalent to a device marketedprior to that date, may not be marketed until certain data is filed with theFDA and the FDA has affirmatively determined that such data justifies marketingunder conditions specified by the FDA.  Amedical device is defined by the Act as an instrument which (1) isintended for use in the diagnosis or the treatment of disease, or is intendedto affect the structure of any function of the human body; (2) does notachieve its intended purpose through chemical action; and (3) is notdependent upon being metabolized for the achievement of its principal intendedpurpose.  The Act requires any companyproposing to market a medical device to notify the FDA of its intention at leastninety days before doing so, and in such notification must advise the FDA as towhether the device is substantially equivalent to a device marketed prior to May 28,1976.  As of the date hereof, the Companyhas received permission from the FDA to market all of its products requiringsuch permission.

 

Some of Mesa’s products are subject to FDAregulations and inspections, which may be time-consuming and costly.  This includes on-going compliance with theFDA’s current Good Manufacturing Practices regulations which require, amongother things, the systematic control of manufacture, packaging and storage ofproducts intended for human use.  Failureto comply with these practices renders the product adulterated and couldsubject the Company to an interruption of manufacture and sale of its medicalproducts and possible regulatory action by the FDA.

 

The manufacture and sale of medical devices isalso regulated by some states.  Althoughthere is substantial overlap between state regulations and the regulations ofthe FDA, some state laws may apply. Mesa, however, does not anticipate that complying with state regulationswill create any significant problems. Foreign countries also have laws regulating medical devices sold inthose countries, which may cause us to expend additional resources oncompliance.

 

Employees

 

On March 31, 2010, the Company had a totalof 112 employees, of which 112 were full-time employees. Currently, 23 personsare employed for marketing and sales, six for research and development, 72 formanufacturing and quality assurance and 11 for administration.

 

Additional Information

 

For the fiscal years ended March 31, 2010and 2009, Mesa spent $669,000 and $636,000, respectively, on Company-sponsoredresearch and development activities.

 

Compliance with federal, state and localprovisions which have been enacted regarding the discharge of materials intothe environment or otherwise relating to the protection of the environment hasnot had, and is not expected to have, any adverse effect upon capitalexpenditures, earnings or the competitive position of the Company.  Mesa is not presently a

 

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party to any litigation or administrative proceedingswith respect to its compliance with such environmental standards.  In addition, the Company does not anticipatebeing required to expend any significant capital funds in the near future forenvironmental protection in connection with its operations.

 

The Company has been issued patents for itsDATATRACE® temperature recording devices, its NUSONICS® sonic flow measurementand sonic concentration monitoring products and its pHoenix, Hydra and NeoStat+dialysis meters and its RAVEN and SGM BIOTECH biological indicators.  Several of these patents have now expired.  Failure to obtain patent protection on theCompany’s remaining products may have a substantial adverse effect upon theCompany since there can be no assurance that other companies will not developfunctionally similar products, placing the Company at a competitivedisadvantage.  Further, there can be noassurance that patent protection will afford protection against competitorswith similar inventions, nor can there be any assurance that the patents willnot be infringed or designed around by others. Moreover, it may be costly to pursue and to prosecute patentinfringement actions against others, and such actions could interfere with thebusiness of the Company.

 

**Item  1A. RISK FACTORS**

 

**We face intense competition***.*

 

The markets for some of our current andpotential products are intensely competitive. We face competition from companies that possess both larger sales forcesand more capital resources.  In addition,there are growing numbers of competitors for certain of our products.

 

**Technological change could renderour products obsolete or non-competitive.**

 

The market for the Company’s products and services are characterized by rapid andsubstantial technological changes and swiftly evolving industry standards. Asindustry standards evolve rapidly, the Company may be required to develop newand competitive products to maintain or increase revenue. A competitive productrequires substantial planning, design, development, and testing at thetechnological, product and manufacturing process stages.  The Company can provide no assurance that itsproducts will remain competitive in a rapidly changing environment. Inaddition, regulations and industry acceptance of new technologies maydecelerate or eliminate meaningful revenue.

 

**Acquisition of businesses could potentiallydecrease profit margins and decrease net income.**

 

The Company maintains its growth strategythrough product development and business and technology acquisition. Businessesacquired by the Company may provide marginal profitability or prove to beunprofitable. Additional risks include the competition among prospectivebuyers, the potential loss of key employees or clients of the acquired company,and the reallocation of capital from ongoing operating processes.

 

**We are utilizing variable ratefinancing.**

 

We have initiated a credit facility of$7,000,000 which is split between a 36 month reducing line of credit of$3,000,000 and a one year revolving line of credit of $4,000,000.  Both of these lines of credits have variableinterest rates which are calculated daily at one percent under the nationalprime rate of the Bank of Oklahoma and are subject to a 3.25 percentfloor.  A change in interest rate marketconditions could increase the Company’s interest costs in the future.

 

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**We may be unable to effectivelyprotect our intellectual property.**

 

Our ability to compete effectively depends inpart on developing and maintaining the proprietary aspects of our technologyand processes.  We cannot assure you thatthe patents we have obtained, or any patents we may obtain, will provide anycompetitive advantages for our products. We also cannot assure you that those patents will not be successfullychallenged, invalidated or circumvented in the future.  In addition, we cannot assure you thatcompetitors, many of which have substantial resources and have made substantialinvestments in competing technologies, have not already applied for orobtained, or will not seek to apply for or obtain, patents that will prevent,limit or interfere with our ability to make, use and sell our products eitherin the United States or in international markets.

 

**We may have product liabilityclaims.**

 

Our products involve a risk of productliability claims.  Although we maintainproduct liability insurance at coverage levels which we believe are adequate,there is no assurance that, if we were to incur substantial liability forproduct liability claims, insurance would provide adequate coverage againstsuch liability.

 

**Our company faces challenges incomplying with certain sections of the Sarbanes-Oxley Act.**

 

Like many smaller public companies, our Companyfaces challenges in complying with the internal control requirements (Section 404)of the Sarbanes-Oxley Act.  Under currentframeworks, compliance in areas such as separation of duties, informationsystem controls, etc. may prove problematic for a smaller company withlimited human resources.  Our Company mayalso be forced to incur significant expense in order to comply with the lawunder current control frameworks and deadlines for implementation.

 

**Changing accounting regulationsmay affect operating results**.

 

Our operating results may be adversely affectedby new laws and accounting regulations that have either been recently enactedor which are under consideration, including costs associated withimplementation of Section 404 of the Sarbanes-Oxley Act.

 

**Our operating results mayfluctuate**.

 

Our results of operations may fluctuatesignificantly from quarter to quarter based on numerous factors including thefollowing:

 

·                                          the introduction of new products;

·                                          the level of market acceptance of our products;

·                                          achievement of research and development milestones;

·                                          timing of the receipt of orders from, and product shipment to majorcustomers;

·                                          timing of expenditures;

·                                          variation in capital spending trends of our customers;

·                                          timing of the expensing of employee stock options;

·                                          delays in educating and training our distributors and representativessales forces;

·                                          manufacturing or supply delays;

·                                          product returns;

·                                          receipt of necessary regulatory approval;

·                                          costs associated with implementing and maintaining compliance with theSarbanes-Oxley Act;

·                                          costs associated with expansion of the Company’s direct salescapabilities; and

·                                          changes in key components by our vendors.

 

10

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**Changing Industry Trends May AffectOperating Results.**

 

Various changes within the industries we servemay limit future demand for our products and may include the following:

 

·                                          changes in dialysis reimbursements;

·                                          mergers within the dialysis provider industry have made the Company moredependent upon fewer large customers for its sales in this industry;

·                                          price competition for key products; and

·                                          increased competition.

 

**Ourgrowth depends on introducing new products and the efforts of third partydistributors.**

 

Our growth depends on the acceptance of ourproducts in the marketplace, the penetration achieved by the companies which wesell to, and rely on, to distribute and represent our products, and our abilityto introduce new and innovative products that meet the needs of the variousmarkets we serve.  There can be noassurance that we will be able to continue to introduce new and innovativeproducts or that the products we introduce, or have introduced, will be widelyaccepted by the marketplace, or that the companies which we contract with todistribute and represent our products will continue to successfully penetrateour various markets.  Our failure tocontinue to introduce new products or gain wide spread acceptance of ourproducts would adversely affect our operations.

 

**We dependon attracting new distributors and representatives for our products**.

 

In order to successfully commercialize ourproducts in new markets, we will need to enter into distribution arrangementswith companies that can successfully distribute and represent our products intovarious markets.

 

**Ourproducts are extensively regulated which could delay product introduction orhalt sales.**

 

The process of obtaining and maintainingrequired regulatory approvals is lengthy, expensive and uncertain.  Although we have not experienced anysubstantial regulatory delays to date, there is no assurance that delays willnot occur in the future, which could have a significant adverse effect on ourability to introduce new products on a timely basis.  Regulatory agencies periodically inspect ourmanufacturing facilities to ascertain compliance with “good manufacturingpractices” and can subject approved products to additional testing andsurveillance programs.  Failure to complywith applicable regulatory requirements can, among other things, result infines, suspension of regulatory approvals, product recalls, operating restrictionsand criminal penalties.  While we believethat we are currently in compliance, if we fail to comply with regulatoryrequirements, it could have an adverse effect on our results of operations andfinancial condition.

 

**Item  1B. Unresolved Staff Comments**

 

NotApplicable

 

**ITEM2.  PROPERTIES**

 

Mesa owns its 39,616 square foot facility at 12100 W.6th Avenue, Lakewood, Colorado 80228. All Datatrace, Medical and Nusonics manufacturing, warehouse, marketing,research and general corporate administrative functions are based at thislocation.  We currently plan to move ourTorqo manufacturing into our Lakewood, CO facility by December 2010.  The facility is approximately 80% utilizedand the Company currently utilizes only one shift.  The Company also owns an approximately 28,000square foot facility at 8607 Park Drive, Omaha, Nebraska 68127.  All RAVEN product manufacturing, warehouse,marketing, research and administrative functions are based at thislocation.  The facility is

 

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currently 95% utilized and the Company currentlyutilizes only one shift.  On April 30,2010, the Company completed the acquisition of the approximately 21,500 squarefoot facility that houses its new SGM Biotech operations.  All SGM Biotech product manufacturing,warehouse, marketing, research and administrative functions are based at thislocation.  The facility is located at 10Evergreen Drive, Bozeman, Montana 59715 and it is currently 95% utilized andthe Company currently utilizes only one shift.

 

The Company does not invest in, and has notadopted any policy with respect to investments in, real estate or interests inreal estate, real estate mortgages or securities of or interests in personsprimarily engaged in real estate activities. It is not the Company’s policy to acquire assets primarily for possiblecapital gain or primarily for income.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

No material legal proceedings to which theCompany is a party or to which any of its property is the subject are pending,and no such proceedings are known by the Company to be contemplated.  The Company is not presently a party to anylitigation or administrative proceedings with respect to its compliance withfederal, state and local provisions which have been enacted regarding thedischarge of materials into the environment or otherwise relating to theprotection of the environment and no such proceedings are known by the Companyto be contemplated.  No legal actions arecontemplated nor judgments entered against any officer or director of theCompany concerning any matter involving the business of the Company.

 

**ITEM4.  RESERVED**

 

**PART II**

 

**ITEM 5.MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

(a)                                  Mesa’s common stock is traded on the Nasdaq Global Market under thesymbol “MLAB”.  For the last two fiscalyears, the high and low closing sales prices of the Company’s common stock asreported to the Company by Nasdaq were as follows:

 
| **Quarter Ended**       | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|--------------|------------|
| June 30, 2008      |       | $        | 24.40      |    | $          | 19.95        |       | $ | .10 |   |
| September 30, 2008 |       | $        | 24.65      |    | $          | 20.43        |       | $ | .10 |   |
| December 31, 2008  |       | $        | 22.55      |    | $          | 16.26        |       | $ | .10 |   |
| March 31, 2009     |       | $        | 20.25      |    | $          | 14.55        |       | $ | .10 |   |
|                    |       |     |       |    |       |         |       |
| June 30, 2009      |       | $        | 22.30      |    | $          | 16.60        |       | $ | .10 |   |
| September 30, 2009 |       | $        | 22.97      |    | $          | 19.93        |       | $ | .10 |   |
| December 31, 2009  |       | $        | 26.27      |    | $          | 22.78        |       | $ | .11 |   |
| March 31, 2010     |       | $        | 28.80      |    | $          | 25.12        |       | $ | .11 |   |

 

The Nasdaq Global Market quotations set forthherein reflect inter-dealer prices, without retail mark-up, mark-down, orcommission and may not represent actual transactions.

 

(b)                                 As of March 31, 2010, there were approximately 1200 record andbeneficial holders of Mesa’s common stock.

 

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(c)                                  During the fiscal year ended March 31, 2010, the Company did notsell any equity securities that were not registered under the Securities Act of1933, as amended.

(d)                                 We made the following repurchases of our common stock, by month, withinthe fourth quarter of the fiscal year covered by this report:

 
| ** **                   | ** ** | ** **    | ** ** | ** **     | ** ** | **Total Share Purchased**    | ** ** | **Remaining Shares** | ** ** |
|------------------------------|------------|---------------|------------|----------------|------------|------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **Shares**    | ** ** | **Avg. price** | ** ** | **as Part of Publicly** | ** ** | **to Purchase**      | ** ** |
| ** **                   | ** ** | **Purchased** | ** ** | **Paid**       | ** ** | **Announced Plan**           | ** ** | **Under Plan**       | ** ** |
| January 1- 31, 2010     |       | 240           |       | $              | 27.24      |                         | 127,200    |                 | 172,800    |   |
| February 1- 28,2010     |       | —        |       | —         |       | 127,200                      |       | 172,800              |       |
| March 1 – 31, 2010 |       | —        |       | —         |       | 127,200                      |       | 172,800              |       |
| Total Fourth Quarter         |       | 240      |       | $              | 27.24      |                         |       |                 |       |   |

 

On November 7, 2005, the Board ofDirectors of Mesa Laboratories, Inc. adopted a share repurchase plan whichallows for the repurchase of up to 300,000 of the Company’s common shares.  This plan will continue until the maximum isreached or the plan is terminated by further action of the Board.

 

For information regarding securities authorized forissuance under our equity compensation plans, please see Footnote 9 to theFinancial Statements.

 

Equity Compensation Plan Informationas of March 31, 2010

 
| ** **                                                  | ** ** | **No. of securities to be** | ** ** | **Weighted-average**            | ** ** | **Number of securities** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **Issued upon exercise of**      | ** ** | **exercise price of** | ** ** | **remaining for future** | ** ** |
| **Plan Category**                                      | ** ** | **Outstanding options**                    | ** ** | **outstanding options**    | ** ** | **issuance under plan**  | ** ** |
|                                                        |       |                                            |       |                            |       |                               |       |
| Equity compensation plans  approved by security holders     |       | 391,765                                         |       | $                               | 17.37      |                               | 201,570    |   |
|                                                        |       |                                            |       |                            |       |                               |       |
| Equity compensation plans  not approved by security holders |       | —                                          |       | —                          |       | —                             |       |
|                                                        |       |                                            |       |                            |       |                               |       |
| Total                                                       |       | 391,765                                         |       | $                               | 17.37      |                               | 201,570    |   |

 

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**ITEM 6. SELECTED FINANCIALDATA**

 

The following table sets forth the Company’sselected historical financial data for each of the five years for the periodended March 31. The selected historical financial data set forth below hasbeen derived from our audited financial statements included elsewhere in thisannual report on Form 10-K. This information should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and our audited financial statements and related notes includedelsewhere in this annual report on Form 10-K.

 
| **(Dollars in thousands,  except EPS)** | ** ** | **2010**   | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Operational Data**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  Sales                              |       | $          | 21,929     |       | $          | 21,536     |       | $          | 19,558     |       | $          | 17,242 |   | $ | 11,583 |   |
| Gross  Profit                           |       | $          | 13,194     |       | $          | 13,817     |       | $          | 12,858     |       | $          | 10,895 |   | $ | 7,437 |   |
| Gross  Margin                           |       | 60         | %          | 64         | %          | 66         | %          | 63         | %          | 64         | %          |
| Operating  Income                       |       | $          | 7,368      |       | $          | 7,608      |       | $          | 7,061      |       | $          | 5,659 |   | $ | 4,110 |   |
| Operating  Margin                       |       | 34         | %          | 35         | %          | 36         | %          | 33         | %          | 35         | %          |
| Net  Profit                             |       | $          | 4,769      |       | $          | 4,790      |       | $          | 4,610      |       | $          | 3,958 |   | $ | 2,805 |   |
| Net  Profit Margin                      |       | 22         | %          | 22         | %          | 24         | %          | 23         | %          | 24         | %          |
| Earnings  Per Diluted Share             |       | $          | 1.45       |       | $          | 1.48       |       | $          | 1.41       |       | $          | 1.22 |   | $ | .92 |   |
| **Financial Position Data**             |       |       |       |       |       |       |       |       |       |       |       |
| Cash  and Investments                   |       | $          | 10,471     |       | $          | 9,111      |       | $          | 5,770      |       | $          | 3,346 |   | $ | 5,711 |   |
| Trade  Receivables (net)                |       | $          | 4,421      |       | $          | 4,307      |       | $          | 3,875      |       | $          | 3,817 |   | $ | 2,425 |   |
| Inventory  (net)                        |       | $          | 4,820      |       | $          | 4,499      |       | $          | 4,020      |       | $          | 3,297 |   | $ | 2,374 |   |
| Current  Assets                         |       | $          | 20,474     |       | $          | 18,593     |       | $          | 14,411     |       | $          | 10,842 |   | $ | 10,955 |   |
| Working  Capital                        |       | $          | 18,530     |       | $          | 17,109     |       | $          | 12,824     |       | $          | 9,373 |   | $ | 9,753 |   |
| Current  Ratio                          |       | 11:1       |       | 13:1       |       | 9:1        |       | 7:1        |       | 9:1        |       |
| Total  Assets                           |       | $          | 33,639     |       | $          | 29,614     |       | $          | 25,533     |       | $          | 22,354 |   | $ | 16,450 |   |
| Current  Liabilities                    |       | $          | 1,944      |       | $          | 1,484      |       | $          | 1,587      |       | $          | 1,469 |   | $ | 1,202 |   |
| Total  Liabilities                      |       | $          | 2,442      |       | $          | 2,012      |       | $          | 1,794      |       | $          | 1,631 |   | $ | 1,531 |   |
| Total  Stockholders’ Equity        |       | $          | 31,197     |       | $          | 27,602     |       | $          | 23,739     |       | $          | 20,723 |   | $ | 14,919 |   |
| **Average Return Data**                 |       |       |       |       |       |       |       |       |       |       |       |
| Stockholder  Investment (1)             |       | 16         | %          | 19         | %          | 21         | %          | 22         | %          | 19         | %          |
| Assets                                  |       | 15         | %          | 17         | %          | 19         | %          | 20         | %          | 17         | %          |
| Invested  Capital (2)                   |       | 24         | %          | 26         | %          | 26         | %          | 29         | %          | 31         | %          |

 

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(1)   Average return on stockholder investment is calculated by dividingtotal net income by the average of end of year and beginning of year totalstockholder’s equity.

(2)   Average return on invested capital (invested capital = totalassets – current liabilities – cash and short-term investments) is calculatedby dividing total net income by the average of end of year and beginning ofyear invested capital.

 

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**ITEM 7  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

Mesa Laboratories, Inc. manufactures anddistributes electronic measurement systems and disposable products for variousniche applications, including renal treatment, food processing, medicalsterilization, pharmaceutical processing and other industrialapplications.  Our Company follows aphilosophy of manufacturing a high quality product and providing a high levelof on-going service for those products. In order to optimize the performance of our Company and to build thevalue of the Company for its shareholders, we continually follow the trend ofvarious key financial indicators.  Asample of some of the most important of these indicators is presented in thefollowing table.

 

**KeyFinancial Indicators**

 
| ** **                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008**   | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|
| Cash and Investments       |       | $        | 10,471,000 |     | $          | 9,111,000  |       | $        | 5,770,000  |   | $ | 3,346,000 |   |
|                       |       |     |       |     |       |       |       |     |       |
| Trade Receivables          |       | $        | 4,641,000  |     | $          | 4,587,000  |       | $        | 4,075,000  |   | $ | 4,017,000 |   |
| Days Sales Outstanding     |       | 61       |       | 74       |       | 60         |       | 63       |       |
|                       |       |     |       |     |       |       |       |     |       |
| Inventory (Net)            |       | $        | 4,820,000  |     | $          | 4,499,000  |       | $        | 4,020,000  |   | $ | 3,297,000 |   |
| Inventory Turns            |       | 1.8      |       | 1.8      |       | 1.8        |       | 1.9      |       |
|                       |       |     |       |     |       |       |       |     |       |
| Working Capital            |       | $        | 18,530,000 |     | $          | 17,109,000 |       | $        | 12,824,000 |   | $ | 9,373,000 |   |
| Current Ratio              |       | 11:1     |       | 13:1     |       | 9:1        |       | 7:1      |       |
|                       |       |     |       |     |       |       |       |     |       |
| Average Return On:         |       |     |       |     |       |       |       |     |       |
| Stockholder Investment (1) |       | 16.2     | %          | 18.7     | %          | 20.7       | %          | 22.2     | %          |
| Assets                     |       | 15.1     | %          | 17.4     | %          | 19.3       | %          | 20.4     | %          |
| Invested Capital (2)       |       | 23.7     | %          | 25.8     | %          | 25.8       | %          | 29.2     | %          |
|                       |       |     |       |     |       |       |       |     |       |
| Net Sales                  |       | $        | 21,929,000 |     | $          | 21,536,000 |       | $        | 19,558,000 |   | $ | 17,242,000 |   |
|                       |       |     |       |     |       |       |       |     |       |   |   |   |   |
| Gross Profit               |       | $        | 13,194,000 |     | $          | 13,817,000 |       | $        | 12,858,000 |   | $ | 10,895,000 |   |
| Gross Margin               |       | 60       | %          | 64       | %          | 66         | %          | 63       | %          |
| Operating Income           |       | $        | 7,368,000  |     | $          | 7,608,000  |       | $        | 7,061,000  |   | $ | 5,659,000 |   |
| Operating Margin           |       | 34       | %          | 35       | %          | 36         | %          | 33       | %          |
| Net Profit                 |       | $        | 4,769,000  |     | $          | 4,790,000  |       | $        | 4,610,000  |   | $ | 3,958,000 |   |
| Net Profit Margin          |       | 22       | %          | 22       | %          | 24         | %          | 23       | %          |
| Earnings Per Diluted Share |       | $        | 1.45       |     | $          | 1.48       |       | $        | 1.41       |   | $ | 1.22 |   |
|                       |       |     |       |     |       |       |       |     |       |
| Capital Expenditures (Net) |       | $        | 586,000    |     | $          | 676,000    |       | $        | 207,000    |   | $ | 1,780,000 |   |
|                       |       |     |       |     |       |       |       |     |       |
| Head Count                 |       | 112      |       | 111      |       | 113        |       | 100      |       |
| Sales Per Employee         |       | $        | 196,000    |     | $          | 194,000    |       | $        | 173,000    |   | $ | 172,000 |   |

 

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(1)         Average return on stockholder investment is calculated by dividing totalnet income by the average of end of year and beginning of year totalstockholder’s equity.

 

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(2)         Average return on invested capital (invested capital = total assets –current liabilities – cash and short-term investments) is calculated bydividing total net income by the average of end of year and beginning of yearinvested capital.

 

While we continually try to optimize theoverall performance and trends, the table above does highlight variousexceptions.  Most of the indicators abovehave declined small amounts in the most recent fiscal year. A small decrease innet profit margin combined with increasing balance sheet levels during fiscal2010 caused the average return calculations to decrease in the current fiscalyear. Our company saw a small decrease in net profit margin in fiscal 2010 dueto a decrease in gross profit margins and decreased interest income on investedcash due to lower interest rates.

 

**Results of Operations**

 

Net Sales

 

Net sales for fiscal 2010 increased two percent fromfiscal 2009, and net sales for fiscal 2009 increased 10 percent from fiscal2008.  In dollars, net sales of$21,929,000 in fiscal 2010 increased $393,000 from $21,536,000 in 2009, and netsales of $21,536,000 in fiscal 2009 increased $1,978,000 from $19,558,000 in2008.

 

Our revenues come from two main sources, which includeproduct revenues and parts and service revenues.  Parts and service revenues are derived fromon-going repair and recalibration or certification of our products.  The certification or recalibration of productis usually a key component of the customer’s own quality system and many of ourcustomers operate in regulated industries, such as food processing or medicaland pharmaceutical processing.  For thisreason, these revenues tend to be fairly stable and grow slowly over time.  Also, it is important to note that the Ravenproducts are disposables and thus do not contribute to the Company’s parts andservice revenue.   During fiscal years2010, 2009 and 2008 our Company had parts and service revenue of $3,560,000,$3,642,000 and $3,499,000.  As apercentage of total revenue, parts and service revenues were 16% in 2010, 17%in 2009 and 18% in 2008.

 

The performance of new product sales is dependent onseveral factors, including general economic conditions in the United States andabroad, capital spending trends, competition and the introduction of newproducts .  New products released to themarket over the past five fiscal years include the 90XL Dialysate Meter forkidney dialysis which was introduced late in fiscal 2006, and the Datatrace RFSystem which was introduced in early fiscal 2009.  For fiscal years 2010, 2009 and 2008, productsales for our company were $18,369,000, $17,894,000 and $16,059,000.

 

During the twelve months of fiscal 2010, sales of theCompany’s Medical products and services increased two percent compared to theprior year periods.  For the twelve monthperiod, increases in shipments of meter accessories, standard solutions andparts and service were partially offset by a decrease in meter sales comparedto prior year.

 

Sales for the twelve month period saw declines inMicropack III products and service which were partially offset by increasedsales of the Micropack RF products.  Forthe fourth quarter, Datatrace sales increased 24 percent compared to the sameperiod last year, reducing the sales decrease to seven percent for the twelvemonth period compared to the same period last year.  During most of fiscal 2010, capital spendingwas impacted negatively by the recession, but we have seen a recovery duringthe fourth quarter ended March 31, 2010 as many major customers moved intoa new budget year.

 

During the twelve months of fiscal 2010, sales ofRaven biological indicator products increased seven percent compared to theprior year period.  The increase in Ravensales for the twelve month period was due to increases in sales of disposablebiological indicator and chemical indicator products.  Most Raven sales are made to customers inmedical related industries and did not suffer decline as a result of therecession.  Sales during fiscal 2010 also

 

16

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benefited from increased production capabilities andautomation, which is allowing our company to better penetrate the market withadditional product size configurations and increased production of keyproducts.

 

Since the acquisition of the Torqo bottle cap testingequipment late in December 2009, shipments have totaled $330,000.  Over the same period, orders for the Torqoproducts were just under $550,000.  Likeour other capital equipment products, we have seen strong order rates for theTorqo products in the quarter ended March 31, 2010, and we expect to seethis product line make larger contributions to sales during fiscal 2011.

 

During fiscal 2010, sales of the Nusonics line ofultrasonic fluid measurement systems decreased 19 percent. The Nusonicsproducts currently contribute less than three percent of the Company’s totalsales and are not expected to grow in the future.

 

During fiscal 2009, sales of the Company’s medicalproducts and services increased 16% for the fiscal year compared to the prioryear period.  For the year, Medical sawincreased sales of meter products, disposables and service, which werepartially offset by lower sales of the discontinued dialyzer reprocessor.  Sales of our new 90XL Meter continued toprogress well during fiscal 2009.

 

During fiscal 2009, sales of Datatrace data loggerproducts performed at the same level as the prior year.  For the year, DataTrace products did notexperience an increase in sales due to existing economic trends which influencedsome industrial customers to delay their capital equipment purchases. Sales forthe twelve month period saw small declines though the various categories ofMicropack III products which were off-set by increased sales of the newMicropack RF products.

 

Fiscal 2009 sales of Raven biological indicatorproducts increased 15 percent compared to the prior year period.  In fiscal 2009, Raven experienced an increasein biological indicator and chemical indicator sales.  Sales during fiscal 2009 benefited fromincreased production capabilities and automation, which is allowing our companyto better penetrate the market with increased production of key products.

 

During fiscal 2009, sales of the Nusonics line ofultrasonic fluid measurement systems increased by three percent compared toprior year. Sales of these products remained stable, but Nusonics productscurrently contribute less than four percent of the Company’s total sales andare not expected to grow in the future.

 

Cost of Sales

 

Cost of sales as a percent of net sales infiscal 2010 increased 4.0 percentage points from fiscal 2009 to 39.8 percent,and in fiscal 2009 increased 1.5 percentage points from fiscal 2008 to 35.8percent from 34.3 percent.  Most of ourproducts enjoy gross margins in excess of 50 percent.  Due to the fact that the dialysis productshave sales concentrated with several companies that maintain large chains oftreatment centers, the products that are sold to the renal market tend to beslightly more price sensitive than the data logging products.  Also, due to the nature of the market forbiological indicators, the Raven products produce gross margins lower thanDatatrace and Medical.  Therefore, shiftsin product mix toward higher sales of Datatrace and Medical products will tendto produce lower cost of sales expense and higher gross margins while shiftstoward higher sales of Raven products will normally produce the opposite effecton cost of sales expense and gross margins.

 

During fiscal 2010, our Company saw increasesin Datatrace cost of sales as a percent of sales due to lower Datarace sales.This has combined with a shift in overall product mix between the DatatraceLogger and Raven Biological Indicator product lines resulting in a lower grossmargin for the overall Company. The acquisition of the Torqo products also hashad a negative effect on margins due to the use of Vibrac, LLC to manufacturethese products for the first year.  Oncemanufacturing of the Torqo products is consolidated at our Lakewood, COfacility we will expect to see cost of sales 

 

17

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decline to less than 50 percent as a percent ofsales.  While cost of sales haveincreased during the year as a percent of sales, these increases are beingsignificantly offset by decreases in our operating expenses. The Companycontinues to monitor and implement cost reduction programs, price increases andimprovements in freight cost recovery.

 

During fiscal 2009, our Company saw an increasein costs of sales due to flat Datatrace sales as a result of the economic downturn,and increases in Raven and Medical products. The Company continued to monitor and implement cost reduction programs,price increases and improvements in freight cost recovery.

 

Selling, General and Administrative

 

General and administrative expenses tend to befairly fixed and stable from year-to-year. To the greatest extent possible, wework at containing and minimizing these costs. Total administrative costs were $2,541,000 in fiscal 2010, $2,522,000 infiscal 2009 and $2,420,000 in fiscal 2008, which represents a $19,000 increasefrom fiscal 2009 to fiscal 2010 and a $102,000 increase from fiscal 2008 tofiscal 2009.  During fiscal 2010, we sawincreases in professional fees related to acquisitions, which were partiallyoffset by a decrease in amortization expense. As we progress into fiscal 2011, we expect to see a significant rise inamortization expense due to the Torqo acquisition and the recently completedSGM Biotech, Inc. acquisition. Fiscal 2009 general and administrative costs increased due to generalincreases in operating costs and the addition of a Controller position.

 

Our selling and marketing costs tend to be far morevariable in relation to sales, although there are various exceptions.  Some of these exceptions include the introductionof new products and the mix of international sales to domestic sales.  For a product line experiencing introductionof a new product, costs will tend to be higher as a percent of sales due tohigher advertising development and sales training programs.  Our Company’s international sales are usuallydiscounted and recorded at the net discounted price, so that a change in mixbetween international and domestic sales may influence selling and marketingcosts.  One other major influence onselling and marketing costs is the mix of domestic dialysis product sales toall other domestic sales.  Domesticdialysis product sales are made by direct telemarketing representatives, whichgives us a lower cost structure, when compared to the field salesman and independentrepresentative sales channels utilized by our other products.  Through fiscal 2010 and fiscal 2009 theCompany continued to focus additional resources on its selling and marketingefforts.  Since acquiring the Torqobottle cap testing line we have been incorporating this line of products intoour Datatrace direct sales channel for domestic sales.

 

In dollars, selling and marketing costs were$2,616,000 in fiscal 2010, $3,051,000 in fiscal 2009 and $2,845,000 in fiscal2008.  As a percent of sales, sellingcost were 11.9 percent in fiscal 2010, 14.2 percent in fiscal 2009 and 14.5percent in fiscal 2008.  During bothfiscal 2010 and 2009, selling and marketing costs as a percent of salesdeclined.  Fiscal 2010 selling andmarketing costs declined due to a small decline in head count and a reductionof trade show costs during the fiscal year. Fiscal 2009 selling and marketing costs declined as a percent of salesdue to sales increasing at a rate slightly higher than the growth of costs.

 

Research and Development

 

Company sponsored research and development cost was$669,000 in fiscal 2010, $636,000 in fiscal 2009 and $532,000 in fiscal 2008.We are currently executing a strategy of increasing the flow of internallydeveloped products. Late in the first quarter of fiscal 2009, the DatatraceMicropack RF product was introduced, and on-going research to introduce thistechnology into the environmental monitoring segment of the market hasproceeded during fiscal 2010. Most of our work during fiscal 2008 was focusedon the development of the new Micropack RF products as part of our Datatraceline.

 

18

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Net Income

 

Net income decreased to $4,769,000 or $1.45 per shareon a diluted basis in fiscal 2010 from $4,790,000 or $1.48 per share on adiluted basis in fiscal 2009, and fiscal 2009 increased from $4,610,000 or$1.41 per share on a diluted basis in fiscal 2008.  During fiscal 2010 profitability was impactedchiefly by an increase in cost of sales and a decrease in interest income,which was mostly offset by a decrease on sales and marketing costs and adecrease in income tax expense due to a decrease in state income taxes.  For the fiscal year 2009, Mesa experiencednet income growth of four percent, which was behind the sales growth rate of 10percent for the fiscal year. This lower profitability growth in fiscal 2009,was due to flat Datatrace product growth and higher cost of sales

 

**Liquidity and Capital Resources**

 

On March 31, 2010, we had cash and cashequivalents of $10,471,000.  In addition,we had other current assets totaling $10,003,000 and total current assets of$20,474,000.  Current liabilities of ourCompany were $1,944,000 which resulted in a current ratio of 11:1.  For comparison purposes at March 31,2009, we had cash and short term investments of $9,111,000, other currentassets of $9,482,000, total current assets of $18,593,000, current liabilitiesof $1,484,000 and a current ratio of 13:1.

 

On December 18, 2009, Mesa announced that it hadpurchased the assets associated with the bottle cap torque testing products ofVibrac, LLC.  The instruments acquired by Mesa include their originalhigh-performance cap testing product, the Torqo I, along with the newer TorqoII and the innovative Smart Bottle.  Under the terms of the agreement,Mesa agreed to pay approximately $2,678,000 in total, and Vibrac has agreed tomanufacture these products for a one year period.  Currently, the Companyowes a holdback amount of $100,000 to Vibrac, LLC, which is to be paid in equalinstallments at June and December 2010.  Due to the timing of the acquisition of theseproducts, they only made a minor contribution to sales and gross profits in thefiscal year.

 

Our Company has made capital acquisitions of$586,000 in fiscal 2010, and $676,000 in fiscal 2009. Fiscal 2009 includedapproximately $444,000 expended on equipment to automate certain manufacturingprocesses for our Raven products.

 

We have instituted a program to repurchase upto 300,000 shares of our outstanding common stock.  Under the plan, the shares may be purchasedfrom time to time in the open market at prevailing prices or in negotiatedtransactions off the market.  Sharespurchased will be canceled and repurchases will be made with existing cashreserves.  We do not maintain a setpolicy for our buyback program.  Most ofour stock buybacks have occurred during periods when the price to earningsmultiple has been near historical low points, or during times when selling activityin the stock is out of balance with buying demand.

 

During fiscal 2010, the Company paid regular quarterlydividends of $.10 per share of common stock during the first two quarters ofthe year and increased the quarterly dividend rate to $.11 per share of commonstock during the last two quarters of the fiscal year.  Total dividends paid during fiscal 2010 were$.42 per share of common stock.  Forfiscal year 2009, dividends totaled $.40 per common share of stock.

 

Our Company invests its surplus capital in variousinterest bearing instruments, including money market funds and short-termtreasuries.  All investments are fixeddollar investments with variable rates in order to minimize the risk ofprincipal loss.

 

At the end of fiscal 2010, the Company did notmaintain a line of credit or any other form of debt.  Nor did the Company guarantee the debt of anyother entity.  The Company has maintaineda long history of surplus cash flow from operations.  This surplus cash flow has been used in thepast to fund acquisitions and stock buybacks and has been partially utilized tofund past special dividends.

 

19

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On April, 27, 2010, the Company completed the purchaseof SGM Biotech, Inc. located in Bozeman, MT.  Under the terms of this acquisition the Companyacquired all of the stock of SGM Biotech for a cash payment of$11,722,000.  After the completion of theacquisition the Company repaid $278,000 of loans owed to the shareholders ofSGM Biotech.  On April 30, 2010, theCompany also completed the acquisition of the facility that houses the SGMBiotech operations for $2,150,000.  Tofinance these acquisitions, the Company entered into a credit facilityconsisting of a 36 month reducing line of credit for $3,000,000 which was fullyutilized at April 30, 2010, and a revolving line of credit for $4,000,000of which $1,521,000 was utilized at April 30, 2010.

 

**Contractual Obligations**

 

At March 31, 2010 we had contractual obligationsfor open purchase orders for routine purchases of supplies and inventory, whichwould be payable in less than one year. In addition, the Company is liable forpayments to Vibrac, LLC of $100,000 of holdback to be paid in two equalpayments, June 2010 and in December 2010, with accumulated interestat a rate of three percent per annum.

 

**Forward Looking Statements**

 

All statements other than statements ofhistorical fact included in this annual report regarding our Company’sfinancial position and operating and strategic initiatives and addressingindustry developments are forward-looking statements.  Where, in any forward-looking statement, theCompany, or its management, expresses an expectation or belief as to futureresults, such expectation or belief is expressed in good faith and believed tohave a reasonable basis, but there can be no assurance that the statement ofexpectation or belief will result or be achieved or accomplished.  Factors which could cause actual results todiffer materially from those anticipated, include but are not limited togeneral economic, financial and business conditions; competition in the datalogging market; competition in the kidney dialysis market; competition in thefluid measurement market, competition in the biological indicator market;competition in the bottle cap torque testing market; the business abilities andjudgment of personnel; the impacts of unusual items resulting from ongoingevaluations of business strategies; and changes in business strategy.  We do not intend to update these forwardlooking statements.  You are advised toreview the “Item 1A. Risk Factors” of this report for more information aboutrisks that could affect the financial results of Mesa Laboratories, Inc.

 

**Critical Accounting Policiesand Estimates**

 

The preparation of our financial statements inconformity with accounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions that affect theamounts reported in our financial statements and accompanying notes.  Actual results could differ materially fromthose estimates.

 

We believe that there are several accountingpolicies that are critical to understanding the Company’s historical and futureperformance, as these policies affect the reported amounts of revenue and themore significant areas involving management’s judgments and estimates.  These significant accounting policies relateto revenue recognition, research and development costs, valuation of inventory,valuation of long-lived assets and stock based compensation.  These policies, and the Company’s proceduresrelated to these policies, are described in detail below.

 

Revenue Recognition

 

We sell our products directly through our salesforce and through distributors and manufacturer’s representatives.  Revenue from direct sales of our product isrecognized upon shipment to the customer. Revenue from ongoing product service and repair is fully recognized uponcompletion and shipment of serviced product.

 

20

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AccountsReceivable

 

At the time the accounts are originated, the Company considers areserve for doubtful accounts based on the creditworthiness of thecustomer.  The provision foruncollectible amounts is continually reviewed and adjusted to maintain theallowance at a level considered adequate to cover future losses.  The allowance is management’s best estimateof uncollectible amounts and is determined based on historical performance thatis tracked by the Company on an ongoing basis. The losses ultimately incurred could differ materially in the near termfrom the amounts estimated in determining the allowance.

 

Research & Development Costs

 

Research and development activities consistprimarily of new product development and continuing engineering on existingproducts.  Costs related to research anddevelopment efforts on existing or potential products are expensed as incurred.

 

Valuation of Inventories

 

Inventories are stated at the lower of cost ormarket, using the first-in, first-out method (FIFO) to determine cost.  The Company’s policy is to periodicallyevaluate the market value of the inventory and the stage of product life cycle,and record a reserve for any inventory considered slow moving or obsolete.  As of March 31, 2010 and 2009, theCompany had recorded a reserve of $200,000 and $175,000 each year,respectively.

 

Valuation of Long-Lived Assets

 

TheCompany assesses the realizable value of long-lived assets for potentialimpairment at least annually or when events and circumstances warrant such areview.  The carrying value of along-lived asset is considered impaired when the anticipated fair value is lessthan its carrying value.  In assessingthe recoverability of our long-lived assets, we must make assumptions regardingestimated future cash flows and other factors to determine the fair value ofthe respective assets.  In addition, wemust make assumptions regarding the useful lives of these assets.  As of March 31, 2010, we evaluated ourlong-lived assets for potential impairment. Based on our evaluation, no impairment charge was recognized.

 

Stock Based Compensation

 

TheCompany implemented the provisions of SFAS 123(R) and now codified as ASC718 effective April 1, 2006 using the modified prospective method. Underthis transition method, stock based compensation expense for the year ended March 31,2007 includes compensation expense for all stock based compensation awardsgranted subsequent to April 1, 2006 and previously granted awards notvested as of April 1, 2006.  TheCompany uses the Black-Scholes valuation model to value option grants.  We use historical data to estimate theexpected price volatility, the expected option life and expected forfeiturerate.  The risk-free rate is based on theU.S. Treasury yield in effect at the time of the grant for the estimated lifeof the option.  The dividend yield isestimated based on the dividend payments made during the prior four quarters asa percent of average stock price for that period.

 

The above listing is not intended to be acomprehensive list of all of our accounting policies.  In many cases, the accounting treatment of aparticular transaction is specifically dictated by accounting principles,generally accepted in the United States of America, with no need for management’sjudgment in their application.  There arealso areas in which management’s judgment in selecting any viable alternativewould not produce a materially different result.  See our audited financial statements andnotes thereto which begin at “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-Kwhich contain accounting policies and other disclosures required by accountingprinciples, generally accepted in the United States of America.

 

21

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**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Not Applicable.

 

**ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**TABLEOF CONTENTS**

 
| Report of Independent Registered Public Accounting  Firm | 23      |
|----------------------------------------------------------|---------|
|                                                     |    |
| Financial Statements:                                    |    |
|                                                     |    |
| Balance Sheets                                           | 24 - 25 |
|                                                     |    |
| Statements of Income                                     | 26      |
|                                                     |    |
| Statement  of Stockholders’ Equity                  | 27      |
|                                                     |    |
| Statements  of Cash Flows                                | 28      |
|                                                     |    |
| Notes to Financial Statements                            | 29 - 43 |

 

22

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors and Stockholders

Mesa Laboratories, Inc.

Lakewood, Colorado

 

We have audited the accompanying balance sheets ofMesa Laboratories, Inc. as of March 31, 2010 and 2009, and therelated statements of income, stockholders’ equity, and cash flows for the yearsthen ended.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.   The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of MesaLaboratories, Inc. as of March 31, 2010 and 2009, and the results ofits operations and its cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 
|               | /s/    | Ehrhardt Keefe Steiner & Hottman PC |
|--------------------|--------|----------------------------------------------|
|               |   | Ehrhardt Keefe Steiner & Hottman PC |
| June 29, 2010 |
| Denver, Colorado   |

 

23

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**MESALABORATORIES, INC.**

**BALANCE SHEETS**

 
| ** **                                                                            | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                            | ** ** | **2010**           | ** ** | **2009** | ** ** |
| **ASSETS**                                                                            | ** ** | ** **         | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                                       |       |               |       |   |   |
| Cash and cash equivalents                                                             |       | $                  | 10,471,000 |   | $ | 9,111,000 |   |
| Accounts receivable -                                                                 |       |               |       |   |   |
| Trade, net of allowance  for doubtfulaccounts  of $220,000 (2010) and$280,000  (2009) |       | 4,421,000          |       | 4,307,000 |   |
| Other                                                                                 |       | 5,000              |       | 16,000 |   |
| Inventories, net                                                                      |       | 4,820,000          |       | 4,499,000 |   |
| Prepaid expenses and other                                                            |       | 381,000            |       | 318,000 |   |
| Deferred income taxes                                                                 |       | 376,000            |       | 342,000 |   |
| TOTAL CURRENT ASSETS                                                                  |       | 20,474,000         |       | 18,593,000 |   |
|                                                                                  |       |               |       |   |   |
| PROPERTY, PLANT AND  EQUIPMENT, net                                                   |       | 4,239,000          |       | 3,879,000 |   |
|                                                                                  |       |               |       |   |   |
| OTHER ASSETS:                                                                         |       |               |       |   |   |
| Goodwill                                                                              |       | 6,265,000          |       | 5,301,000 |   |
| Other intangible assets,  net                                                         |       | 2,661,000          |       | 1,685,000 |   |
| Deferred income taxes —  long-term                                               |       | —             |       | 156,000 |   |
|                                                                                  |       |               |       |   |   |
|                                                                                  |       | $                  | 33,639,000 |   | $ | 29,614,000 |   |

 

See notes to financial statements.

 

24

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**MESALABORATORIES, INC.**

**BALANCESHEETS**

 
| ** **                                                                                                              | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                              | ** ** | **2010**           | ** ** | **2009** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                          | ** ** | ** **         | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Accounts payable, trade                                                                                                 |       | $                  | 480,000    |   | $ | 296,000 |   |
| Accrued salaries and  payroll taxes                                                                                     |       | 1,190,000          |       | 1,033,000 |   |
| Accrued warranty expense                                                                                                |       | 30,000             |       | 30,000 |   |
| Due to Vibrac, LLC                                                                                                      |       | 100,000            |       | — |   |
| Other accrued liabilities                                                                                               |       | 11,000             |       | 6,000 |   |
| Taxes payable                                                                                                           |       | 133,000            |       | 119,000 |   |
| TOTAL CURRENT LIABILITIES                                                                                               |       | 1,944,000          |       | 1,484,000 |   |
|                                                                                                                    |       |               |       |   |   |
| LONG TERM LIABILITIES:                                                                                                  |       |               |       |   |   |
| Deferred income taxes                                                                                                   |       | 498,000            |       | 528,000 |   |
|                                                                                                                    |       |               |       |   |   |
| COMMITMENTS                                                                                                             |       |               |       |   |   |
|                                                                                                                    |       |               |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                              |       |               |       |   |   |
| Preferred stock, no par  value;authorized 1,000,000 shares; noneissued                                                  |       | —             |       | — |   |
| Common stock, no par  value; authorized8,000,000  shares; issued andoutstanding,  3,203,726 (2010) and3,182,228  (2009) |       | 4,883,000          |       | 4,817,000 |   |
| Retained earnings                                                                                                       |       | 26,314,000         |       | 22,785,000 |   |
|                                                                                                                    |       |               |       |   |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                         |       | 31,197,000         |       | 27,602,000 |   |
|                                                                                                                    |       | $                  | 33,639,000 |   | $ | 29,614,000 |   |

 

See notes to financial statements.

 

25

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**MESA LABORATORIES, INC.**

**STATEMENTSOF INCOME**

** **
| ** **                                   | ** ** | **Years Ended March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Sales                                        |       | $                              | 21,929,000 |   | $ | 21,536,000 |   |
| Cost of Sales                                |       | 8,735,000                      |       | 7,719,000 |   |
| Gross profit                                 |       | 13,194,000                     |       | 13,817,000 |   |
|                                         |       |                           |       |   |   |
| Operating expenses                           |       |                           |       |   |   |
| Selling                                      |       | 2,616,000                      |       | 3,051,000 |   |
| General and administrative                   |       | 2,541,000                      |       | 2,522,000 |   |
| Research and development                     |       | 669,000                        |       | 636,000 |   |
| Total operating expenses                     |       | 5,826,000                      |       | 6,209,000 |   |
|                                         |       |                           |       |   |   |
| Operating income                             |       | 7,368,000                      |       | 7,608,000 |   |
| Other income                                 |       | 36,000                         |       | 86,000 |   |
| Earnings before income  taxes                |       | 7,404,000                      |       | 7,694,000 |   |
|                                         |       |                           |       |   |   |
| Income taxes                                 |       | 2,635,000                      |       | 2,904,000 |   |
|                                         |       |                           |       |   |   |
| Net income                                   |       | $                              | 4,769,000  |   | $ | 4,790,000 |   |
|                                         |       |                           |       |   |   |
| Net income per share  (basic)                |       | $                              | 1.49       |   | $ | 1.51 |   |
|                                         |       |                           |       |   |   |
| Net income per share  (diluted)              |       | $                              | 1.45       |   | $ | 1.48 |   |
|                                         |       |                           |       |   |   |
| Average common shares  outstanding - basic   |       | 3,194,000                      |       | 3,179,000 |   |
|                                         |       |                           |       |   |   |
| Average common shares  outstanding - diluted |       | 3,293,000                      |       | 3,238,000 |   |

 

See notes to financial statements.

 

26

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**MESALABORATORIES, INC.**

**STATEMENT OF STOCKHOLDERS’ EQUITY**

** **
| ** **                                                                                                | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Total**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------|------------|--------------|------------|
| ** **                                                                                                | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Retained** | ** ** | **Stockholders** | ** ** |
| ** **                                                                                                | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Earnings** | ** ** | **Equity** | ** ** |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| BALANCE, March 31,  2008                                                                             |       | 3,166,492        |       | $          | 4,665,000  |         | $          | 19,074,000 |   | $ | 23,739,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Common stock issued for  conversion of stock options net of 5,682 shares returned to Company as  payment  |       | 23,468           |       | 165,000    |       | —       |       | 165,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Purchase and retirement oftreasury stock                                                                  |       | (7,732           | )          | (13,000    | )          | (119,000     | )          | (132,000 | ) |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Dividends paid ($.40 per  share)                                                                          |       | —           | ** ** | **—** |       | (1,272,000   | )          | (1,272,000 | ) |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Stock based compensation                                                                                  | ** ** | **—**       | ** ** | **—** |       | 276,000      |       | 276,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Tax benefit on exercise of  non-qualified options                                                         |       | —           |       | —     |       | 36,000       |       | 36,000 |   |
|                                                                                                      |       |             |       |       |       |         |       |   |   |
| Net income for the year                                                                                   |       | —           |       | —     |       | 4,790,000    |       | 4,790,000 |   |
| BALANCE, March 31,  2009                                                                             |       | 3,182,228        |       | 4,817,000  |       | 22,785,000   |       | 27,602,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Common stock issued for  conversion of stock options net of 25,619 shares returned to Company as  payment |       | 33,066           |       | 93,000     |       | —       |       | 93,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Purchase and retirement oftreasury stock                                                                  |       | (11,568          | )          | (27,000    | )          | (238,000     | )          | (265,000 | ) |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Dividends paid ($.42 per  share)                                                                          |       | —           | ** ** | **—** |       | (1,343,000   | )          | (1,343,000 | ) |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Tax Benefit on exercise ofnon-qualified stock options                                                     |       | —           |       | —     |       | 59,000       |       | 59,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Stock based compensation                                                                                  | ** ** | **—**       | ** ** | **—** |       | 282,000      |       | 282,000 |   |
| ** **                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income for the year                                                                                   |       | —           |       | —     |       | 4,769,000    |       | 4,769,000 |   |
| BALANCE, March 31,  2010                                                                             |       | 3,203,726        |       | $          | 4,883,000  |         | $          | 26,314,000 |   | $ | 31,197,000 |   |

 

See notes to financial statements.

 

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**MESALABORATORIES, INC.**

 

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                    | ** ** | **Years Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Cash flows from operating  activities:                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                    |       | $                              | 4,769,000  |   | $ | 4,790,000 |   |
| Depreciation and  amortization                                |       | 786,000                        |       | 788,000 |   |
| Allowance for bad debt                                        |       | (60,000                        | )          | 80,000 |   |
| Deferred income taxes                                         |       | 92,000                         |       | 116,000 |   |
| Stock based compensation                                      |       | 282,000                        |       | 276,000 |   |
| Change in assets and  liabilities                             | ** ** | ** **                     | ** ** | ** ** | ** ** |
| (Increase) decrease in  accounts receivable                   |       | (43,000                        | )          | (494,000 | ) |
| (Increase) decrease in  inventories                           |       | (143,000                       | )          | (479,000 | ) |
| (Increase) decrease in  prepaid expenses                      |       | (63,000                        | )          | 101,000 |   |
| Increase (decrease) in  accounts payable, trade               |       | 184,000                        |       | 123,000 |   |
| Increase (decrease) in  accrued liabilities and taxes payable |       | 176,000                        |       | (226,000 | ) |
| Net cash (used) provided  by operating activities             |       | 5,980,000                      |       | 5,075,000 |   |
|                                                          |       |                           |       |   |   |
| Cash flows from investing  activities:                        |       |                           |       |   |   |
| Product line acquired                                         |       | (2,578,000                     | )          | — |   |
| Deposits                                                      |       | —                         |       | 145,000 |   |
| Capital expenditures, net  of retirements                     |       | (586,000                       | )          | (676,000 | ) |
| Net cash (used) provided  by investing activities             |       | (3,164,000                     | )          | (531,000 | ) |
|                                                          |       |                           |       |   |   |
| Cash flow from financing  activities:                         |       |                           |       |   |   |
| Tax benefit of  nonqualified stock options                    |       | 59,000                         |       | 36,000 |   |
| Dividends paid                                                |       | (1,343,000                     | )          | (1,272,000 | ) |
| Net proceeds from issuance  of stock                          |       | 93,000                         |       | 165,000 |   |
| Treasury stock repurchases                                    |       | (265,000                       | )          | (132,000 | ) |
| Net cash (used) provided  by financing activities             |       | (1,456,000                     | )          | (1,203,000 | ) |
| Net increase (decrease) in  cash and cash equivalents         |       | 1,360,000                      |       | 3,341,000 |   |
| Cash and cash equivalents  atbeginning of year                |       | 9,111,000                      |       | 5,770,000 |   |
| Cash and cash equivalents  atend of year                      |       | $                              | 10,471,000 |   | $ | 9,111,000 |   |
|                                                          |       |                           |       |   |   |
| Supplemental disclosures  of cash flow information:           |       |                           |       |   |   |
| Cash paid during the year  for:                               |       |                           |       |   |   |
| Income taxes                                                  |       | $                              | 2,504,000  |   | $ | 2,665,000 |   |

 

Supplemental disclosure of non-cash activity:

 

The Company acquired certain assets of  Vibrac LLC during the quarter ended December 31,2009 (Note 2).

 

See notes to financial statements

 

28

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**MESALABORATORIES, INC.**

**NOTES TO FINANCIAL STATEMENTS**

 

**1.****                                 ****Summary of Significant Accounting Policies:**

 

**General** - Mesa Laboratories, Inc. was incorporated under the laws of theState of Colorado on March 26, 1982, for the purpose of designing,manufacturing and marketing electronic instruments, supplies and disposableproducts.

 

**Concentration of Credit Risk** - Financial instruments which potentially subject the Company toconcentrations of credit risk consist of money market funds, short-terminvestments and accounts receivable.  TheCompany invests primarily all of its excess cash in money market fundsadministered by reputable financial institutions.  The Company grants credit to its customerswho are located throughout the United States and foreign countries.  To reduce credit risk, the Companyperiodically evaluates the money market fund administrators and performs creditanalysis of customers and monitors their financial condition.  Additionally, the Company maintains cashbalances in bank deposit accounts which, at times, may exceed federally insuredlimits.  The Company has not experiencedany losses in such accounts.

 

During the fiscal year ended March 31,2010, one customer represented approximately 14% of the Company’s revenues andapproximately 10% of the Company’s accounts receivable balance. During thefiscal year ended March 31, 2009, one customer represented approximately14% of the Company’s revenues and approximately 12% of the Company’s accountsreceivable balance.

 

**Cash Equivalents** - Cash equivalents include all highly liquid investments with anoriginal maturity of three months or less.

 

**Accounts Receivable** - At thetime the accounts are originated, the Company considers a reserve for doubtfulaccounts based on the creditworthiness of the customer.  The provision for uncollectible amounts is continuallyreviewed and adjusted to maintain the allowance at a level considered adequateto cover future losses.  The allowance ismanagement’s best estimate of uncollectible amounts and is determined based onhistorical performance that is tracked by the Company on an ongoing basis.  The losses ultimately incurred could differmaterially in the near term from the amounts estimated in determining theallowance.

 

**Inventories** - Inventories are stated at the lower of cost or market, using thefirst-in, first-out method (FIFO) to determine cost.  The Company’s policy is to periodicallyevaluate the market value of the inventory and the stage of product life cycle,and record a reserve for any inventory considered slow moving or obsolete.  As of March 31, 2010 and 2009 theCompany had recorded a reserve of $200,000 and $175,000, respectively, againstslow moving inventory.

 

**Property, Plant and Equipment** - Property, plant and equipment is stated at acquisition cost.  Depreciation and amortization is providedusing the straight-line method over the estimated useful lives of 3 to 39years.

 

**Goodwill**  **and OtherIntangible Assets** — Goodwill, which resulted from the acquisitionsof Nusonics, Datatrace, Raven, Automata and Torqo, is not subject toamortization, and is tested annually for impairment in accordance with currentaccounting standards.  Certain intangibleassets including patents, non-compete agreements and customer relationshipswere recognized as part of the Raven and Torqo acquisitions and are amortizedover their estimated useful lives which range from 3 to 16 years.

 

29

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**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

**Valuation of Long-Lived Assets** - The Company assesses the realizable value of long-lived assets forpotential impairment at least annually or when events and circumstances warrantsuch a review.  The carrying value of along-lived asset is considered impaired when the anticipated fair value is lessthan its carrying value.  In assessingthe recoverability of our long-lived assets, we must make assumptions regardingestimated future cash flows and other factors to determine the fair value ofthe respective assets.  In addition, wemust make assumptions regarding the useful lives of these assets.  As of March 31, 2010 and 2009, weevaluated our long-lived assets for potential impairment.  Based on our evaluation, no impairment chargewas recognized.

 

**Revenue Recognition** - Revenue is recognized when persuasive evidence of an arrangementexists, when title and risk of ownership passes, the sales price is fixed ordeterminable, and collectibility is probable. The Company recognizes revenues at the time products are shipped.Revenue from ongoing product service and repair is fully recognized uponcompletion and shipment of serviced product.

 

Sales to distributors are made at their net discountedprice.  This net discounted price is netof any volume pricing that may be available. Customers who may be unsure of the appropriateness of our products fortheir application are offered demonstration equipment prior to purchase, thusno return rights are extended.  Productsare built to customer order and no price protections are offered.

 

Other than normal and customary on-goingcustomer service, the Company does not have any post shipment contractualobligations to its customers, such as installation, training, etc.

 

**Research & DevelopmentCosts** - Costs related to research and developmentefforts on existing or potential products are expensed as incurred.  Research and development costs for the fiscalyears ended March 31, 2010 and 2009 were $669,000 and $636,000 each year,respectively.

 

**Accrued Warranty Expense** - The Company provides limited product warranty on its products and,accordingly, accrues an estimate of the related warranty expense at the time ofsale.

 

**Advertising Costs** - Advertising costs are expensed as incurred.  Advertising costs for the years ended March 31,2010 and 2009 were $269,000 and $368,000, respectively.

 

**Income Taxes** - The Company accounts for income taxes under the liability method,which requires an entity to recognize deferred tax assets and liabilities.  Temporary differences are differences betweenthe tax basis of assets and liabilities and their reported amounts in thefinancial statements that will result in taxable or deductible amounts infuture years.

 

**Stock Based Compensation** — The Company records equity compensation at the grant date based onthe fair value of the award.  The Companyrecognizes the expense on a straight-line basis over the service period net ofan estimated forfeiture rate, resulting in a compensation cost for only thoseshares expected to vest.

 

30

----

 

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

**Earnings Per Share** - Basic earnings per share is calculated using the average number ofcommon shares outstanding.  Dilutedearnings per share is computed on the basis of the average number of commonshares outstanding plus the effect of outstanding stock options using thetreasury stock method, which totaled 99,000 and 59,000 additional shares in2010 and 2009, respectively.

 

Basic net income per common share is computedby dividing net income by the weighted average number of shares of common stockoutstanding during the period. Diluted net income per common share is computedusing the treasury stock method to compute the weighted average common stockoutstanding assuming the conversion of potentially dilutive common shares.

 

The following table presents a reconciliation of thedenominators used in the computation of net income per common share — basic andnet income per common share — diluted for the twelve month periods ended March 31,2010 and 2009:

 
| ** **                                        | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **March 31,**      | ** ** |
| ** **                                        | ** ** | **2010**                | ** ** | **2009** | ** ** |
|                                              |       |                    |       |   |   |
| Net income available for  shareholders            |       | $                       | 4,769,000  |   | $ | 4,790,000 |   |
|                                              |       |                    |       |   |   |
| Weighted avg. outstanding  shares of common stock |       | 3,194,000               |       | 3,179,000 |   |
| Dilutive effect of stock  options                 |       | 99,000                  |       | 59,000 |   |
|                                              |       |                    |       |   |   |
| Common stock and equivalents                      |       | 3,293,000               |       | 3,238,000 |   |
|                                              |       |                    |       |   |   |
| Earnings per share:                               |       |                    |       |   |   |
| Basic                                             |       | $                       | 1.49       |   | $ | 1.51 |   |
| Diluted                                           |       | $                       | 1.45       |   | $ | 1.48 |   |

 

For the twelve months ended March 31, 2010 and2009, none and 184,970 shares, respectively, attributable to outstanding stockoptions were excluded from the calculation of diluted earnings per sharebecause the exercise prices of the stock options were greater than or equal tothe average price of the common shares, and therefore their inclusion wouldhave been anti-dilutive.

 

**Use of Estimates** - The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

**Fair Value of Measurements**- The Company’s financial instruments include cash, accounts receivable,accounts payable and accrued liabilities. The carrying value of these financialinstruments is considered to be representative of their fair value due to theshort maturity of these instruments.

 

Effective April 1, 2008, the Company adopted theauthoritative guidance that applies to all financial assets and liabilitiesrequired to be measured and reported on a fair value basis. BeginningApril 1, 2009, the Company also applied the guidance to non-financialassets and liabilities measured at fair

 

31

----

 

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

value on a nonrecurring basis, including long-livedassets initially measured at fair value. The guidance defines fair value as theprice that would be received to sell an asset or paid to transfer a liability(an exit price) in an orderly transaction between market participants at themeasurement date. The guidance establishes a hierarchy for inputs used inmeasuring fair value that maximizes the use of observable inputs and minimizesthe use of unobservable inputs by requiring that the most observable inputs beused when available. Observable inputs are inputs that market participantswould use in pricing the asset or liability developed based on market dataobtained from sources independent of the Company. Unobservable inputs areinputs that reflect the Company’s assumptions of what market participants woulduse in pricing the asset or liability based on the best information availablein the circumstances. The financial and nonfinancial assets and liabilities areclassified based on the lowest level of input that is significant to the fairvalue measurement. The hierarchy is broken down into three levels based on thereliability of the inputs as follows:

 

Level1:    Quoted prices in active markets for identical assets or liabilities;

 

Level2:    Quoted prices in active markets for similar assets and liabilities andinputs that are observable for the asset or liability; or

 

Level3:    Unobservable inputs in which there is little or no market data, whichrequires the reporting entity to develop its own assumptions.

 

The following table presents the Company’s financialassets and liabilities that were accounted for at fair value in connection withthe Company’s acquisition of a product line from Vibrac, LLC (Note 2) on anon-recurring basis as of March 31, 2010 by level within the fair valuehierarchy:

 
| ** **                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Assets                     |       |        |       |        |       |        |       |
| Goodwill                   |       | $           | —     |        | $          | —      |       | $ | 963,000 |   |
| Definite lived intangibles |       | $           | —     |        | $          | —      |       | $ | 1,415,000 |   |
| Property and equipment     |       | $           | —     |        | $          | 122,000     |       | $ | — |   |
| Inventory                  |       | $           | —     |        | $          | 178,000     |       | $ | — |   |

 

Intangible assets consist primarily of customerrelationships and tradename, which are valued on the income approach valuationtechnique using certain key assumptions for customer attrition, growth rate forcustomer relationships and royalty discount rate, royalties avoided, growthrate for tradename.  Property and equipmentacquired in business combinations consists of inventory and property andequipment and are valued at replacement cost for used equipment.

 

**Acquisitions** - Effective April 1, 2009, transaction costs are expensed undernew accounting guidance.  The Companyexpensed $63,000 of transaction costs that was included in general andadministrative expenses on the accompanying statement of income during the yearended March 31, 2010.

 

**Recently Issued AccountingPronouncements** - In September 2006,ASC Topic 820 was issued which defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. ASC Topic 820 does not require anynew fair value measurements, but provides guidance on how to measure fair valueby providing a fair value hierarchy used to classify the source of theinformation. We adopted the

 

32

----

 

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

provisionsof ASC Topic 820 on January 1, 2009. The adoption of ASC Topic 820 did nothave a significant impact on our consolidated financial statements.

 

OnJuly 1, 2009, the FASB Accounting Standards Codification (“ASC”) becamethe single source of authoritative nongovernmental GAAP, except for rules andinterpretive releases of the Securities and Exchange Commission. All othernon-grandfathered accounting literature became non-authoritative. The adoptionof SFAS 168 did not have a material impact on our consolidated financial statements.As a result of the adoption of SFAS 168, all references to GAAP now refer tothe codified ASC topic.

 

In December 2007,the FASB issued SFAS No. 141R (revised 2007), Business Combinations, now codified in ASC 805.ASC 805 retains the fundamental requirements of the original pronouncementrequiring that the purchase method be used for all business combinations.ASC 805 defines the acquirer as the entity that obtains control of one ormore businesses in the business combination, establishes the acquisition dateas the date that the acquirer achieves control and requires the acquirer torecognize the assets acquired, liabilities assumed and any non-controllinginterest at their fair values as of the acquisition date. ASC 805 alsorequired that acquisition-related costs be recognized separately from theacquisition.

 

The Companywas required to apply the guidance of ASC 805 to any business combinationscompleted on or after January 1, 2009. InApril 2009, ASC Topic 855 was issued which establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or available to be issued. Weadopted ASC Topic 855 for the quarter ending June 30, 2009. The adoptiondid not have a material impact on our financial statements.

 

In April 2008, the FASB issued FSPFAS 142-3, Determination of theUseful Life of Intangible Assets, now codified as ASC 350-30-65-1.ASC 350-30-65-1 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, now codified asASC 350-30. ASC 350-30-65-1 was effective for the Company beginningApril 1, 2009, and its implementation of FSP FAS 142-3 did not havean impact on the financial statements.

 

**2.****                                     ****Acquisition of Product Line:**

 

On December 18, 2009, Mesa announced that it hadpurchased certain assets associated with the bottle cap torque testing productsof Vibrac LLC.  The instruments acquiredby Mesa include their original high-performance cap testing product, the TorqoI, along with the newer Torqo II and the innovative Smart Bottle.  The purchase price consisted of a $2,400,000cash payment at closing, a cash payment of $178,000 in January 2010 and a$100,000 holdback amount to be paid in two equal payments on the six month andone year anniversary of closing.  Theholdback amount accrues interest at three percent per annum, and the ultimatepayment may be reduced as defined in the asset purchase agreement.  The purchase price was allocated to theassets acquired based on their estimated fair value at the acquisition date.

 

33

----

 

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

Assets acquired consisted of:

 
| Inventory              |   | $         | 178,000   |   |
|------------------------|--------|-----------|-----------|--------|
| Property and Equipment |   | 122,000   |      |
| Customer Relationships |   | 1,028,000 |      |
| Non-compete Agreements |   | 37,000    |      |
| Trademarks             |   | 350,000   |      |
| Goodwill               |   | 963,000   |      |
|                   |   | $         | 2,678,000 |   |

 

Due to the timing of the acquisition of theseproducts, they only made a minor contribution to sales and gross profits infiscal 2010.  The Company will be able todeduct goodwill acquired for tax purposes.

 

The results of Torqo product operations have beenincluded in the financial statements commencing from the acquisition date.  The pro forma effect of the acquisition onthe combined results of operations as if the acquisition had been completed on April 1,2009 and 2008 are as follows:

 
| ** **                             | ** ** | **Year Ended**     | ** ** | **Year Ended**     | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                             | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **                             | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| ** **                             | ** ** | **(Unaudited)**    | ** ** | **(Unaudited)**    | ** ** |
|                                   |       |               |       |               |       |
| Total net sales                        |       | $                  | 23,335,000 |               | $          | 23,111,000 |   |
| Net income from operations             |       | $                  | 7,563,000  |               | $          | 7,566,000 |   |
| Net income                             |       | $                  | 4,926,000  |               | $          | 4,760,000 |   |
| Net income per common  share (Basic)   |       | $                  | 1.54       |               | $          | 1.50 |   |
| Net income per common  share (Diluted) |       | $                  | 1.50       |               | $          | 1.47 |   |

 

**3.****                                     ****Inventories:**

 

Inventories consist of the following:

 
| ** **      | ** ** | **March 31** | ** ** |
|-----------------|------------|-------------------|------------|
| ** **      | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Raw materials   |       | $                 | 3,785,000  |   | $ | 3,092,000 |   |
| Work-in-process |       | 569,000           |       | 518,000 |   |
| Finished goods  |       | 666,000           |       | 1,064,000 |   |
| Less reserve    |       | (200,000          | )          | (175,000 | ) |
|            |       | $                 | 4,820,000  |   | $ | 4,499,000 |   |

 

Work-in-process and finished goods include rawmaterials, direct labor and manufacturing overhead at March 31, 2010 and2009.

 

34

----

 

**MESA LABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

**4.****                                     ****Property, Plant and Equipment:**

 

Property, plant and equipment consist of thefollowing:

 
| ** **                    | ** ** | **March 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Land                          |       | $                  | 273,000    |   | $ | 273,000 |   |
| Building                      |       | 2,776,000          |       | 2,601,000 |   |
| Manufacturing equipment       |       | 3,535,000          |       | 3,081,000 |   |
| Computer equipment            |       | 534,000            |       | 487,000 |   |
| Furniture and fixtures        |       | 92,000             |       | 78,000 |   |
| Construction in progress      |       | 19,000             |       | 1,000 |   |
|                          |       | 7,229,000          |       | 6,521,000 |   |
| Less accumulated depreciation |       | (2,990,000         | )          | (2,642,000 | ) |
|                          |       | $                  | 4,239,000  |   | $ | 3,879,000 |   |

 

Depreciation expense for the years ended March 31,2010 and 2009 were $347,000 and $285,000, respectively.

 

**5.****                                     ****Goodwill and Other Intangible Assets**

 

As of March 31, 2010, goodwill amounted to$6,265,000, which includes the addition in fiscal 2010 of $963,000 for theacquisition of the Torqo Bottlecap Testing product line.   Prior to the Torqo acquisition, goodwillamounted to $5,301,000, which resulted from the acquisitions of Nusonics, Datatrace,Raven and Automata. The Company completed its annual impairment tests duringthe fourth quarters of fiscal 2010 and 2009 and determined there was noimpairment.  Other intangible assets areas follows:

 
| ** **             | ** ** | **As of March 31, 2010** | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Carrying  Amount**          | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Useful Life** | ** ** |
| Patents                |       | $                             | 37,000     |   | $ | 9,000 |   | $ | 28,000 |   | 16 years |   |
| Non-compete Agreements |       | 418,000                       |       | 386,000 |   | 32,000 |   | 3 years |   |
| Trade Names            |       | 473,000                       |       | — |   | 473,000 |   | Indefinite |   |
| Customer Relationships |       | 3,636,000                     |       | 1,508,000 |   | 2,128,000 |   | 7 years |   |
|                   |       | $                             | 4,564,000  |   | $ | 1,903,000 |   | $ | 2,661,000 |   |   |   |

 
| ** **             | ** ** | **As of March 31, 2009** | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Carrying  Amount**          | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Useful Life** | ** ** |
| Patents                |       | $                             | 37,000     |   | $ | 7,000 |   | $ | 30,000 |   | 16 years |   |
| Non-compete Agreements |       | 382,000                       |       | 371,000 |   | 11,000 |   | 3 years |   |
| Trade Names            |       | 123,000                       |       | — |   | 123,000 |   | Indefinite |   |
| Customer Relationships |       | 2,608,000                     |       | 1,087,000 |   | 1,521,000 |   | 7 years |   |
|                   |       | $                             | 3,150,000  |   | $ | 1,465,000 |   | $ | 1,685,000 |   |   |   |

 

35

----

** **

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

Amortization expense was$439,000 in 2010 and $503,000 in 2009.

 

Estimated amortization expense based on the intangibleassets in the table above for the fiscal years 2011 to 2015 is $534,000,$534,000, $530,000, $180,000 and $149,000, respectively.

 

**6.****                                     ****Income Taxes:**

 

Effective April 1, 2007, we adopted theprovisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting of Uncertainty in IncomeTaxes—An Interpretation of FASB Statement No. 109 now codified in ASC 740.Under ASC 740, we must recognize the tax benefit from an uncertain tax positiononly if it is more likely than not that the tax position will be sustained onexamination by the taxing authorities, based on the technical merits of theposition. We measure the tax benefits recognized in the consolidated financialstatements from such a position based on the largest benefit that has a greaterthan 50% likelihood of being realized upon ultimate resolution. The applicationof income tax law is inherently complex. Laws and regulations in this area arevoluminous and are often ambiguous. As such, we are required to make manysubjective assumptions and judgments regarding our income tax exposures.Interpretations of and guidance surrounding income tax law and regulationschange over time and may result in changes to our subjective assumptions andjudgments which can materially affect amounts recognized in our Balance Sheetsand Statements of Income. The result of the reassessment of our tax positions inaccordance with ASC 740 did not have a material impact on our financialstatements. Our federal tax returns for all years after 2006 and our state taxreturns after 2005 are subject to future examination by tax authorities for allour tax jurisdictions. We recognize interest and penalties related to incometax matters in other income (expense) and corporate, general and administrationexpenses, respectively.

 

The components of the provision for incometaxes for the years ended March 31, 2010 and 2009 are as follows:

** **
| ** **              | ** ** | **March 31,** | ** ** |
|-------------------------|------------|--------------------|------------|
| ** **              | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Current tax provision   | ** ** | ** **         | ** ** | ** ** | ** ** |
| Federal                 |       | $                  | 2,284,000  |   | $ | 2,316,000 |   |
| State                   |       | 258,000            |       | 472,000 |   |
|                    |       | 2,542,000          |       | 2,788,000 |   |
| Deferred tax provision: |       |               |       |   |   |
| Federal                 |       | 84,000             |       | 97,000 |   |
| State                   |       | 9,000              |       | 19,000 |   |
|                    |       | 93,000             |       | 116,000 |   |
|                    |       | $                  | 2,635,000  |   | $ | 2,904,000 |   |

 

Deferred taxes result from temporarydifferences in the recognition of income and expenses for financial and incometax reporting purposes and differences between the fair value of assetsacquired in business combinations accounted for as a purchase and their taxbases.  The components of net deferredtax assets and liabilities as of March 31, 2010 and 2009 are as follows:

 

36

----

 

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 
| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Current deferred tax  assets:              | ** ** | ** **         | ** ** | ** ** | ** ** |
| Accrued vacation                           |       | $                  | 146,000    |   | $ | 133,000 |   |
| Bad debt expense                           |       | 81,000             |       | 104,000 |   |
| Inventory reserve                          |       | 74,000             |       | 65,000 |   |
| Warranty reserve                           |       | 11,000             |       | 11,000 |   |
| Other                                      |       | 64,000             |       | 29,000 |   |
|                                       |       | 376,000            |       | 342,000 |   |
| Long-term deferred tax  asset (liability): |       |               |       |   |   |
| Depreciation and  amortization             |       | (498,000           | )          | (372,000 | ) |
| Net deferred  (liability)/asset            |       | $                  | (122,000   | ) | $ | (30,000 | ) |

 

A reconciliation of the Company’s income taxprovision for the years ended March 31, 2010 and 2009, and the amountscomputed by applying statutory rates to income before income taxes is asfollows:

 
| ** **                                  | ** ** | **March 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|
| ** **                                  | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Income taxes at statutory  rates            |       | $                  | 2,518,000  |   | $ | 2,616,000 |   |
| State income taxes, net of  federal benefit |       | 216,000            |       | 225,000 |   |
| Tax benefit on stock  option exercises      |       | 2,000              |       | 87,000 |   |
| Meals and entertainment                     |       | 13,000             |       | 13,000 |   |
| Key-man life                                |       | 4,000              |       | 6,000 |   |
| Sec. 199 manufacturing  deduction           |       | (142,000           | )          | (148,000 | ) |
| Other                                       |       | 24,000             |       | 105,000 |   |
|                                        |       | $                  | 2,635,000  |   | $ | 2,904,000 |   |

 

**7.****                                     ****Stock Repurchase:**

 

In November, 2005, the Company’s Board ofDirectors approved a program to repurchase up to 300,000 shares of itsoutstanding common stock.  Under theprogram, shares may be purchased from time to time in the open market atprevailing prices or in negotiated transactions off the market.  Shares purchased will be cancelled andrepurchases of shares will be funded through existing cash reserves.  During the years ended March 31, 2010and 2009, The Company repurchased 11,568 and 7,732 shares of common stock for$265,000 and $132,000, respectively.

 

**8.**                                      **Employee Benefit Plan:**

 

The Company adopted a 401(k) planeffective January 1, 2000. Participation is voluntary and employees are eligible to participate atage 21 and after six months of employment with the Company.  The Company matches 50% of the employee’scontribution up to 6% of the employees salary. A participant vests in the Company’s contributions at a rate of 25% peryear, fully vesting at

 

37

----

 

**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

the end of the participant’sfourth year of service. The Company contributed $110,000 to the plan for fiscal2010 and $118,000 for fiscal 2009.

 

**9.****                                     ****Stockholders’ Equity:**

 

The State of Colorado has eliminated theability of Colorado corporations to retain treasury stock.  As a result, the Company reduced common stockto its average share value and further reduced retained earnings for theremainder of the cost of treasury stock acquired in each fiscal year. In themost recent fiscal year, management estimated that approximately 10% of theprice paid for repurchased shares was attributable to the original purchase ofcommon stock, while the remainder was charged to retained earnings.

 

The Company has adopted incentive stock optionplans for the benefit of the Company’s key employees and outside directors.Under terms of the plans, options are granted at an amount not less than 100%of the bid price of the underlying shares at the date of grant. Options areexercisable for a term of five to ten years and, during such term, may beexercised as follows:  25% after eachyear, and 100% anytime after the fourth year until the end of the fifth totenth year, or 10% after each of the first five years, 25% after each of thesixth and seventh years and 100% after the seventh year until the end of thetenth year.

 

On October 3, 1996, the Company adopted anonqualified performance stock option plan for the benefit of the Company’soutside Directors.  The plan providesthat the outside Directors will receive grants to be determined and approved bythe Company’s inside Directors and not to exceed 20,000 options per year perdirector.  Under the terms of the plan,the options are exercisable for a term of ten years and, during such term areexercisable as follows:  25% after eachyear, and 100% anytime after the fourth year until the end of the tenthyear.  The purchase price of the commonstock will be equal to 100% of the closing price of the common stock on theover-the-counter market on the date of grant. Effective March 24, 2006,this plan has expired, and no new grants can be made.

 

On October 21, 1999, the Company adopted anew stock compensation plan. The purpose of the plan is to encourage ownershipof the Common Stock of the Company by certain officers, directors, employeesand certain advisors of the Company in order to provide incentive to promotethe success and business of the Company. A total of 300,000 shares of Common Stock were reserved for issuanceunder the plan and are subject to terms as set by the Compensation Committee ofthe Board of Directors at the time of grant. On October 18, 2004, the shareholders approved an amendment to theplan to reserve an additional 200,000 shares of Common Stock for issuance underthe plan.  This plan has expired and nonew grants can be made.

 

On December 8, 2006, the Company adopted anew stock compensation plan. The purpose of the plan is to encourage ownershipof the Common Stock of the Company by certain officers, directors, employeesand certain advisors of the Company in order to provide incentive to promotethe success and business of the Company. A total of 400,000 shares of Common Stock were reserved for issuanceunder the plan and are subject to terms as set by the Compensation Committee ofthe Board of Directors at the time of grant. On June 22, 2010, the Board of Directors approved an amendment tothe Company’s 2006 Stock Compensation Plan to increase the number of sharesauthorized for issuance under the 2006 Stock Compensation Plan from fourhundred thousand (400,000) to eight hundred thousand (800,000), subject to theapproval by the majority of the Company’s shareholders at the next annualmeeting of shareholders.

 

38

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**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

All option plans have been approved by thestockholders of the Company.

 

The following is a summary of options grantedunder the plans:

 
| ** **                                | ** ** | **FY 2010**                      | ** ** | **FY 2009**                      | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **WEIGHTED********AVG EXERCISE** | ** ** | **WEIGHTED********AVG EXERCISE** | ** ** |
| ** **                                | ** ** | **SHARES**                       | ** ** | **PRICE**                        | ** ** | **SHARES** | ** ** | **PRICE** | ** ** |
| Options outstanding at  beginning of year |       | 358,725                          |       | $                                | 16.68      |   | 324,455 |   | $ | 14.92 |   |
| Options granted                           |       | 98,800                           |       | $                                | 16.76      |   | 84,100 |   | $ | 21.65 |   |
| Options forfeited                         |       | (7,075                           | )          | $                                | 18.26      |   | (20,480 | ) | $ | 18.49 |   |
| Options exercised                         |       | (58,685                          | )          | $                                | 12.05      |   | (29,350 | ) | $ | 10.10 |   |
| Options outstanding at end  of year       |       | 391,765                          |       | $                                | 17.37      |   | 358,725 |   | $ | 16.68 |   |
|                                      |       |                             |       |                             |       |   |   |   |   |
| Options exercisable at end  of year       |       | 144,680                          |       | $                                | 15.80      |   | 133,330 |   | $ | 13.21 |   |
|                                      |       |                             |       |                             |       |   |   |   |   |
| Shares available for  future option grant |       | 201,570                          |       |                             |       | 306,715 |   |   |   |

 

The following is a summary of information about stockoptions outstanding as of March 31, 2010:

 
| ** **                      | ** ** | **Options Outstanding**                      | ** ** | **Options Exercisable**                             | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|
| **Range  of  Exercise  Prices** | ** ** | **Number  Outstanding as  of 03/31/10** | ** ** | **Remaining  Contractual  Life in Years** | ** ** | **Weighted - Average  Exercise Price** | ** ** | **Number  Exercisable as of  03/31/10** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
| $5.91 - $15.44                  |       | 120,255                                      |       | 3.6                                                 |       | $ | 13.64 |   | 89,290 |   | $ | 13.15 |   |
| $16.60 - $19.75                 |       | 189,860                                      |       | 4.8                                                 |       | $ | 17.78 |   | 33,190 |   | $ | 18.97 |   |
| $20.75 - $24.31                 |       | 81,650                                       |       | 3.8                                                 |       | $ | 21.90 |   | 22,200 |   | $ | 21.74 |   |
| $5.91 - $24.31                  |       | 391,765                                      |       | 4.2                                                 |       | $ | 17.37 |   | 144,680 |   | $ | 15.80 |   |

 

**10.****                              ****Stockbased compensation:**

 

Effective April 1, 2006, we adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123(R)), now codified in ASC 718, which requires the measurementand recognition of compensation expense for all share-based payment awards madeto employees and directors. ASC 718 supersedes our previous accounting underAccounting Principles Board Opinion No. 25, Accounting for Stock Issued toEmployees.

 

We adopted the modified prospective transition methodof applying ASC 718 which requires the application of the standard as of April 1,2006 and requires us to record compensation cost related to unvested stockoptions as of April 1, 2006, by recognizing the unamortized grant datefair value of these awards over the remaining service periods of those awardswith no change in historical reported earnings. Awards granted after April 1, 2006 are valued at fair value inaccordance with the provisions of ASC 718 and recognized on a straight linebasis over the service periods of each award. We estimated forfeiture rates for the year based on historicalexperience.

 

39

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**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

Amounts recognized in the financial statements relatedto stock-based compensation are as follows:

 
| ** **                                                                       | ** ** | **March 31** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                       | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Total cost of stock based  compensationcharged  against income before income tax |       | $                 | 282,000    |   | $ | 276,000 |   |
| Amount of income tax  benefit recognized in                                      |       |              |       |   |   |
| Earnings                                                                         |       | 100,000           |       | 99,000 |   |
| Amount charged against net  income                                               |       | $                 | 182,000    |   | $ | 177,000 |   |
| Impact on net income per  common share:                                          |       |              |       |   |   |
| Basic                                                                            |       | $                 | .06        |   | $ | .06 |   |
| Diluted                                                                          |       | $                 | .06        |   | $ | .05 |   |

 

Stock-based compensation expense was allocated as costof sales and general and administrative expense in the statements of income.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model (Black-Scholes).We use historical data to estimate the expected price volatility, the expectedoption life and expected forfeiture rate. The risk-free interest rate is basedon the U.S. Treasury yield curve in effect at the time of grant for theestimated life of the option. The dividend yield is calculated based upon thedividend payments made during the prior four quarters as a percent of theaverage stock price for that period. The following assumptions were used to estimatethe fair value of options granted during fiscal 2010 and 2009 using theBlack-Scholes model:

 
| ** **                    | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Stock options:                |       |     |       |     |       |
| Volatility                    |       | 34%      |       | 33-34%   |       |
| Risk-free interest rate       |       | 1.7-2.7% |       | 2.7-3.6% |       |
| Expected option life  (years) |       | 5-10     |       | 5-10     |       |
| Dividend yield                |       | 2.0%     |       | 1.7-2.0% |       |

 

A summary of the option activity for fiscal2010 is as follows:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted-  average  Exercise  Price per  Share** | ** ** | **Weighted-  average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  March 31, 2009 |       | 358,725               |       | $                                                  | 16.68      |                                                 | 4.6        |                            |       |   |
| Options granted                     |       | 98,800                |       | 16.76                                              |       | 4.7                                                  |       |                            |       |
| Options forfeited                   |       | (7,075                | )          | 18.26                                              |       | —                                               |       |                            |       |
| Options expired                     |       | —                |       | —                                             |       | —                                               |       |                            |       |
| Options exercised                   |       | (58,685               | )          | 12.05                                              |       | —                                               |       |                            |       |
| Outstanding at  March 31, 2010 |       | 391,765               |       | $                                                  | 17.37      |                                                 | 4.2        |                            | $          | 3,367,000 |   |
|                                |       |                  |       |                                               |       |                                                 |       |                            |       |
| Exercisable at  March 31, 2010 |       | 144,680               |       | $                                                  | 15.80      |                                                 | 3.3        |                            | $          | 1,469,000 |   |

 

40

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**MESA LABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

A summary of the option activity for fiscal2009 is as follows:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted-  average  Exercise  Price per  Share** | ** ** | **Weighted-  average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  March 31, 2008 |       | 324,455               |       | $                                                  | 14.92      |                                                 | 5.1        |                            |       |   |
| Options granted                     |       | 84,100                |       | 21.65                                              |       | 4.8                                                  |       |                            |       |
| Options forfeited                   |       | (20,480               | )          | 18.49                                              |       | —                                               |       |                            |       |
| Options expired                     |       | —                |       | —                                             |       | —                                               |       |                            |       |
| Options exercised                   |       | (29,350               | )          | 10.10                                              |       | —                                               |       |                            |       |
| Outstanding at  March 31, 2009 |       | 358,725               |       | $                                                  | 16.68      |                                                 | 4.6        |                            | $          | (245,000 | ) |
|                                |       |                  |       |                                               |       |                                                 |       |                            |       |
| Exercisable at  March 31, 2009 |       | 133,330               |       | $                                                  | 13.21      |                                                 | 3.6        |                            | $          | 372,000 |   |

 

The weighted average exercise price fair value basedon the Black-Scholes model for options granted in fiscal 2010 was $16.76 and$21.65 in fiscal 2009. The Company issues new shares of common stock uponexercise of stock options.  The total intrinsic value of options exercisedwas $676,000 and $172,000 during fiscal 2010 and 2009, respectively.

 

A summary of the status of our unvested option sharesas of March 31, 2010 is as follows:

 
| ** **                       | ** ** | **Number of  Shares** | ** ** | **Weighted-  average  Grant-Date  Fair Value** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------------------------------|------------|
| Unvested at March 31,  2009 |       | 225,395               |       | $                                              | 5.92       |   |
| Options granted                  |       | 98,800                |       | $                                              | 4.43       |   |
| Options forfeited                |       | (7,075                | )          | $                                              | 4.98       |   |
| Options vested                   |       | (70,035               | )          | $                                              | 5.24       |   |
| Unvested at March 31,  2010 |       | 247,085               |       | $                                              | 5.51       |   |

 

As of March 31, 2010, there was $739,000 of totalunrecognized compensation cost related to unvested share-based compensationgranted under our plans. That cost is expected to be recognized over aweighted-average period of 2.5 years.

 

**11.****         ****Segment Data:**

 

The Company adopted SFAS No. 131, Disclosuresabout Segments of an Enterprise and Related Information now codified as ASC280. ASC 280 designates the internal reporting that is used by management formaking operating decisions and assessing performance as the source of theCompany’s reportable segments. ASC 280 also requires disclosure about productsand sources, geographic areas and major customers. The Company aggregates itssegments as one reportable segment based on the similar characteristics oftheir operations.

 

41

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**MESALABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

 

Revenues related to operations in the U.S. and foreigncountries for the years ended March 31, 2010 and 2009 are presented below.Revenues from external customers are attributed to individual countries basedupon locations to which the product is shipped or exported. Long-lived assetsrelated to continuing operations in the U.S. and foreign countries as of theyears ended March 31, 2010 and 2009 are as follows:

 
| ** **                                 | ** ** | **Years Ended March 31** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| Net revenues from  unaffiliated customers: | ** ** | ** **                    | ** ** | ** ** | ** ** |
| United States                              |       | $                             | 16,251,000 |   | $ | 15,555,000 |   |
| Foreign (no country  exceeds 10% of total) |       | $                             | 5,678,000  |   | $ | 5,981,000 |   |
|                                       |       |                          |       |   |   |
| Long-lived assets at end  of year:         |       |                          |       |   |   |
| United States                              |       | $                             | 13,165,000 |   | $ | 11,022,000 |   |

 

Thefollowing table summarizes total sales by product line for 2010 and 2009respectively:

 
| ** **                     | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| Dialysis Meter and Disposables |       | $                             | 8,010,000  |   | $ | 7,827,000 |   |
| Datatrace Loggers              |       | 5,821,000                     |       | 6,270,000 |   |
| Raven Biological Indicators    |       | 7,146,000                     |       | 6,674,000 |   |
| Torqo Bottle Cap Test Systems  |       | 330,000                       |       | — |   |
| Nusonics Ultrasonic Meters     |       | 622,000                       |       | 765,000 |   |
|                           |       |                          |       |   |   |
| Total sales                    |       | $                             | 21,929,000 |   | $ | 21,536,000 |   |

 

**12.****         ****Quarterly Results (unaudited):**

 

Quarterly financial information for fiscal 2010and 2009 is summarized as follows:

** **
| **($ in thousands, except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| **2010**                                            | ** ** | **Qtr.**  | ** ** | **Qtr**    | ** ** | **Qtr**   | ** ** | **Qtr**    | ** ** |
| Net revenue                                         |       | $         | 4,977      |       | $          | 5,407     |       | $          | 5,318      |   | $ | 6,227 |   |
| Gross profit                                        |       | $         | 2,983      |       | $          | 3,311     |       | $          | 3,298      |   | $ | 3,602 |   |
| Net income                                          |       | $         | 1,026      |       | $          | 1,243     |       | $          | 1,154      |   | $ | 1,346 |   |
| Earnings per share — basic                     |       | $         | .32        |       | $          | .39       |       | $          | .36        |   | $ | .42 |   |
| Earnings per share —  diluted                  |       | $         | .31        |       | $          | .38       |       | $          | .35        |   | $ | .41 |   |

 

42

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**MESA LABORATORIES, INC.**

**NOTES TOFINANCIAL STATEMENTS**

**(CONTINUED)**

** **
| **($ in thousands, except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| **2009**                                            | ** ** | **Qtr.**  | ** ** | **Qtr**    | ** ** | **Qtr**   | ** ** | **Qtr**    | ** ** |
| Net revenue                                         |       | $         | 5,054      |       | $          | 5,679     |       | $          | 5,337      |   | $ | 5,466 |   |
| Gross profit                                        |       | $         | 3,204      |       | $          | 3,646     |       | $          | 3,434      |   | $ | 3,533 |   |
| Net income                                          |       | $         | 1,016      |       | $          | 1,353     |       | $          | 1,216      |   | $ | 1,205 |   |
| Earnings per share — basic                     |       | $         | .32        |       | $          | .43       |       | $          | .38        |   | $ | .38 |   |
| Earnings per share —  diluted                  |       | $         | .31        |       | $          | .42       |       | $          | .38        |   | $ | .37 |   |

 

**13.****         ****Related Party Transactions:**

 

On December 31, 2008, the Companypurchased 2,000 shares of Mesa Laboratories, Inc. common stock in arelated party transaction from its Chief Financial Officer, Mr. StevenPeterson, for $34,840.  This transactionwas paid from the Company’s existing cash balance, and the price paid of $17.42per common share was based on the weighted average of closing prices for theprevious five trading days and compared favorably to the closing price on December 31,2008 of $17.50 per common share.

 

On April 30, 2010, the Company purchasedthe building housing the facilities of SGM Biotech, Inc. for $2,150,000from Surreal, LLC.  Surreal, LLC is ownedby the former owners of SGM Biotech, Inc., which was acquired by theCompany on April 27, 2010.

 

**14.****         ****Subsequent Events:**

 

Subsequent to year end On April, 27, 2010, the Companycompleted the purchase of SGM Biotech, Inc. located in Bozeman, MT.  Under the terms of this acquisition TheCompany acquired all of the stock of SGM Biotech for $11,722,000.  A cash payment of $11,122,013 was made atclosing with an additional $600,000 placed into a joint escrow account.  The $600,000 placed in escrow is to be paidto the sellers in $200,000 increments at three months, six months and one yearfollowing closing.  The purchase price issubject to a final working capital adjustment as defined in the Stock PurchaseAgreement.  After the completion of theacquisition, the Company repaid $278,000 of loans owed to the shareholders of SGMBiotech.  On April 30, 2010, theCompany also completed the acquisition of the facility that houses the SGMBiotech, Inc. operations for $2,150,000.

 

To finance these acquisitions, the Company enteredinto a credit facility consisting of a 36 month reducing line of credit for$3,000,000 and maturing at April 27, 2013, which was fully utilized at April 30,2010, and a revolving line of credit for $4,000,000 of which $1,521,000 wasutilized at April 30, 2010.  Both ofthese lines of credit are subject to a variable rate of interest and a ratefloor, both of which were 3.25% at the time these lines were initiated.  We are currently in the process of completingthe initial accounting and purchase price allocation for this acquisition.  Due to the increase in intangible assets as aresult of this acquisition, amortization expense is expected to risesignificantly in fiscal 2011 and subsequent years.

 

On June 22, 2010, the Board of Directors approvedan amendment to the Company’s 2006 Stock Compensation Plan to increase thenumber of shares authorized for issuance under the 2006 Stock Compensation Planfrom four hundred thousand (400,000) to eight hundred thousand (800,000),subject to the approval by the majority of the Company’s shareholders at thenext annual meeting of shareholders.

 

43

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**ITEM 9.****    ****CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T).  CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

We maintain disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) that are designed to reasonably ensure thatinformation required to be disclosed by us in the reports we file or submitunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information isaccumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Our management evaluated, with the participation ofour Chief Executive Officer and Chief Financial Officer, the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered in this annual report on Form 10-K. Based onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of such period to provide reasonable assurance that information required tobe disclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that material information relating to our company is made known tomanagement, including our Chief Executive Officer and Chief Financial Officer,particularly during the period when our periodic reports are being prepared.

 

**Management’s Report on InternalControl over Financial Reporting**

 

Mesa Laboratories, Inc. management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange ActRules 13a-15(f) and 15d-15(f). Under the supervision and with theparticipation of our Chief Executive Officer and Chief Financial Officer, ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting based on the framework in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on that evaluation, our management concluded that ourinternal control over financial reporting was effective as of March 31,2010.

 

This annual report does not include an attestationreport of the company’s registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject toattestation by the company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit thecompany to provide only management’s report in this annual report.

 

**Changes in Internal Control OverFinancial Reporting**

 

There was no change in our internal control overfinancial reporting that occurred during our fourth quarter of the year endedMarch 31, 2010 that has materially affected, or is reasonably likely tomaterially affect our internal control over financial reporting.

 

44

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**Inherent Limitations of DisclosureControls and Procedures and Internal Control over Financial Reporting**

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system will be met. In designingand operating a control system, one must consider the potential benefits ofcontrols relative to their costs and the reality of limited resources availableto allocate to control activities, particularly in smaller companies. Inaddition, the design of any control system is based in part upon certainassumptions about the likelihood of future events and there can be no assurancethat any control will meet its objectives under all potential futureconditions. Because of such inherent limitations in any control system, therecan be no absolute assurance that control issues, misstatements, and/or fraudwill be prevented or detected.

 

**ITEM 9B.********OTHER INFORMATION**

 

None.

 

**PART III**

 

Certain information required by Part III isincorporated by reference to the Company’s Definitive Proxy Statement pursuantto Regulation 14A (the “Proxy Statement”) for its Annual Meeting ofShareholders to be held September 23, 2010 (“Annual Meeting”).

 

**ITEM 10.**** ****DIRECTORS,EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by Item 10 is incorporatedherein by reference to the sections entitled “Election of Directors,” “Section 16(a) BeneficialOwnership Reporting Compliance,” “Corporate Governance — Code of Ethics andBusiness Conduct” and “Corporate Governance — Audit Committee” that appear inthe Company’s definitive Proxy Statement for its Annual Meeting. Informationconcerning executive officers John J. Sullivan, Glenn Adriance and Steven W.Peterson are included in the sections referred to above.

 

**ITEM 11.**** ****EXECUTIVECOMPENSATION**

 

The information required by Item 11 is incorporatedherein by reference to the section entitled “Executive Compensation” thatappears in the Company’s definitive Proxy Statement for its Annual Meeting.

 

**ITEM 12.********SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

The information required by Item 12 relating tosecurity ownership of certain beneficial owners and management and relatedshareholder matters is incorporated herein by reference to the section entitled“Security Ownership of Certain Beneficial Owners and Management” that appearsin the Company’s definitive Proxy Statement for its Annual Meeting.

 

For information regarding securities authorizedfor issuance under our equity compensation plans, please see Footnote 9 to theFinancial Statements.

 

45

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**ITEM 13.**** ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

On December 31, 2008 the Company purchased2,000 shares of Mesa Laboratories, Inc. common stock in a related partytransaction from its Chief Financial Officer, Mr. Steven Peterson, for$34,840.  This transaction was paid fromthe Company’s existing cash balance, and the price paid of $17.42 per commonshare was based on the weighted average of closing prices for the previous fivetrading days and compared favorably to the closing price on December 31,2008 of $17.50 per common share.

 

On April 30, 2010, the Company purchasedthe building housing the facilities of SGM Biotech, Inc. for $2,150,000from Surreal, LLC.  Surreal, LLC is ownedby the former owners of SGM Biotech, Inc., which was acquired by theCompany on April 27, 2010.

 

**ITEM 14.**** ****PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The information required by Item 14 relating toprincipal accountant fees and services is incorporated herein by reference tothe section entitled “Disclosure of Fees Paid to Independent Auditors” thatappears in the Company’s definitive Proxy Statement for its Annual Meeting ofShareholders

** **

**PART IV**

 

**ITEM 15.**** ****EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES**

 

(a)   1.Financial Statements of Mesa Laboratories, Inc and its subsidiaries areincluded herein:

 
| ** **                                                                               | ** ** | **Page** |
|------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm                                 |       | 23       |
|                                                                                     |       |     |
| Balance Sheets as of March 31, 2010 and 2009                                        |       | 24-25    |
|                                                                                     |       |     |
| Statements of Income for the years ended  March 31, 2010 and 2009                   |       | 26       |
|                                                                                     |       |     |
| Statement of Stockholders’ Equity for the years ended  March 31, 2010 and 2009 |       | 27       |
|                                                                                     |       |     |
| Statements  of Cash Flows for the years ended March 31, 2010 and 2009               |       | 28       |
|                                                                                     |       |     |
| Notes to Financial Statements                                                            |       | 29-43    |

 

(b) Exhibits

 
| (3)(i)   |   | Articles of Incorporation and Articles of Amendment  and Bylaws of Registrant -incorporated by reference to the Exhibits to the  Registration Statement on Form S-18, file number 2-88647-D, filed  December 21, 1983. |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                             |
| (3)(ii)  |   | Articles of Amendment of Registrant - incorporated  by reference to the Exhibit to the Report on Form 10-K for the  fiscal year ended March 31, 1988.                                                             |
|     |   |                                                                                                                                                                                                                             |
| (3)(iii) |   | Articles of Amendment of Registrant dated  October 4, 1990 - incorporated by reference to the Exhibit to the Report  on Form 10-K for the fiscal year ended March 31, 1991.                                  |

 

46

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| (3)(iv) |   | Articles of Amendment of Registrant dated  October 20, 1992 - incorporated by reference to the Exhibit to the  Report on Form 10-KSB for the fiscal year ended March 31, 1993.                                                                                                                                                                                                                                                   |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (23)(i) |   | Consent of Ehrhardt Keefe Steiner & Hottman  PC, independent registered public accounting firm, to the incorporation by  reference in the Registration Statements on Form S-8 (file numbers  333-89808, 333-02074, 333-18161, 333-48556, 333-122911, 333-138619 and  333-152210) of their report dated June 29, 2010, included in the  Registrant’s Report on Form 10-K for the fiscal year ended  March 31, 2010. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (31.1)  |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (31.2)  |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (32.1)  |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) and 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (32.2)  |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) and 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (b)     |   | Reports on Form 8-K. On February 12, 2010, the Registrant filed a Report on  Form 8-K, under Item 2.02, reporting the issuance of a press release  reporting revenues and earnings for the quarter and nine months ended  December 31, 2009.                                                                                                                                                                                     |

 

47

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**SIGNATURES**

 

Pursuant to requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |               | MESA  LABORATORIES, INC. |
|--------|--------------------|-------------------------------|
|   |               | Registrant                    |
|   |               |                          |
|   |               |                          |
| Date:  | June 29, 2010 |                          | By: | /s/John J. Sullivan, Ph.D. |
|   |               |                          | John J. Sullivan, Ph.D., CEO |
|        |                    |                               |  |  |

 

Pursuant to the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 
| **Name**                   | ** ** | **Title**                                                                            | ** ** | **Date**           |
|----------------------------|------------|--------------------------------------------------------------------------------------|------------|--------------------|
|                       |       |                                                                                 |       |               |
| /s/Luke R. Schmieder       |       | Chairman of the Board of Directors                                                   |       | June 29, 2010 |
| Luke R. Schmieder          |       |                                                                                 |       |               |
|                       |       |                                                                                 |       |               |
| /s/John J. Sullivan, Ph.D. |       | Chief Executive Officer,  President, Treasurer and Director                          |       | June 29, 2010 |
| John J. Sullivan, Ph.D.    |       |                                                                                 |       |
|                       |       |                                                                                 |       |               |
| /s/Steven W. Peterson      |       | Vice President, Finance,  Chief Financial and Chief Accounting Officer and Secretary |       | June 29, 2010 |
| Steven W. Peterson         |       |                                                                                 |       |
|                       |       |                                                                                 |       |               |
| /s/Paul D. Duke            |       | Director                                                                             |       | June 29, 2010 |
| Paul D. Duke               |       |                                                                                 |       |               |
|                       |       |                                                                                 |       |               |
| /s/H. Stuart Campbell      |       | Director                                                                             |       | June 29, 2010 |
| H. Stuart Campbell         |       |                                                                                 |       |               |
|                       |       |                                                                                 |       |               |
| /s/Michael T. Brooks       |       | Director                                                                             |       | June 29, 2010 |
| Michael T. Brooks          |       |                                                                                 |       |               |
|                       |       |                                                                                 |       |               |
| /s/Robert V. Dwyer         |       | Director                                                                             |       | June 29, 2010 |
| Robert V. Dwyer            |       |                                                                                 |       |               |
|                       |       |                                                                                 |       |               |
| /s/Evan Guillemin          |       | Director                                                                             |       | June 29, 2010 |
| Evan Guillemin             |       |                                                                                 |       |               |

 

48

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**EXHIBITS INDEX**

 
| (23)(i) |   | Consent of Ehrhardt Keefe Steiner & Hottman  PC, independent registered public accounting firm, to the incorporation by  reference in the Registration Statements on Form S-8 (file numbers  333-89808, 333-02074, 333-18161, 333-48556, 333-122911, 333-138619 and  333-152210) of their report dated June 29, 2010, included in the  Registrant’s Report on Form 10-K for the fiscal year ended  March 31, 2010. |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (31.1)  |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (31.2)  |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (32.1)  |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) and 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (32.2)  |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) and 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                      |

 

49

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