This Annual Report on Form10-K contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward lookingforward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Annual Report onForm 10-K.
We face competition from numerous competitors, most of whom have far greater resources than we have, which may make it more difficult for us to achieve significant market penetration.
The bioprocessing market is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants.
Many of our competitors are large, well-capitalized companies with significantly more market share and resources than we have. As a consequence, they are able to spend more aggressively on product development, marketing, sales and other product initiatives than we can. Many of these competitors have:
significantly greater name recognition;
larger and more established distribution networks;
additional lines of products and the ability to bundle products to offer higher discounts or other incentives to gain a competitive advantage;
greater experience in conducting research and development, manufacturing, clinical trials, marketing, obtaining regulatory approval and entering into collaboration or other strategic partnership arrangements; and
Our current and future competitors, or other companiesincluding certain of our customers, may at any time develop additional products that compete with our products. If an existing or future competitorany company develops products that compete with or are superior to our products, our revenue may decline. In addition, some of our competitors may compete by lowering the price of their products. If prices were to fall, we may not be able to improve our gross margins or sales growth sufficiently to maintain and grow our profitability.
We dependDespite our increasingly diversified client base, we have historically depended on, and expect to continue to depend on, a limited number of customers for a high percentage of our revenues.
The loss of, or a significant reduction in orders from, any of theseour large customers, including following any termination or failure to renew a long-term supply contract, would significantly reduce our revenues and harm our results of operations. If a large customer purchases fewer of our products, defers orders or fails to place additional orders with us for any other reason, including for business continuity purposes, our revenue could decline, and our operating results may not meet market expectations. Under our long-term supply agreements with GE Healthcare (“GE”), we supply Protein A ligands to GE from our manufacturing facilities in Lund, Sweden and Waltham, Massachusetts (the “Lund Agreement” and “Waltham Agreement,” respectively). The Lund Agreement runs pursuant to its terms, through 2019 and the Waltham Agreement runs, pursuant to its terms, through 2021. GE may elect, upon six months’ prior notice to us, to reduce its minimum purchase requirements under the Lund Agreement. Even if GE so elects, GE would still be required to continue to purchase at least 50% of its global demand pursuant to the Waltham Agreement through the expiration of this agreement pursuant to its terms on December 31, 2021.
In addition, if thoseour customers order our products, but fail to pay on time or at all, our liquidity and operating results could be materially and adversely affected. Furthermore, if any of our current or future products compete with those of any of our largest customers, these customers may place fewer orders with us or cease placing orders with us, which would negatively affect our revenues and operating results.
If we are unable to expand our product portfolio, our ability to generate revenue could be adversely affected.
In connection with the Company’s decision to focus our efforts on the growth of our core bioprocessing business, weWe are increasingly seeking to develop and commercialize our own portfolio of products. Our future financial performance will depend, in part, on our ability to successfully develop and acquire additional bioprocessing products. There is no guarantee that we will be able to successfully acquire or develop additional bioprocessing products, and the Company’s financial performance will likely suffer if we are unable to do so.
If intangible assets and goodwill that we recorded in connection with our acquisitions become impaired, we couldmay have to take significant charges against earnings.
In connection with the accounting for the Novozymes Acquisition, the Refine Acquisition, the Atoll Acquisition and the TangenX Acquisition,our completed acquisitions, we recorded a significant amount of intangible assets, including developed technology and customer relationships relating to the acquired product lines, and goodwill. Under U.S. GAAP, we must assess, at least annually and potentially more frequently, whether the value of intangible assets and goodwill has been impaired. Intangible assets and goodwill will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of intangible assets and goodwill will result in a charge against earnings, which could materially adversely affect our results of operations and shareholders’ equity in future periods.
Our exposure to political, economic and other risks that arise from operating a multinational business has and may continue to increase.
We operate on a global basis with offices or activities in Japan, South Korea, China, India, Europe and North America. Our operations and sales outside of the United States have increased as a result of the Novozymes Acquisition, the Refine Acquisition and the Atoll Acquisitionour strategic acquisitions and the continued expansion of our commercial organization. Risks related to these increased foreign operations include:
fluctuations in foreign currency exchange rates;rates, which may affect the costs incurred in international operations and could harm our results of operations and financial condition;
changes in general economic and political conditions in countries where we operate, particularly as a result of ongoing economic instability within the European Union and other foreign jurisdictions;
the occurrence of a trade war, or other governmental action related to tariffs or trade agreements;
being subject to complex and restrictive employment and labor laws and regulations, as well as union and works council restrictions;
changes in tax laws or rulings in the United States or other foreign jurisdictions that may have an adverse impact on our effective tax rate;
being subject to burdensome foreign laws and regulations, including regulations that may place an increased tax burden on our operations;
being subject to longer payment cycles from customers and experiencing greater difficulties in timely accounts receivable collections; and
required compliance with a variety of foreign laws and regulations.regulations, such as data privacy requirements, real estate and property laws, anti-competition regulations, import and trade restrictions, export requirements, U.S. laws such as the Foreign Corrupt Practices Act of 1977 and the U.S. Department of Commerce’s Export Administration Regulations, and other U.S. federal laws and regulations established by the office of Foreign Asset Control, local laws such as the U.K. Bribery Act of 2010 or other local laws that prohibit corrupt payments to governmental officials or certain payments or remunerations to customers.
Our business success depends in part on our ability to anticipate and effectively manage these and other.other related factors. We cannot assure you that these and other related factors will not materially adversely affect our international operations or business as a whole.
In addition, a deterioration in diplomatic relations between the United States and any country where we conduct business could adversely affect our future operations and lead to a decline in profitability.
We may be unable to efficiently manage efficiently having becomeour growth as a larger and more geographically diverse organization.
Our strategic acquisitions, of Novozymes, Refine, Atoll and TangenX, the continued expansion of our commercial sales operations, and our organic growth have increased the scope and complexity of our business. WeAs a result, we will face challenges inherent in efficiently managing a more complex business with an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. Our inability to manage successfully the geographically more diverse (including from a cultural perspective) and substantially larger combined organization could materially adversely affect our operating results and, as a result, the market price of our common stock.
Our business is subject to a number of environmental risks.
Our manufacturing business involves the controlled use of hazardous materials and chemicals and is therefore subject to numerous environmental and safety laws and regulations and to periodic inspections for possible violations of these laws and regulations. In addition to these hazardous materials and chemicals, our facility in Sweden also uses Staphylococcus aureus and toxins produced by Staphylococcus aureus in some of its manufacturing processes. Staphylococcus aureus and the toxins it produces, particularly enterotoxins, can cause severe illness in humans. The costs of compliance with environmental and safety laws and regulations are significant. Any violations, even if inadvertent or accidental, of current or future environmental and safety laws or regulations and the cost of compliance with any resulting order or fine could adversely affect our operations.
Our acquisitions expose us to risks that could adversely affect our business, and we may not achieve the anticipated benefits of acquisitions of businesses or technologies.
In addition to our acquisitions of Novozymes, Refine, Atoll and TangenX, and asAs a part of our growth strategy, we may make selected acquisitions of complementary products and/or businesses. Any acquisition involves numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:
difficulties in integrating new operations, technologies, products, and personnel;
problems maintaining uniform procedures, controls and policies with respect to our financial accounting systems;
lack of synergies or the inability to realize expected synergies and cost-savings;
difficulties in managing geographically dispersed operations;operations, including risks associated with entering foreign markets in which we have no or limited prior experience;
negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges;
the potential loss of key employees, customers, and strategic partners of acquired companies;
claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;
the assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;
the issuance of equity securities to finance or as consideration for any acquisitions wouldthat dilute the ownership of our stockholders;
the issuance of equity securities to finance or as consideration for any acquisitions may not be an option of if the price of our common stock is low or volatile which could preclude us from completing any such acquisitions;
any collaboration, strategic alliance and licensing arrangement may require us to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us;
diversion of management’s attention and company resources from existing operations of the business;
inconsistencies in standards, controls, procedures, and policies;
the impairment of intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and
assumption of, or exposure to, historical liabilities of the acquired business, including unknown contingent or similar liabilities that are difficult to identify or accurately quantify.quantify; and
risks associated with acquiring intellectual property, including potential disputes regarding acquired companies’ intellectual property.
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. There can be no assurance that any of the acquisitions we may make will be successful or will be, or will remain, profitable. Our failure to successfully address the foregoing risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to make payments on our debt.
We incurred significant indebtedness in the amount of $115.0 million in aggregate principal with additional accrued interest under our 2.125% Convertible Senior Notes due 2021 (the “Notes”). Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors that may be beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. In addition, in the event of a fundamental change or a default under the Notes, the holders and/or the trustee under the indentures governing the Notes may accelerate the payment obligations or trigger the holders’ repurchase rights under the Notes. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including the Notes.
If a make-whole fundamental change, such as an acquisition of our company, occurs prior to the maturity of the Notes, under certain circumstances, the conversion rate for the Notes will increase such that additional shares of our common stock will be issued upon conversion of the Notes in connection with such make-whole fundamental change. The increase in the conversion rate will be determined based on the date on which the make-whole fundamental change occurs or becomes effective and the price paid (or deemed paid) per share of our common stock in such transaction. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or
notes being converted. Our failure to repurchase Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Notes as required by the indenture would constitute a default under the indenture. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or make cash payments upon conversions thereof.
In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
place us at a disadvantage compared to our competitors who have less debt; and
limit our ability to borrow additional amounts for working capital and other general corporate purposes, including to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies.
Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
Future strategic transactions or acquisitions may require us to seek additional financing, which we may not be able to secure on favorable terms, if at all.
We plan to continue a strategy of growth and development for our bioprocessing business, and we actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio of development programs. In order to complete such strategic transactions, we may need to seek additional financing to fund these investments and acquisitions. Should we need to do so, we may not be able to secure such financing, or obtain such financing on favorable terms because of the volatile nature of the biotechnology marketplace. In addition, future acquisitions may require the issuance or sale of additional equity or debt securities, which may result in additional dilution to our stockholders.
We rely on a limited number of suppliers or, for certain of our products, one supplier, and we may not be able to find replacements or immediately transition to alternative suppliers, which could have a material adverse effect on our financial condition, results of operations and reputation.
There are only a limited number of suppliers of materials related to the XCell ATF Systemfor certain of our products. An interruption in operations of the business related to these products could occur if we encounter delays or difficulties in securing thesethe required materials, or if we cannot then obtain an acceptable substitute. Any such interruption could significantly affect the business related to these products and our financial condition, results of operations and reputation.
For example, we believe that only a small number of suppliers are currently qualified to supply materials for the XCell ATF System. The use of materials furnished by these replacement suppliers would require us to alter our operations related to the XCell ATF System. Transitioning to a new supplier for our products would be time consuming and expensive, may result in interruptions in our operations, could affect the performance specifications of our product lines or could require that we revalidate the materials. There can be no assurance that we will be able to secure alternative materials and bring such materials on line and revalidate them without experiencing interruptions in our workflow. If we should encounter delays or difficulties in securing, reconfiguring or revalidating the materials required for our products, our business related to these products and our financial condition, results of operations and reputation could be adversely affected.
We have limited sales and as
As we evolve from a company dependent on others to commercialize our products to a company selling directly to end users, we may encounter difficulties in expanding our product portfolio and our commercial marketing capabilities.
We have a small sales force and, priorPrior to 2016, we generated most of our revenues through sales of bioprocessing products to a limited number of life sciences companies, such as GE Healthcare, MilliporeSigma and through other individual distributors. However, due in part to our recent strategic acquisitions, an increasing amount of our revenue is attributable to our commercialization of bioprocessing products that we sell directly toend-users, such as including biopharmaceutical companies and contract manufacturing organizations. This has required and will continue to require us to invest additional resources in our sales and marketing capabilities. We may not be able to attract and retain additional sales and marketing professionals, and the cost of building the sales and marketing function may not generate our anticipated revenue growth. In addition, our sales and marketing efforts may be unsuccessful. Our failure to manage these risks may have a negative impact on our financial condition, or results of operations and may cause our stock price to decline.
If we are unable to obtain or maintain our intellectual property, we may not be able to succeed commercially.
We endeavor to obtain and maintain trade secrets and, to a lesser extent with respect to the products that currently account for a majority of our revenue, patent and trade secret protection for our products and processes when available in order to protect themour products and processes from unauthorized use and to produce a financial return consistent with the significant time and expense required to bring our products to market. Our success will depend, in part, on our ability to:
preserve our trade secrets andknow-how;
operate without infringing the proprietary rights of third parties;
obtain and maintain patent protection for our products and manufacturing processes; and
We consider trade secrets,know-how and other forms of market protection to be among the most important elements of our proprietary position, in particular, as it relates to the products that currently account for a majority of our revenue. We also own or have exclusive rights to a number of U.S. patents and U.S. pending patent applications as well as corresponding foreign patents and patent applications. We continue to actively and selectively pursue patent protection and seek to expand our patent estate, particularly for our products currently in development, and we cannot be sure that any patent applications relating to our products that we will file in the future or that any currently pending applications will issue on a timely basis, if ever. Since patent applications in the United States filed prior to November 2000 are maintained in secrecy until patents issue and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, weWe cannot be certain that we were the first to make the inventions covered by each of our pending patent applications or that we were the first to file patent applications for such inventions. Even if patents are issued, the degree of protection afforded by such patents will depend upon the:
scope of the patent claims;
validity and enforceability of the claims obtained in such patents; and
our willingness and financial ability to enforce and/or defend them.
The patent position of life sciences companies is often highly uncertain and usually involves complex legal and scientific questions. Patents which may be granted to us in certain foreign countries may be subject to opposition proceedings brought by third parties or result in suits by us, which may be costly and result in adverse consequences for us.
In some cases, litigation or other proceedings may be necessary to assert claims of infringement, to enforce patents issued to us or our licensors, to protect trade secrets,know-how or other intellectual property rights we own or to determine the scope and validity of the proprietary rights of third parties. Such litigation could result in
substantial cost to us and diversion of our resources. An adverse outcome in any such litigation or proceeding could have a material adverse effect on our business, financial condition and results of operations.
If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may be required to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which would result in substantial costs to us.
While one of our U.S. patents covering recombinant Protein A had its term adjusted to expire in 2028, our other U.S. patents covering recombinant Protein A have expired, and as a result, we may face increased competition, which could harm our results of operations, financial condition, cash flow and future prospects.
Other companies could begin manufacturing and selling native or some of the commercial forms of recombinant Protein A in the U.S.United States and may directly compete with us on certain Protein A products. This may induce us to sell Protein A at lower prices and may erode our market share, which could adversely affect our results of operations, financial condition, cash flow and future prospects.
Our freedom to develop our products may be challenged by others, and we may have to engage in litigation to determine the scope and validity of competitors’ patents and proprietary rights, which, if we do not prevail, could harm our business, results of operations, financial condition, cash flow and future prospects.
There has been substantial litigation and other proceedings regarding the complex patent and other intellectual property rights in the life sciences industry. We have been a party to, and in the future may become a party to, patent litigation or other proceedings regarding intellectual property rights.
Other types of situations in which we may become involved in patent litigation or other intellectual property proceedings include:
We may initiate litigation or other proceedings against third parties to seek to invalidate the patents held by such third parties or to obtain a judgment that our products or services do not infringe such third parties’ patents.
We may initiate litigation or other proceedings against third parties to seek to enforce our patents against infringement.
If our competitors file patent applications that claim technology also claimed by us, we may participate in interference or opposition proceedings to determine the priority of invention.
If third partiesthird-parties initiate litigation claiming that our processes or products infringe their patent or other intellectual property rights, we will need to defend against such claims.
The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If a patent litigation or other intellectual property proceeding is resolved in a way that is unfavorable to us, we or our collaborative or strategic partners
may be enjoined from manufacturing or selling our products and services without a license from the other party and be held liable for significant damages. The failure to obtain any required license on commercially acceptable terms or at all may harm our business, results of operations, financial condition, cash flow and future prospects.
Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time, attention and resources.
We may become involved in litigation or other proceedings with collaborative partners, which may be time consuming, costly and could result in delays in our development and commercialization efforts.
In connection with the Company’s decision to focus its efforts on the growth of its core bioprocessing business, we sought development and commercialization partnerships for our remaining portfolio of clinical stage assets. Any disputes with such partners such as BioMarin, that lead to litigation or similar proceedings may result in us incurring legal expenses, as well as facing potential legal liability. Such disputes, litigation or other proceedings are also time consuming and may cause delays in our development and commercialization efforts. If we fail to resolve these disputes quickly and with terms that are no less favorable to us than the current terms of the arrangements, our business, results of operations, financial condition, cash flow and future prospects may be harmed.
If we are unable to continue to hire and retain skilled personnel, then we will have trouble developing and marketing our products.
Our success depends largely upon the continued service of our management and scientific staff and our ability to attract, retain and motivate highly skilled technical, scientific, management and marketing personnel. We also face significant competition in the hiring and retention of such personnel from other companies, research and academic institutions, government and other organizations who have superior funding and resources. The loss of key personnel or our inability to hire and retain skilled personnel could materially adversely affect our product development efforts and our business.
The market may not be receptive to our new bioprocessing products upon their introduction.
We expect a portion of our future revenue growth to come from introducing new bioprocessing products, including line extensions and new features for our OPUS disposable chromatography columns, our XCell ATF System, our SiusSIUS TFF product line, our Spectrum hollow fiber modules and TFF systems and our growth factors. For example, in 2016, we introduced a resin recovery port on our largest OPUS columns, and we launched single-use versions of XCell ATF Systems. The commercial success of all of our products will depend upon their acceptance by the life science and biopharmaceutical industries. Many of the bioprocessing products that we are developing are based upon new technologies or approaches. As a result, there can be no assurance that these new products, even if successfully developed and introduced, will be accepted by customers. If customers do not adopt our new products and technologies, our results of operations may suffer and, as a result, the market price of our common stock may decline.
If our newOur products do not achieve sufficient market acceptance, our resultsare subject to quality control requirements.
Whether a product is produced by us or purchased from outside suppliers, it is subjected to quality control procedures, including the verification of operationsporosity and competitive position could suffer.
There can be no assurance that unforeseen problems will not occur with respectcertain products, the complete validation for good manufacturing practices, U.S. Food and Drug Administration, CE and ISO 2001 compliance, prior to final packaging. Quality control is performed by a staff of technicians utilizing calibrated equipment. In the development, performance or market acceptance of new products or thatevent we, will otherwise be able to successfully develop and market new products. Failure of our new products to gain market acceptance or our failuremanufacturers, produce products that fail to successfully developcomply with required quality standards, it may incur delays in fulfilling orders, write-downs, damage to our reputation and market new products could reduce our margins, which would have an adverse effect on our business, financial condition and results of operations.damages resulting from product liability claims.
If our products do not perform as expected or the reliability of the technology on which our products are based is questioned, we could experience lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation.
Our success depends on the market’s confidence that we can provide reliable, high-quality bioprocessing products. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. Our reputation and the public image of our products and technologies may be impaired if our products fail to perform as expected. Although our products are tested prior to shipment, defects or errors could nonetheless occur in our products. Furthermore, the Protein A that we manufacture is subsequently incorporated into products that are sold by other life sciences companies and we have no control over the manufacture and
production of those products. In the future, if our products experience, or are perceived to experience, a material defect or error, this could result in loss or delay of revenues, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Such defects or errors could also narrow the scope of the use of our products, which could hinder our success in the market. Even after any underlying concerns or problems are resolved, any lingering concerns in our target market regarding our technology or any manufacturing defects or performance errors in our products could continue to result in lost revenue, delayed market acceptance, damaged reputation, increased service and warranty costs and claims against us.
If we are unable to manufacture our products in sufficient quantities and in a timely manner, our operating results will be harmed, our ability to generate revenue could be diminished and our gross margin may be negatively impacted.
Our revenues and other operating results will depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner. Any interruptions we experience in the manufacturing or shipping of our products could delay our ability to recognize revenues in a particular quarter. Manufacturing problems can and do arise, and as demand for our products increases, any such problems could have an increasingly significant impact on our operating results. While we have not generally experienced problems with, or delays in, our production capabilities that resulted in delays in our ability to ship finished products, there can be no assurance that we will not encounter such problems in the future. We may not be able to quickly ship products and recognize anticipated revenues for a given period if we experience significant delays in the manufacturing process. In addition, we must maintain sufficient production capacity in order to meet anticipated customer demand, which carries fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we are unable to manufacture our products consistently, in sufficient quantities, and on a timely basis, our bioprocessing revenue, gross margins and our other operating results will be materially and adversely affected.
Our operating results may fluctuate significantly, our customers’ future purchases are difficult to predict and any failure to meet financial expectations may result in a decline in our stock price.
Our quarterly operating results may fluctuate in the future as a result of many factors such as the impact of seasonal spending patterns, changes in overall spending levels in the life sciences industry, the inability of some of our customers to consummate anticipated purchases of our products due to changes inend-user demand, and other unpredictable factors that may affect ordering patterns. Because our revenue and operating results are difficult to predict, we believe thatperiod-to-period comparisons of our results of operations are not a good indicator of our future performance. Additionally, if revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed. In particular, a large portion of our manufacturing costs, our research and development, sales and marketing and general and administrative expenses are not significantly affected by variations in revenue. Further, our gross margins are dependent on product mix. A shift in sales mix away from our higher margin products to lower margin products will adversely affect our gross margins. If our quarterly operating results fail to meet investor expectations, the price of our common stock may decline.
Securities or industry analysts may not publish favorable research or reports about our business or may publish no information, which could cause our stock price or trading volume to decline.
Our future revenues pursuant toThe trading market for our asset purchase agreement with BioMarincommon stock is influenced by the research and reports that industry or securities analysts publish about us and our business. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who cover us issue an adverse opinion regarding the HDACi program depends significantly on BioMarin’s development and commercialization activities, over which we have no control.our stock price, our business or stock price would likely decline. If BioMarin is unableone or determines not to further develop or commercialize the HDACi program, or experiences significant delays in doing so, we may see a delay in receiving any potential milestone or royalty paymentsmore of these analysts cease coverage of our company or fail to receive any additional financial benefits from the program.
We entered into an asset purchase agreement with BioMarin on January 21, 2014, related to the histone deacetylase inhibitor (“HDACi”) portfolio, which includes the Friedreich’s ataxia program. We are dependent on BioMarin for the future success of this development program. We have no control over the conduct and timing of development efforts with respect to the HDACi program. BioMarin’s failure to devote sufficient financial and other resources to the development plan may resultregularly publish reports covering us, we could lose visibility in the delayedmarket, which in turn could cause our stock price or unsuccessful development of the program, which could leadtrading volume to the non-payment or delay in payment of milestones under the asset purchase agreement and may preclude or delay commercialization of any product under the HDACi program and any royalties we could receive on future commercial sales. Our future financial results may be harmed if BioMarin does not commercialize the HDACi program successfully or on a timely basis prior to the achievement of any milestones or the payment of any royalties to us.decline.
Health care reform measures could adversely affect our business.
The efforts of governmental and third-party payors to contain or reduce the costs of health care may adversely affect the business and financial condition of pharmaceutical and biotechnology companies, including us.ours. Specifically, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. The U.S. Congress passed the America Affordable Health Choices Act of 2009 andFor example, in March 2010, the Patient Protection and Affordable Care Act, Thisas amended by the Health Care and Education Reconciliation Act of 2010 (together, the “Affordable Care Act”), was passed, which substantially changes the way health care is financed by both governmental and private insurers and significantly impacts the U.S. life sciences industry. The Affordable Care Act and other federal and state proposals and health care reforms could limit the prices that can be charged for the products we develop and may limit our commercial opportunity. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act (the “MMA”) changed the way Medicare covers and pays for pharmaceutical products. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors. Efforts by the government and other third-party payors to contain or reduce the costs of health care through various means may limit our commercial opportunities and result in a decrease in the price of our common stock or limit our ability to raise capital.
The recent presidential and congressional elections may lead to amendmentsRecent federal government efforts have been aimed at amending or repeals ofrepealing all or portions of existing health care reform legislation, including the Affordable Care Act. Changes in existing health care reform measures may result in uncertainty with respect to legislation, regulation and government policy that could significantly impact our business and the life sciences industry.
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other corporate tax reform policies, or changes in tax legislation or policies could materially impact our financial position and results of operations.
Corporate tax reform, base-erosion efforts and tax transparency continue to be high priorities in many tax jurisdictions where we have business operations. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform legislation is being proposed or enacted in a number of jurisdictions. For example, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), adopting broad U.S. corporate income tax reform will, among other things, reduce the U.S. corporate income tax rate, but will impose base-erosion prevention measures on earnings ofnon-U.S. subsidiaries of U.S. entities as well as the transition tax on mandatory deemed repatriation of accumulatednon-U.S. earnings of U.S. controlled foreign corporations. There is no assurance that our actual income tax liability will not be materially different than what is reflected in our income tax provisions and accruals.
In addition, many countries are beginning to implement legislation and other guidance to align their international tax rules with the Organisation for EconomicCo-operation and Development’s Base Erosion and Profit Shifting recommendations and action plan that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer pricing documentation rules, and nexus-based tax incentive practices. Because of the heightened scrutiny of corporate taxation policies, prior decisions by tax authorities regarding treatments and positions of corporate income taxes could be subject to enforcement activities, and legislative investigation and inquiry, which could also result in changes in tax policies or prior tax rulings. Any such changes in policies or rulings may also result in the taxes we previously paid being subject to change.
Due to the large scale of our international business activities, any substantial changes in international corporate tax policies, enforcement activities or legislative initiatives may materially adversely affect our business, the amount of taxes we are required to pay and our financial condition and results of operations generally.
We compete with life science, pharmaceutical and biotechnology companies who are capable of developing new approaches that could make our products and technology obsolete.
The market for therapeutic and commercial products is intensely competitive, rapidly evolving and subject to rapid technological change. LifeWe compete with several medium and small companies in each of our product categories as well as several large companies, including GE Healthcare, Danaher Corporation (Pall), Thermo Fisher Scientific Inc., MilliporeSigma and Sartorius. These competitors, as well as other life science, pharmaceutical and biotechnology companies may have substantially greater financial, manufacturing, marketing, and research and development resources than we have. Newhave, as well as stronger name recognition, longer operating histories and benefits derived from greater economies of scale. These factors, among others, may enable our competitors to market their products at lower prices or on terms more advantageous to customers than what we can offer. Competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations. Additionally, new approaches by these competitors may make our products and technologies obsolete or noncompetitive.
We may become subject to litigation, which could result in substantial costs and divert management’s attention and resources from our business.
From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from our expectations. If we receive an adverse judgment in any litigation, we could be required to pay substantial damages. With or without merit, litigation can be complex, can extend for a protracted period of time, can be very expensive and the expense can be unpredictable. Litigation initiated by us could also result in counter-claims against us, which could increase the costs associated with the litigation and result in our payment of damages or other judgments against us. In addition, litigation, and any related publicity, may divert the efforts and attention of some of our management and key personnel, which wouldcould adversely affect our business.
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (the “FCPA”) and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We have operations and agreements with third parties and make sales in jurisdictions outside of the U.S.,United States, which may experience corruption. Our activities in jurisdictions outside of the U.S.United States create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors, because these parties are not always subject to our control. These risks have increased following our recent acquisitions of overseas operations and facilities. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold us liable for successor liability FCPA violations committed by any companies in which we invest or that we acquire.
Our stock price could be volatile, which could cause shareholders to lose part or all of their investment.
The market price of our common stock, like that of the common stock of many other companies with similar market capitalizations, is highly volatile. In addition, the stock market has experienced extreme price and volume fluctuations. This volatility has significantly affected the market prices of securities of many life sciences,
biotechnology and pharmaceutical companies for reasons frequently unrelated to or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Anti-takeover provisions in our charter documents, certain of our contracts with third parties, and under Delaware law could make an acquisition of us, even one that may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our certificate of incorporation andby-laws may delay or prevent an acquisition of us or a change in our management. These provisions include the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. Additionally, certain of our contracts with third parties allow for
termination upon specified change of control transactions. Anti-takeover provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management, and anti-takeover or change of control contract termination rights may frustrate or prevent any attempts by a third party to acquire or attempt to acquire the Company.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, leases, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.
Our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates.
We conduct a large portion of our business in international markets. For the fiscal year ended December 31, 2016, 40%2018, 28% of our revenues and 22%15% of our costs and expenses were denominated in foreign currencies, primarily the Swedish Krona, the British pound sterling, and the Euro. We are exposed to the risk of an increase or decrease in the value of the foreign currencies relative to the U.S. Dollar, which could increase the value of our expenses and decrease the value of our revenue when measured in U.S. Dollars. As a result, our results of operation may be influenced by the effects of future exchange rate fluctuations and such effects may have an adverse impact on our common stock price.
Our ability to use net operating loss and tax credit carryforwards and certainbuilt-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and it is possible that certain transactions or a combination of certain transactions may result in material additional limitations on our ability to use our net operating loss and tax credit carryforwards.
Section 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certainbuilt-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership
changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certainbuilt-in losses is equal to the product of the applicable long term tax exemptlong-term,tax-exempt rate and the value of the company’s stock immediately before the ownership change. We may be unable to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability. We have completed a number of financings sinceWhile our inception which may have resulted in a change in control as defined by Section 382 analysis completed during 2018 did not show any current exposure, future transactions or couldcombinations of future transactions may result in a change in control under Section 382 in the future.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent fraud. If we identify a material weaknessesweakness in our internal control over financial reporting, our ability to meet our reporting obligations and the trading price of our stock could be negatively affected.
A material weakness is a deficiency,Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement ofprevent fraud could harm our annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors.
business. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. In addition, we are required under the Sarbanes-Oxley Act of 2002 to report annually on our internal control over financial reporting. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. For example, in 2012, we updated our internal controls to include our operations in Sweden. If we, or our independent registered public accounting firm, determine that our internal controls over financial reporting are not effective, or we discover areas that need improvement in the future or discover a material weakness, these shortcomings could have an adverse effect on our business and financial results, and the price of our common stock could be negatively affected. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors.
If we cannot conclude that we have effective internal control over our financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified opinion regarding the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could lead to a decline in our stock price. Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the SEC, The NASDAQNasdaq Stock Market or other regulatory authorities.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent fraud.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. We must annually evaluate our internal procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management and our independent registered public accounting firm to assess the effectiveness of internal control over financial reporting.
We have recentlypreviously implemented several significant ERP modules and expect to implement additional ERP modules in the future. The implementation of the ERP system represents a change in our internal control over financial reporting. Although we continue to monitor and assess our internal controls in the new ERP system environment as changes are made and new modules are implemented, and we have taken additional steps to modify and enhance the design and effectiveness of our internal control over financial reporting, there is a risk that deficiencies may occur that could constitute significant deficiencies or in the aggregate a material weakness.
If we fail to remedy any deficiencies or maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our operating results or financial condition.
Natural disasters, geopolitical unrest, war, terrorism, public health issues or other catastrophic events could disrupt the supply, delivery or demand of products, which could negatively affect our operations and performance.
We are subject to the risk of disruption by earthquakes, floods and other natural disasters, fire, power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics and other events beyond our control and the control of the third parties on which we depend. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, our employees, facilities, partners, suppliers, distributors or customers, and could decrease demand for our products, create delays and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products to our customers. A catastrophic event that results in the destruction or disruption of our data centers or our critical business or information technology systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected.
Changes in laws and regulations governing the privacy and protection of data and personal information could adversely affect our business.
We are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of proprietary information and personally-identifying information, which among other things, imposes certain requirements relating to the privacy, security and transmission of certain individually identifiable information. In addition, numerous other federal and state laws, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure and security of personal information.
Various foreign countries also have, or are developing, laws governing the collection, use, disclosure, security, and cross-border transmission of personal information. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business. For example, privacy requirements in the European Union (“EU”) govern the transfer of personal information from the European Economic Area to the United States. While we continue to address the implications of changes to the EU data privacy regulations, the area remains an evolving landscape with new regulations coming into effect and continued legal challenges and our efforts to comply with the evolving data protection rules may be unsuccessful. Failure to comply with laws regarding data protection would expose us to risk of enforcement actions taken by data protection authorities in the EU and the potential for significant penalties if we are found to benon-compliant. Similarly, failure to comply with federal and state laws in the United States regarding privacy and security of personal information could expose us to penalties under such laws. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our business.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
We leaseOur material office and manufacturing properties asleases are detailed below:
Location | Square Feet | Principal Use | Lease Expiration | |||||
Waltham, Massachusetts | Corporate headquarters, manufacturing, research and development, marketing and | May 31, 2023 | ||||||
| 68,908 | Manufacturing, research and development, marketing and administrative operations | July 15, 2020(1) | |||||
Marlborough, Massachusetts | Manufacturing operations | |||||||
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Lund, Sweden | Manufacturing and administrative operations | December 31, 2021 | ||||||
| In 2018, we expanded our facility in Rancho Dominguez, California by approximately 15,000 square feet. The lease for the expanded portion of the facility expires on November 30, 2025. |
During the fiscal year ended December 31, 2016,2018, we incurred total rental costs for all facilities of approximately $2,664,000.$4.4 million.
| ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the Nasdaq Global Market under the symbol “RGEN.” The quarterly high and low sales prices for our common stock are shown in the following tables.
| Year Ended December 31, 2016 | ||||||||
| High | Low | |||||||
First Quarter | $ | 28.85 | $ | 20.07 | ||||
Second Quarter | $ | 28.97 | $ | 21.11 | ||||
Third Quarter | $ | 33.79 | $ | 25.93 | ||||
Fourth Quarter | $ | 34.06 | $ | 26.16 | ||||
| Year Ended December 31, 2015 | ||||||||
| High | Low | |||||||
First Quarter | $ | 34.15 | $ | 19.53 | ||||
Second Quarter | $ | 42.48 | $ | 28.88 | ||||
Third Quarter | $ | 42.22 | $ | 27.25 | ||||
Fourth Quarter | $ | 36.00 | $ | 21.69 | ||||
Stockholders and Dividends
As of February 17, 2017,22, 2019, there were 412353 stockholders of record of our common stock. We have not paid any dividends since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. We anticipate that we will retain all earnings, if any, to support our operations. Any future determination as to the payment of dividends will be at the sole discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors our Board of Directors deems relevant.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 20162018 regarding shares of Common Stockcommon stock that may be issued under the Company’s equity compensation plans, consisting of the Second Amended and Restated 2001 Repligen Corporation Stock Plan, the 1992 Repligen CorporationAmended and Restated 2012 Stock Option and Incentive Plan and the current 20122018 Stock Option and Incentive Plan.
Plan Category | Number of securities to be issued upon exercise of outstanding options | Weighted- average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column)(2) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||||||||||
| (a) | (b) | (c) | ||||||||||||||||||||||
Equity compensation plans approved by security holders | 1,236,586 | (1) | $ | 16.88 | (2) | 1,821,576 | 1,703,639 | (1) | $ | 27.54 | (2) | 2,874,751 | ||||||||||||
Equity compensation plans not approved by security holders | N/A | $ | N/A | N/A | ||||||||||||||||||||
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Total | 1,236,586 | $ | 16.88 | 1,821,576 | ||||||||||||||||||||
| (1) | Includes |
| (2) | Since |
Issuer Purchases of Equity Securities
In June 2008, the Board of Directors authorized a program to repurchase up to 1.25 million shares of our common stock to be repurchased at the discretion of management from time to time in the open market or through privately
negotiated transactions. The repurchase program has no set expiration date and may be suspended or discontinued at any time. We did not repurchase any shares of common stock during the year ended December 31, 2016.2018. In prior years, we repurchased a total of 592,827 shares, leaving 657,173 shares remaining under this authorization.
The graph below matches Repligen Corporation’s cumulative5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index, the NASDAQ Pharmaceutical index, and the NASDAQ Biotechnology index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 20112013 to December 31, 2016.2018.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Repligen Corporation, the NASDAQ Composite Index,
the NASDAQ Pharmaceutical Index and the NASDAQ Biotechnology Index
*$100 invested on 12/31/1113 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, and such information shall not be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that Repligen specifically incorporates it by reference into such filing.
Recent Sales of Unregistered Securities and Equity Purchases by the Company
In April 2016, in connection with the Atoll acquisition, we issued and contributed 538,700 shares of our common stock to our wholly-owned subsidiary, Repligen Sweden AB, to enable Repligen Sweden AB to fulfill its obligation to deliver the aforementioned shares under the share purchase agreement we entered into with Repligen Sweden AB and the seller of Atoll GmbH. This issuance was intended to be exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506(b) promulgated under Regulation D.
| ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
The following selected consolidated financial data are derived from the audited financial statements of Repligen. The selected financial data set forth below should be read in conjunction with our financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report, and in our Annual Reports on Form10-K for the fiscal years ended December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014.
| (In thousands, except per share data) | 2016 | 2015(1) | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2018 (1) | 2017(2) | 2016 | 2015(3) | 2014 | ||||||||||||||||||||||||||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||||||||||
Product revenue | $ | 104,441 | $ | 83,537 | $ | 60,431 | $ | 47,482 | $ | 41,834 | $ | 193,891 | $ | 141,089 | $ | 104,441 | $ | 83,537 | $ | 60,431 | ||||||||||||||||||||
Royalty and other revenue | 100 | — | 3,117 | 20,687 | 20,433 | 141 | 147 | 100 | — | 3,117 | ||||||||||||||||||||||||||||||
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Total revenue | 104,541 | 83,537 | 63,548 | 68,169 | 62,267 | 194,032 | 141,236 | 104,541 | 83,537 | 63,548 | ||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||||||||||||||||||
Cost of product revenue | 47,117 | 35,251 | 28,022 | 22,481 | 24,957 | 86,531 | 67,050 | 47,117 | 35,251 | 28,022 | ||||||||||||||||||||||||||||||
Cost of royalty and other revenue | — | — | — | 2,682 | 2,213 | |||||||||||||||||||||||||||||||||||
Research and development | 7,355 | 5,740 | 5,609 | 7,341 | 10,490 | 15,821 | 8,672 | 7,355 | 5,740 | 5,609 | ||||||||||||||||||||||||||||||
Selling, general and administrative | 30,853 | 24,699 | 17,154 | 12,701 | 13,227 | 65,692 | 51,509 | 30,853 | 24,699 | 17,154 | ||||||||||||||||||||||||||||||
Contingent consideration – fair value adjustments | 3,242 | 4,083 | 2,072 | 91 | 611 | — | — | 3,242 | 4,083 | 2,072 | ||||||||||||||||||||||||||||||
Gain on bargain purchase | — | — | — | — | (314 | ) | ||||||||||||||||||||||||||||||||||
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Total operating expenses | 88,567 | 69,773 | 52,857 | 45,296 | 51,184 | |||||||||||||||||||||||||||||||||||
Total operating costs and expenses | 168,044 | 127,231 | 88,567 | 69,773 | 52,857 | |||||||||||||||||||||||||||||||||||
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Income (loss) from operations | 15,974 | 13,764 | 10,691 | 22,873 | 11,083 | |||||||||||||||||||||||||||||||||||
Investment income | 346 | 136 | 309 | 301 | 219 | |||||||||||||||||||||||||||||||||||
Interest expense | (3,768 | ) | (32 | ) | (50 | ) | (50 | ) | (57 | ) | ||||||||||||||||||||||||||||||
Other income (expense) | (860 | ) | (445 | ) | 188 | (110 | ) | 26 | ||||||||||||||||||||||||||||||||
Income from operations | 25,988 | 14,005 | 15,974 | 13,764 | 10,691 | |||||||||||||||||||||||||||||||||||
Other expenses, net | (4,552 | ) | (6,757 | ) | (4,282 | ) | (341 | ) | 447 | |||||||||||||||||||||||||||||||
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Income (loss) before income taxes | 11,692 | 13,423 | 11,138 | 23,014 | 11,271 | |||||||||||||||||||||||||||||||||||
Income tax (benefit) provision | 11 | 4,078 | 2,968 | 6,921 | (2,885 | ) | ||||||||||||||||||||||||||||||||||
Income before income taxes | 21,436 | 7,248 | 11,692 | 13,423 | 11,138 | |||||||||||||||||||||||||||||||||||
Income tax provision (benefit) | 4,819 | (21,105 | ) | 11 | 4,078 | 2,968 | ||||||||||||||||||||||||||||||||||
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Net income (loss) | $ | 11,681 | $ | 9,345 | $ | 8,170 | $ | 16,093 | $ | 14,156 | ||||||||||||||||||||||||||||||
Net income | $ | 16,617 | $ | 28,353 | $ | 11,681 | $ | 9,345 | $ | 8,170 | ||||||||||||||||||||||||||||||
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Earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 0.35 | $ | 0.28 | $ | 0.25 | $ | 0.51 | $ | 0.46 | $ | 0.38 | $ | 0.74 | $ | 0.35 | $ | 0.28 | $ | 0.25 | ||||||||||||||||||||
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Diluted | $ | 0.34 | $ | 0.28 | $ | 0.25 | $ | 0.50 | $ | 0.45 | $ | 0.37 | $ | 0.72 | $ | 0.34 | $ | 0.28 | $ | 0.25 | ||||||||||||||||||||
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Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
Basic | 33,573 | 32,882 | 32,498 | 31,667 | 30,914 | 43,767 | 38,234 | 33,573 | 32,882 | 32,498 | ||||||||||||||||||||||||||||||
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Diluted | 34,099 | 33,577 | 33,264 | 32,407 | 31,253 | 45,471 | 39,150 | 34,099 | 33,577 | 33,264 | ||||||||||||||||||||||||||||||
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| 2016 | 2015 | 2014 | 2013 | 2012 | As of December 31, | |||||||||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||
Cash and marketable securities(2) | $ | 141,780 | $ | 73,407 | $ | 62,003 | $ | 73,842 | $ | 49,970 | ||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||
Cash and marketable securities(4) | $ | 193,822 | $ | 173,759 | $ | 141,780 | $ | 73,407 | $ | 62,003 | ||||||||||||||||||||||||||||||
Working capital | 163,078 | 84,471 | 70,264 | 75,049 | 55,457 | 145,897 | 217,571 | 163,078 | 84,471 | 70,264 | ||||||||||||||||||||||||||||||
Total assets | 288,913 | 146,237 | 128,293 | 118,645 | 97,010 | 774,621 | 743,519 | 288,913 | 146,237 | 128,293 | ||||||||||||||||||||||||||||||
Long-term obligations | 99,074 | 4,708 | 5,879 | 3,458 | 2,133 | 29,211 | 126,760 | 99,074 | 4,708 | 5,879 | ||||||||||||||||||||||||||||||
Accumulated deficit | (59,861 | ) | (71,542 | ) | (80,887 | ) | (89,057 | ) | (105,151 | ) | (15,568 | ) | (31,508 | ) | (59,861 | ) | (71,542 | ) | (80,887 | ) | ||||||||||||||||||||
Stockholders’ equity | 168,764 | 122,748 | 111,732 | 103,886 | 84,125 | |||||||||||||||||||||||||||||||||||
Total stockholders’ equity | 615,568 | 591,548 | 168,764 | 122,748 | 111,732 | |||||||||||||||||||||||||||||||||||
| (1) | Includes the full year impact of the |
| (2) | Includes the full year impact of the acquisition of Atoll GmbH on April 1, 2016 and the acquisition of TangenX Corporation on December 14, 2016. |
| (3) | Includes the full year impact of the acquisition of Refine Technology on June 2, 2014. |
| (4) | Excludes restricted cash of |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Repligen and its subsidiaries, collectively doing business as Repligen Corporation (“Repligen”, the “Company”“we”, “we”“our”, or “our”“the Company”) is a bioprocessing-focused,leading provider of advanced bioprocessing technology and solutions used in the process of manufacturing biologic drugs. Our products are made to substantially increase biopharmaceutical manufacturing efficiencies and flexibility. As the global life sciences company bringing over 30 years of expertisebiologics market continues to experience strong growth and innovationexpansion, our customers – primarily large biopharmaceutical companies and contract manufacturing organizations – face critical production cost, capacity, quality and time pressures that our products are made to address. Our commitment to bioprocessing is helping set new standards for the way our customers. Our mission iscustomers manufacture biologic drugs – including monoclonal antibodies, recombinant proteins, vaccines and gene therapies. We are dedicated to inspire“inspiring advances in bioprocessingbioprocessing” as a trusted partner in the production of biologic drugs that improve human health worldwide. Focused on cost and process efficiencies,
Our Chromatography products featurepre-packed chromatography columns under our OPUS® brand. OPUS columns, which we deliver innovative technologiesto our customerspre-packed with their choice of chromatography resin, are single-campaign(“single-use”) disposable columns that help set new standardsreplace the use of traditional (more permanent) glass columns used in the way biologic drugs are manufactured. We develop and market a broad range of high-value productsdownstream purification processes. By designing OPUS as an advanced and flexible solutions that address critical stepsoption for the purification of biologics from process development through clinical-scale and some commercial manufacturing, Repligen has become a leader in the productionpre-packed columns.
Our Filtration products offer a number of advantages to manufacturers of biologic drugs – principally antibody-based therapeutics,at volumes that span from pilot studies to clinical and commercial-scale production. XCell ATF™ systems are used primarily in upstream perfusion (“continuous manufacturing”) processes to increase cell concentration and significantly improve biologic product yield from a bioreactor. To address increasing industry demand for“plug-and-play” technology, we developed and in 2016 launchedsingle-use formats of the original stainless steel XCell ATF device. In December 2016, we acquired TangenX Technology Corporation (“TangenX”), balancing our upstream XCell ATF offering with a downstream portfolio of flat-sheet filters and cassettes used in biologic drug purification and formulation processes. The TangenX portfolio includes thesingle-use SIUS™ TFF brand, providing customers with a high-performance,low-cost alternative to reusable TFF products. In August 2017, we completed our acquisition of Spectrum. Spectrum brands include the KrosFlo® family of products, ProConnex® disposable flow-path products, TFF systems and others. The Spectrum acquisition significantly strengthened our Filtration product line and diversifies our end markets beyond mAbs to include vaccine, recombinant proteinsprotein and vaccines – while ensuring that the highest drug qualitygene therapies.
We are a leading OEM manufacturer and safety standards are upheld.
Since our strategic decision in 2012 to focus fully on building our bioprocessing business, we have expanded and diversified our portfolio beyond our legacysupplier of Protein A affinity ligands business to include a number of technology leading bioprocessing products that we sell direct to biopharmaceutical companies and CDMOs (contract development and manufacturing organizations) worldwide. Our dedicated team of professionals has substantial experience in biomanufacturing and works proactively with industry leaders and customers to develop innovative solutions that address pressure points in the bioproduction process.
Our bioprocessing products drive process efficiency, cost and yield improvements. In upstream processes, our XCell™ ATF filtration devices and protein cell culture supplements are used in clinical and commercial-stage manufacturing to improve biologic drug yields. In downstream processes, ourlife sciences companies. Protein A ligands are a criticalan essential “binding” component of Protein A resins used to purify over 50 antibody-based drugs on the market and more than 350 in clinical development. Also in downstream processes, our OPUS pre-packed chromatography columns (PPCs) areresins used in the purification of clinical-stage biologics, andvirtually all monoclonal antibody (“mAb”) based drugs on the market or in development that our Sius™ TFF filtration cassettes are used to concentrate clinical and commercial-stage biologic drugs.
We manufacture and supply Protein A ligands through long-term agreements with major life sciences companies, such as GE Healthcare and MilliporeSigma, who in turn produce andcustomers sell Protein A resins to end users (biopharmaceutical companies and CDMOs).manufacturers) for use in downstream purification of mAbs. We also manufacture and supply oursell growth factor products used to supplement cell culture supplements through a distribution agreement with MilliporeSigma.
We market our chromatography and filtration products globally through a direct commercial organizationmedia in the United States and Europe with a combination of direct sales and distributors in Asia. Since 2014, we have invested in expanding our global commercial organization adding 30 sales, marketing, product management, service and applications personnel to form a 37-person commercial team. Our commercial and R&D teams have a track record of successfully launching new products and applications, as well as building new markets for acquired technologies. For example, since acquiring the XCell ATF business in 2014, we have rapidly expanded its market penetration through increased customer interaction, new products and expanded applications that increase flexibility and convenience while streamlining biomanufacturing workflow for our customers.
Our portfolio of bioprocessing products has expanded from our legacy Protein A line since 2011 through strategic acquisitions and internal product development. We have focused on building a portfolio of technology-leading products that we sell directly to end users. In 2016, we added the Sius TFF filtration line through our purchase of TangenX Technology Corporation (“TangenX”), and we added a lab-scale pre-packed chromatography column line through our purchase of Atoll GmbH. In 2014, we acquired the XCell ATF filtration line from Refine Technologies LLC. In 2011, we added to our Protein A ligands business and added cell culture growth factors through our acquisition of Novozymes Biopharma Sweden AG. Internally, we developed and market our process-scale OPUS pre-packed chromatography columns. Also through internal innovation, we have extended both our OPUS and XCell ATF product lines, to include more size options and technology features to benefit our customers. For example in 2016 we introduced a resin recovery feature on our largest OPUS columns (OPUS R) and we launched a single-use (disposable) alternative to our stainless steel XCell ATF Systems.
Many of our products are early in their adoption cycle and, together with the expansion of our commercial organization and strategic acquisitions, have contributed to product revenue expansion from $41.8 million in 2012 to $104.5 million in 2016. While all product franchises have grown, our diversification strategy has resulted in our direct product sales accounting for approximately 50% of our bioprocessing revenue in 2016, compared to approximately 20% in 2012. To meet increased demand for our products, we have increased and continueorder to increase the volumecell growth and scale of manufacturing at our two manufacturing facilitiesproductivity in the United States and Sweden and plan to expand manufacturing capacity at our newly acquired manufacturing facilities in the United States and Germany.a bioreactor.
Customers use our products to produce initial quantities of drug for clinical studies and thenscale-up to larger volumes as the drug progresses to commercial production following regulatory approval. Detailed specifications for a drug’s manufacturing process are included in the applications that must be approved bybiopharmaceutical companies file for marketing approval with regulators, such as the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency, throughout the clinical trial process and prior to final commercial approval. As a result, products that become part of the manufacturing specifications of a late-stage clinical or commercial process can be very “sticky” due tosensitive given the costs and uncertainties associated with displacing them.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates
While our significant accounting policies are more fully described in the notes to our consolidated financial statements, we have identified the policies and estimates below as being critical to our business operations and the understanding of our results of operations. The impact of and any associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition,” including in the “Results of Operations” section, where such policies affect our reported and expected financial results.
Revenue recognition
Product Sales
We generate revenue from the sale of bioprocessing products, equipment devices, and related consumables used with these equipment devices to customers in the life science and biopharmaceutical industries. On product sales to end customers, Under ASC 606, “Revenue from Contracts with Customers,”revenue is recognized netwhen, or as, obligations under the terms of discounts,a contract are satisfied, which occurs when bothcontrol of the titlepromised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method or the most likely amount method, depending on the facts and riskcircumstances relative to the contract. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of loss have transferredcumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of December 31, 2018.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The Company recognizes product revenue under the terms of each customer agreement upon transfer of control to the customer, as determined by the shipping terms provided there are no uncertainties regarding acceptance, and all obligations have been completed. Generally, our product arrangements for equipment sales are multiple element arrangements, and may include services, such as installation and training, and multiple products, such as consumables and spare parts. In accordance with ASC 605-25, based on terms and conditions of the product arrangements, the Company believes that these services and undelivered products can be accounted for separately from the delivered product element as the delivered products have value to our customers onwhich occurs at a standalone basis. Accordingly, revenue for services not yet performed at the time of product shipment are deferred and recognized as such services are performed. The relative selling price of any undelivered products is also deferred at the time of shipment and recognized as revenue when these products are delivered. For product sales to distributors, the Company recognizes revenue for both equipment and consumables upon delivery to the distributors unless direct shipment to the end user’s is requested. In this case, revenue is recognized upon delivery to the end user’s location. In general, distributors are responsible for shipment to the end customer along with installation, training and acceptance of the equipment by the end customer. Shipments to distributors are not contingent upon resale of the product. We have a few longstanding customers who comprise the majority of revenue and have excellent payment histories and therefore we do not require collateral. We have had no significant write-offs of uncollectible invoicespoint in the periods presented.
At the time of sale, we also evaluate the need to accrue for warranty and sales returns. The supply agreements we have with our customers and related purchase orders identify the terms and conditions of each sale and the price of the goods ordered. Due to the nature of the sales arrangements, inventory produced for sale is tested for
quality specifications prior to shipment. Since the product is manufactured to order and in compliance with required specifications prior to shipment, the likelihood of sales return, warranty or other issues is largely diminished. Furthermore, there is no customer right of return in our sales agreements. Sales returns and warranty issues are infrequent and have not had a material impact on our financial statements historically.
Shipping and handling fees are recorded as a component of product revenue, with the associated costs recorded as a component of cost of product revenue.
Pfizer License Agreement
In December 2012, we entered into an exclusive worldwide licensing agreement (the “License Agreement”) with Pfizer, Inc. (“Pfizer”) to advance the SMA program, which is led by RG3039 and also includes backup compounds and enabling technologies. Under the terms of the License Agreement, we received $5 million from Pfizer as an upfront payment on January 22, 2013, a $1 million milestone payment on September 4, 2013 and a $1 million milestone payment on December 28, 2014. On January 26, 2015, Pfizer sent us a termination notice, and the License Agreement expired on April 25, 2015. On March 17, 2016, we terminated our licensing agreement with CureSMA and returned all patent rights and related data and materials to CureSMA.
BioMarin License Agreement
On January 21, 2014, we out-licensed our histone deacetylase inhibitor (“HDACi”) portfolio, which includes the Friedreich’s ataxia program, to BioMarin Pharmaceuticals Inc. (“BioMarin”). Under the terms of the agreement, we received an upfront payment of $2 million in January 2014 from BioMarin and a $125,675 payment in September 2014 upon tech transfer, and we have the potential to receive up to $160 million in future milestone payments for the development, regulatory approval and commercial sale of portfolio compounds included in the agreement. In addition, we are eligible to receive royalties on sales of qualified products developed.time.
Inventories
Inventories relate to our bioprocessing business. We value inventory at cost or, if lower, fair marketnet realizable value, using thefirst-in,first-out method. We review our inventory at least quarterly and record a provision for excess and obsolete inventory based on our estimates of expected sales volume, production capacity and expiration dates of raw materials,work-in-process and finished products. Expected sales volumes are determined based on supply forecasts provided by key customers for the next three to 12 months. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. Manufacturing of bioprocessing finished goods is done to order and tested for quality specifications prior to shipment.
A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying consolidated financial statements, there have been no material adjustments related to a revised estimate of inventory valuations.
Business combinations
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made, the extent of royalties to be earned in excess of the defined minimum
royalties, etc. Management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments. To the extent our estimates change in the future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration. Changes in the fair value of contingent consideration are recorded in our consolidated statement of operations. We have accrued approximately $6.1 million as of December 31, 2016 related to sales targets as part of the Refine Acquisitionoperations and the Atoll Acquisition.comprehensive income.
We use the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimatingafter-tax cash flows attributable to these assets over their respective useful lives and then discounting theseafter-tax cash flows back to a present value. We base our assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, etc. We base the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. We believe the estimated purchased customer relationships, developed technologies, trademark / tradename, patents, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.
Intangible assets and goodwill
Intangible Assetsassets
We amortize our intangible assets that have finite lives using the straight-line method. Amortization is recorded over the estimated useful lives ranging from 2 to 20 years. We review our intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Further, we also review our indefinite-lived intangible assets not subject to amortization to determine if any adverse conditions exist or a change in circumstances occurred that would indicate an impairment. If the carrying value of an asset exceeds its estimated undiscounted cash flows, we will write-down the carrying value of the intangible asset to its fair value in the period identified. In assessing fair value, we must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, we may be required to record impairment charges. We generally calculate fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
Goodwill
We test goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that
would indicate impairment and trigger an interim impairment assessment include, but are not limited, to current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Our annual impairment test date is the last day of our fiscal year, December 31 2016. The Company performed itsst. While we currently operate as one operating segment, we perform our annual impairment test over each of the Company’s onetwo reporting unitunits and concluded that goodwill was not impaired.
Accrued liabilities
We estimate accrued liabilities by identifying services performed on our behalf, estimating the level of service performed and determining the associated cost incurred for such service as of each balance sheet date. For example, we would accrue for professional and consulting fees incurred with law firms, audit and accounting
service providers and other third partythird-party consultants. These expenses are determined by either requesting those service providers to estimate unbilled services at each reporting date for services incurred or tracking costs incurred by service providers under fixed fee arrangements.
We have processes in place to estimate the appropriate amounts to record for accrued liabilities, which principally involve the applicable personnel reviewing the services provided. In the event that we do not identify certain costs that have begun to be incurred or we under or over-estimate the level of services performed or the costs of such services, the reported expenses for that period may be too low or too high. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services often require the exercise of judgment. We make these judgments based upon the facts and circumstances known at the date of the financial statements.
A change in the estimated cost or volume of services provided could result in additional accrued liabilities. Any significant unanticipated changes in such estimates could have a significant impact on our accrued liabilities and reported operating results. There have been no material adjustments to our accrued liabilities in any of the periods presented in the accompanying consolidated financial statements.
Stock-based compensation
We use the Black-Scholes option pricing model to calculate the fair value of share-based awards on the grant date.
The expected term of options granted represents the period of time for which the options are expected to be outstanding and is derived from our historical stock option exercise experience and option expiration data. For purposes of estimating the expected term, we have aggregated all individual option awards into one group, as we do not expect substantial differences in exercise behavior among our employees. The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of options granted. We determined the expected volatility based upon the historical volatility of our common stock over a period commensurate with the option’s expected term. The risk-free interest rate is the implied yield available on U.S. Treasuryzero-coupon issues with a remaining term equal to the option’s expected term on the grant date. We have never declared or paid any cash dividends on any of our capital stock and do not expect to do so in the foreseeable future. Accordingly, we use an expected dividend yield of zero to calculate the grant-date fair value of a stock option.
We recognize compensation expense on awards that vest based on service conditions on a straight-line basis over the requisite service period based upon the number of options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted by an amount of estimated forfeitures. We recognize compensation expense on awards that vest based on performance conditions based on our assessment of the probability that the performance condition will be achieved over the service period. Forfeitures represent only the unvested portion of a surrendered option. Forfeitures are estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. Based on an analysis of historical data, we have calculated an 8% annual forfeiture rate fornon-executive level employees, a 3% annual forfeiture rate for executive level employees, and a 0% forfeiture rate fornon-employee members of the Board of Directors, which we believe are reasonable assumptions to estimate forfeitures. However, the estimation of forfeitures requires significant judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
For the fiscal years ended December 31, 2016, 20152018, 2017 and 2014,2016, we recorded stock-based compensation expense of approximately $4,595,000, $3,598,000$10.2 million, $6.7 million and $1,766,000,$4.6 million, respectively, for share-based awards granted under all of the Company’s stock plans.
As of December 31, 2016,2018, there was $9,555,000$27.1 million of total unrecognized compensation cost related to unvested share-based awards. This cost is expected to be recognized over a weighted average remaining requisite service period of 2.974.53 years. We expect 719,5791,195,236 unvested options and restricted stock unitsRSUs to vest over the next five years.
Income Taxestaxes
Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We account for uncertain tax positions using a “more-likely-than-not”“more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate our tax position on a quarterly basis. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
RESULTS OF OPERATIONSResults of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.
Revenues
Total revenues for fiscal years 2016, 2015,2018, 2017, and 20142016 were comprised of the following:
| Years ended December 31, | % Change | |||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 vs. 2015 | 2015 vs. 2014 | ||||||||||||||||
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Product revenues | $ | 104,441 | $ | 83,537 | $ | 60,431 | 25 | % | 38 | % | ||||||||||
Royalty and other revenue | 100 | — | 3,117 | 100 | % | (100 | %) | |||||||||||||
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Total revenue | $ | 104,541 | $ | 83,537 | $ | 63,548 | 25 | % | 31 | % | ||||||||||
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Revenue: | ||||||||||||||||||||||||||||
Product | $ | 193,891 | $ | 141,089 | $ | 104,441 | $ | 52,802 | 37.4 | % | $ | 36,648 | 35.1 | % | ||||||||||||||
Royalty and other | 141 | 147 | 100 | (6 | ) | (4.1 | %) | 47 | 47.0 | % | ||||||||||||||||||
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Total revenue | $ | 194,032 | $ | 141,236 | $ | 104,541 | $ | 52,796 | 37.4 | % | $ | 36,695 | 35.1 | % | ||||||||||||||
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Product revenues
Historically, the majority of our bioprocessing products are sold to customers who incorporate our products into their proprietary antibody purification processes for monoclonal antibodies. These customers then sell their products directly to the pharmaceutical industry. Increasingly,Since 2016, we arehave been increasingly focused on selling our products directly to customers in the pharmaceutical industry and to our its contract manufacturers. These direct sales have increased to approximately 52%72% of our product revenue during fiscal 2016.2018. We expect that direct sales will continue to account for an increasing percentage of our product revenues. Sales of our bioprocessing products can be impacted by the timing of large-scale production orders and the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations.
Product revenues were comprised of the following (in thousands):following:
| December 31, 2016 | December 31, 2015 | December 31, 2014 | For the Years Ended December 31, | |||||||||||||||||||||
| 2018 | 2017(1) | 2016(2,3) | ||||||||||||||||||||||
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Chromatography products | $ | 45,326 | $ | 36,309 | $ | 29,520 | ||||||||||||||||||
Filtration products | 90,586 | 49,050 | 19,774 | |||||||||||||||||||||
Protein products | $ | 54,716 | $ | 52,938 | $ | 43,674 | 54,375 | 53,969 | 54,716 | |||||||||||||||
Filtration products | 19,774 | (2) | 15,676 | 6,739 | (1) | |||||||||||||||||||
Chromatography products | 29,520 | (3) | 14,613 | 9,811 | ||||||||||||||||||||
Other | 431 | 310 | 207 | 3,604 | 1,761 | 431 | ||||||||||||||||||
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Total product revenues | $ | 104,441 | $ | 83,537 | $ | 60,431 | ||||||||||||||||||
Total product revenue | $ | 193,891 | $ | 141,089 | $ | 104,441 | ||||||||||||||||||
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| (1) | 2017 revenue for filtration, chromatography and other products includes revenue related to |
| (2) | 2016 revenue for filtration products includes revenue related to |
| (3) | 2016 revenue for chromatography products includes revenue related to |
Revenue from protein products includes our Protein A ligands and cell culture growth factors. Revenue from filtration products includes our XCell ATF Systems and consumables, KrosFlo filtration products and SiusSIUS filtration products. Revenue from chromatography products includes our OPUS and OPUS PD chromatography columns, chromatography resins and ELISA test kits. Other revenue primarily consists of revenue from the sale of our operating room products to hospitals as well as freight revenues.revenue.
For fiscal 2016, bioprocessing2018, product salesrevenue increased by $20,904,000$52.8 million, or 25%37%, as compared to fiscal 2015,2017. The increase is due to the continued adoption of our products by our key bioprocessing customers and a full year of revenues derived from our acquisition of Spectrum in August 2017. Sales of our bioprocessing products are impacted by the timing of orders, development efforts at our customers orend-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend.
For 2017, product revenues increased by $36.6 million, or 35%, as compared to 2016. The increase in product revenues is due largely to increased volumes in our Filtration and Chromatography products, as well asfull year of revenue generated from Atoll and TangenX in 2017, and revenues of $19.4 million generated from the Atoll Acquisition. We sell our various bioprocessing products at different price points. The mixacquisition of products sold varies and impacts the fluctuationsSpectrum in total product revenue and cost of product revenues from period to period.
For fiscal 2015, bioprocessing product sales increased by $23,106,000 or 38% as compared to fiscal 2014, due largely to increased volumes in our Protein, Chromatography and Filtration products.2017. We sell our various bioprocessing products at different price points. The mix of products sold varies and impacts the fluctuations in total product revenue and cost of product revenues from period to period.
Royalty revenues
We recognized $2,126,000 of revenue for fiscal 2014Royalty revenues in 2018 and 2017 relate to royalties received from the out-license ofa third-party systems manufacturer associated with our HDACi portfolio to BioMarinOPUS PD chromatography columns. Royalty revenues are variable and are dependent on January 21, 2014. We also recognized $1,000,000 of revenue for fiscal 2014 from the out-license ofsales generated by our Spinal Muscular Atrophy program to Pfizer on December 28, 2012. We did not recognize any such revenue in fiscal 2015 and 2016, and we do not expect to recognize any research and license revenue or to receive any incremental funding for our therapeutic development programs going forward.partner.
Costs and operating expenses
Total costs and operating expenses for fiscal years 2016, 2015,2018, 2017 and 20142016 were comprised of the following:
| Years ended December 31, | % Change | For the Years Ended December 31, | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 vs. 2015 | 2015 vs. 2014 | 2018 | 2017 | 2016 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||
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Cost of product revenue | $ | 47,117 | $ | 35,251 | $ | 28,022 | 34 | % | 26 | % | $ | 86,531 | $ | 67,050 | $ | 47,117 | $ | 19,481 | 29.1 | % | $ | 19,933 | 42.3 | % | ||||||||||||||||||||||||
Research and development | 7,355 | 5,740 | 5,609 | 28 | % | 2 | % | 15,821 | 8,672 | 7,355 | 7,149 | 82.4 | % | 1,317 | 17.9 | % | ||||||||||||||||||||||||||||||||
Selling, general and administrative | 30,853 | 24,699 | 17,154 | 25 | % | 44 | % | 65,692 | 51,509 | 30,853 | 14,183 | 27.5 | % | 20,656 | 66.9 | % | ||||||||||||||||||||||||||||||||
Contingent consideration – fair value adjustments | 3,242 | 4,083 | 2,072 | (21 | %) | 97 | % | — | — | 3,242 | — | N/A | (3,242 | ) | (100.0 | %) | ||||||||||||||||||||||||||||||||
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Total costs and operating expenses | $ | 88,567 | $ | 69,773 | $ | 52,857 | 27 | % | 32 | % | $ | 168,044 | $ | 127,231 | $ | 88,567 | $ | 40,813 | 32.1 | % | $ | 38,664 | 43.7 | % | ||||||||||||||||||||||||
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Cost of product revenue
For fiscal 2016,2018, cost of product revenue increased $11,866,000$19.5 million, or 34%29%, as compared to fiscal 2015.2017 due primarily to the increase in product revenue mentioned above. Gross margins may fluctuate in future quarters based on expected production volume and product mix. For 2017, cost of product revenue increased $19.9 million, or 42% as compared to 2016. This increase is primarily due to the increase in product revenues noted above. For fiscal 2015,above, the sale of higher cost of product revenue increased $7,229,000 or 26% as compared to fiscal 2014. This increase is primarilySpectrum finished goods inventory due to the increased product revenue noted above.step up to fair value upon acquisition, and costs related to continuing investments in our operations to support future growth.
Gross margins were 55%, 58%53%, and 54%55% for fiscal2018, 2017 and 2016, 2015, and 2014, respectively. During fiscal 2016,2018, gross margins decreasedincreased compared to 2017 primarily due to higher product revenue. During 2017, gross margins declined slightly compared to fiscal 20152016 due to product mix, the sale of higher cost Spectrum finished good inventory due to step up to fair value upon acquisition and increasedcontinuing investments in operations to support growing demands for the bioprocessing products that we manufacture. During fiscal 2015, gross margins increased slightly compared to fiscal 2014 due to increased capacity utilization and product mix.future growth.
Research and development expenses
During fiscal2018, 2017 and 2016, 2015 and 2014, research and development expenses were related to bioprocessing products which included personnel, supplies and other research expenses. In August 2012, we announced a strategic focus on our Bioprocessing business and a simultaneous effort to find partners, out-licensing opportunities or other funding arrangements with external parties to reduce or eliminate the net expenditures on research and development activities for our therapeutic programs. In January 2013, we announced that we entered into an outlicensing agreement with Pfizer, Inc. for our Spinal Muscular Atrophy program, under an arrangement that would provide $5.0 million up front and up to $65.0 million in milestone payments, plus royalties. On January 26, 2015, Pfizer notified us that they were terminating this arrangement for convenience effective as of April 26, 2015. In January 2014, we announced that we entered into an outlicensing agreement with BioMarin Pharmaceutical Inc. for our Friedreich’s ataxia portfolio, under an arrangement that would provide $2.0 million up front and up to $160.0 million in future milestones, plus royalties.
Due to the small size of the Company and the fact that these various programs share personnel and fixed costs, we do not track all of our expenses or allocate any fixed costs by program, and therefore, have not provided an estimate of historical costs incurred by project. In addition to the legacy product research and development, the currentsingle-use XCell ATF project incurs expenses related to product development, sterilization, validation testing, and other research related expenses.
For fiscal 2016,2018, research and development expenses increased by $1,615,000$7.1 million, or 28%82%, as compared to fiscal 2015.2017. This increase is primarily driven by investments made during 2018 to expand our proteins product offerings through our development agreement with Navigo Proteins GmbH (“Navigo”). Additionally, the increase is related to product development activities acquired as part of the Spectrum acquisition and increased activity in our various bioprocessing development projects.
For 2017, research and development expenses increased by $1.3 million, or 18% as compared to 2016. This increase is related to the increased expenditures related to the continued development of our single usesingle-use XCell ATF products our OPUS resin recovery port, and other new products in development. Expenditures in 2016 included personnel, supplies and other external development, expenses.
For fiscal 2015, research and developmentas well as expenses increasedincurred by $131,000 or 2% as compared to fiscal 2014. This increase is primarily related to the timing of expenditures, including personnel, supplies and other development expenses related to our new products in development.Spectrum since acquisition.
We expect our research and development expenses in the year ending December 31, 2017, which relate to bioprocessing product development,2019 to increase moderately.in order to support new product development.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses include the costs associated with selling our commercial products and costs required to support our marketing efforts, including legal, accounting, patent, shareholder services, amortization of intangible assets and other administrative functions.
For fiscal 2016,2018, SG&A costs increased by $6,154,000$14.2 million, or 25%28%, as compared to fiscal 2015.2017. The increase is due to selling and administrative activities incurred following the Spectrum acquisition, as well as the continued buildout of our administrative infrastructure to support expected future growth and continued expansion of our customer-facing activities to drive sales of our bioprocessing products.
For 2017, SG&A costs increased by $20.7 million, or 67%, as compared to 2016. This increase is primarily due to costs related to our acquisition of Spectrum, the continuing buildout of our administrative infrastructure to support future growth, the continuing expansion of our customer-facing activities to drive sales of our bioprocessing products, a full year of costs related to the Atoll Acquisition and TangenX Acquisition and expensescosts incurred by Repligen GmbH (formerly Atoll) post-acquisition.
For fiscal 2015, SG&A costs increased by $7,545,000 or 44% as compared to fiscal 2014. This increase is primarily due to higher administrative expenses related to the implementation of an inventory accounting software package, the buildout of our administrative infrastructure to support future growth and the expansion of our customer-facing activities to drive sales of our bioprocessing products. This increase is partially offset by $818,000 of closing and transition costs incurred in 2014 related to the Refine Acquisition.Spectrum since acquisition.
Contingent Considerationconsideration
For fiscal 2016, our contingent consideration liability decreased approximately $669,000 compared to fiscal 2015. In fiscal 2016, we recorded contingent consideration expense related primarily to theour acquisitions of Refine Acquisition
and the Atoll Acquisition.Atoll. Contingent consideration related to the Refine Acquisition in 2016 is based on actual 2016 XCell ATF sales and any receipts related to the resolution, withdrawal or settlement of certain patent disputes with a third party to be paid to the former shareholders of Refine. Contingent consideration related to Atoll is based on actual 2016 sales growth compared to 2015 sales. The decrease is attributable to recording Refine contingent consideration fair value adjustments related to projected 2015 and 2016 XCell ATF sales in the previous year, while in 2016 we only recorded fair value adjustments related to 2016 sales. This decrease is partially offset by contingent consideration expense related to the Atoll Acquisition.our acquisition of Atoll. Because the contingent consideration periods related to theour acquisitions of BioFlash, Refine and Atoll acquisitions all concluded in 2016, we dodid not expect to incur any contingent consideration expense in 2017.
For fiscal 2015,Other expenses, net
The table below provides detail regarding our contingent consideration liability increased approximately $2,943,000 compared to fiscal 2014. The contingent consideration for this period stems from the BioFlash and Refine acquisitions. The increase is primarily attributed to a $4,048,000 increase in the fair value of the contingent consideration stemming from the Refine acquisition, partially offset by payments of approximately $1,139,000 to Refine and BioFlash. The contingent consideration related to BioFlash is valued using management’s estimates of royalties to be paid to the former shareholders of BioFlash based on sales of the acquired assets. The contingent consideration related to the Refine Acquisition is valued using management’s estimates of expected future milestone payments based on forecasted sales of the acquired assets and portion of any receipts that might be received in connection with the resolution, withdrawal or settlement of certain patent disputes with a third party to be paid to the former shareholders of Refine.other expenses, net:
| For the Years Ended December 31, | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
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Investment income | $ | 1,895 | $ | 371 | $ | 346 | $ | 1,524 | 410.8 | % | $ | 25 | 7.2 | % | ||||||||||||||
Interest expense | (6,709 | ) | (6,441 | ) | (3,768 | ) | (268 | ) | 4.2 | % | (2,673 | ) | 70.9 | % | ||||||||||||||
Other expenses | 262 | (687 | ) | (860 | ) | 949 | (138.1 | %) | 173 | (20.1 | %) | |||||||||||||||||
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Total other expense, net | $ | (4,552 | ) | $ | (6,757 | ) | $ | (4,282 | ) | $ | 2,205 | (32.6 | %) | $ | (2,475 | ) | 57.8 | % | ||||||||||
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Investment income
Investment income includes income earned on invested cash balances. Investment income for fiscal 2016, 2015, and 2014 was $346,000, $136,000, and $309,000, respectively. The increase of $210,000$1.5 million for 2018, as compared to 2017 was attributable to higher average invested cash balances and higher interest rates on such invested cash balances. The increase of approximately $25,000, or 154%7%, for fiscal 20162017 was primarily due to higher invested funds following the issuance of our convertible senior notesinterest rates during 20162017 compared to 2015. The decrease of $173,000 or 56% for fiscal 2015 was primarily due to lower invested funds during 2015 compared to 2014.2016. We expect investment income to vary based on changes in the amount of funds invested and fluctuation of interest rates.
Interest expense
Interest expense primarily relates to interest related to our issuance of 2.125% Convertible Senior Notes due 2021 (the “Notes”) in May 2016. Interest expense increased $0.3 million in 2018, as compared to 2017 due to the
decrease in the balance of debt issuance costs that are being amortized. As these costs decrease the carrying value of the debt increases and interest calculated based on the carrying value increases as well. The increase of $2.7 million in 2017, as compared to 2016 was due to incurring a full year of interest expense on the Notes in 2017.
Other expenses
Changes in other expense in 2018, compared to the corresponding periods in the prior year are primarily attributable to foreign currency gains related to amounts due fromnon-Swedish kronor-based customers and cash balance denominated in U.S. dollars and British pounds held by Repligen Sweden AB.
Provision (benefit) for income taxes
TheIncome tax provision (benefit) for income taxes forthe years ended December 31, 2018, 2017 and 2016 was as follows:
| For the Years Ended December 31, | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||||
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Income tax provision (benefit) | $ | 4,819 | $ | (21,105 | ) | $ | 11 | $ | 25,924 | >(100% | ) | $ | (21,116 | ) | >(100% | ) | ||||||||||||
Effective tax rate | 22.5 | % | (291.2% | ) | 0.1 | % | ||||||||||||||||||||||
For the year ended December 31, 2016 totaled $11,000. Our current2018, we recorded an income tax provision of $4,077,000$4.8 million. The effective tax rate was 22.5% in 2018 and is based upon the estimated income from the year and the composition of the income in different jurisdictions. The effective tax rate was higher than the U.S. statutory rate of 21% due to state tax effects and the impact of the Global IntangibleLow-Taxed Income tax enacted as part of the Tax Cuts and Jobs Act (the “2017 Tax Act”) enacted in December 2017.
For the year ended December 31, 2017, we recorded an income tax benefit of ($21.1) million. This income tax benefit was composed of current income tax provision of $3.6 million, offset by ($24.7) million deferred tax benefit. The 2017 tax provision of $3.6 million primarily relates to a foreign tax provision of $4,027,000.$3.3 million. Our deferred tax benefit of ($4,066,000)24.7) million is primarily due to a reduction of the valuation allowance on our deferred tax assets in the amount of $8,535,000 resulting$12.2 million from the sale of certain intellectual property to Repligen Sweden AB during 2017 and taxable temporary differences generated from the TangenX Acquisition andSpectrum acquisition. Additionally, the issuanceCompany recorded a deferred tax benefit of our convertible senior notes, partially offset by an increase in$12.8 million resulting from a reduction of the U.S. federal income tax on the Company’s net U.S. deferred tax liabilities related tostemming from new U.S. federal tax amortization of indefinite lived intangibles and the conversion option on our convertible senior notes.legislation passed in December 2017.
The provision for income taxes for the year ended December 31, 2015 totaled $4,078,000. Our current tax provision of $3,745,000 primarily relates to a foreign tax provision of $3,507,000 and $315,000 related to the resolution of our uncertain tax position for historic research and development credits and certain state apportionment matters. Our deferred tax provision of $333,000 is primarily due to an increase in deferred tax liabilities related to tax amortization of indefinite lived intangibles.
In June 2015, we received a final assessment from the Massachusetts Department of Revenue (“DOR”) regarding an examination for the years ended March 31, 2010 and 2011 and the nine months ended December 31, 2011. This examination related to the qualification of Research and Development tax credits. The final settlement resulted in a payment to the DOR of approximately $141,000.
In December 2015, we reached a negotiated settlement with the DOR regarding an appeal of an assessment made in 2013 for the years ended March 31, 2008 and 2009. The primary issues in the appeal related to the sourcing of intellectual property settlements and the qualification of Research and Development tax credits. The final settlement resulted in a payment to the DOR of approximately $1,012,000.
Non-GAAP Financial Measures
We providenon-GAAP adjusted income from operations,non-GAAP adjusted net income and adjusted EBITDA as supplemental measures to GAAP measures regarding our operating performance. These financial measures exclude the impact of certain acquisition related items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of eachnon-GAAP financial measures to its most comparable GAAP financial measures are described below.
We include this financial information because we believe these measures provide a more accurate comparison of our financial results between periods and more accurately reflect how management reviews its financial results. We excluded the impact of certain acquisition related items because we believe that the resulting charges do not accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
Non-GAAP Adjusted Income adjusted income from Operationsoperations
Non-GAAP adjusted income from operations is measured by taking income from operations as reported in accordance with GAAP and excluding acquisition and integration costs, inventorystep-up charges, intangible
amortization and contingent consideration expenses booked through our consolidated statements of comprehensive income. The following is a reconciliation of income from operations in accordance with GAAP tonon-GAAP adjusted income from operations for the years ended December 31, 20162018 and 2015 (in thousands):2017:
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
GAAP income from operations | $ | 15,974 | $ | 13,764 | ||||
Non-GAAP adjustments to net income: | ||||||||
Acquisition costs | 2,214 | — | ||||||
Contingent consideration – fair value adjustments | 3,242 | 4,083 | ||||||
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Non-GAAP adjusted income from operations | $ | 21,430 | $ | 17,847 | ||||
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GAAP income from operations | $ | 25,988 | $ | 14,005 | ||||
Non-GAAP adjustments to income from operations: | ||||||||
Acquisition and integration costs | 2,928 | 7,519 | ||||||
Inventorystep-up charges | — | 3,816 | ||||||
Intangible amortization | 10,518 | 6,215 | ||||||
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Non-GAAP adjusted income from operations | $ | 39,434 | $ | 31,555 | ||||
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Non-GAAP Adjusted Net Income adjusted net income
Non-GAAP adjusted net income is measured by taking net income as reported in accordance with GAAP and excluding acquisition and integration costs and related tax effects, inventorystep-up charges, contingent consideration expenses, intangible amortization and related tax effects,non-cash interest expense, the partial release of the valuation allowance on our deferred tax assets and the net impact of tax benefits recorded in conjunction with the TangenX Acquisitionreform legislation booked through our consolidated statements of comprehensive income. The following is a reconciliation of net income in accordance with GAAP tonon-GAAP adjusted net income for the years ended December 31, 20162018 and 2015:2017:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2018 | 2017 | ||||||||||||||||||||||||||||||
| 2016 | 2015 | Amount | Fully Diluted Earnings per Share | Amount | Fully Diluted Earnings per Share | |||||||||||||||||||||||||||
| Amount (in thousands) | Fully Diluted Earnings per Share | Amount (in thousands) | Fully Diluted Earnings per Share | (Amounts in thousands, except per share data) | ||||||||||||||||||||||||||||
GAAP net income | $ | 11,681 | $ | 0.34 | $ | 9,345 | $ | 0.28 | $ | 16,617 | $ | 0.37 | $ | 28,353 | $ | 0.72 | ||||||||||||||||
Non-GAAP adjustments to net income: | ||||||||||||||||||||||||||||||||
Acquisition costs | 2,214 | 0.07 | — | — | ||||||||||||||||||||||||||||
Contingent consideration – fair value adjustments | 3,242 | 0.10 | 4,083 | 0.12 | ||||||||||||||||||||||||||||
Acquisition and integration costs | 2,928 | 0.06 | 7,519 | 0.19 | ||||||||||||||||||||||||||||
Inventorystep-up charges | — | — | 3,816 | 0.10 | ||||||||||||||||||||||||||||
Intangible amortization | 10,518 | 0.23 | 6,215 | 0.16 | ||||||||||||||||||||||||||||
Non-cash interest expense | 2,274 | 0.07 | — | — | 4,248 | 0.09 | 3,977 | 0.10 | ||||||||||||||||||||||||
Net tax benefit from Atoll and TangenX acquisitions | (4,269 | ) | (0.13 | ) | — | — | ||||||||||||||||||||||||||
Tax effect of intangible amortization and acquisition costs | (979 | ) | (0.02 | ) | (882 | ) | (0.02 | ) | ||||||||||||||||||||||||
Release of valuation allowance on deferred tax assets | — | — | (12,236 | ) | (0.31 | ) | ||||||||||||||||||||||||||
Net impact of tax reform legislation | — | — | (9,586 | ) | (0.24 | ) | ||||||||||||||||||||||||||
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Non-GAAP adjusted net income | $ | 15,142 | $ | 0.44 | $ | 13,428 | $ | 0.40 | $ | 33,332 | $ | 0.73 | $ | 27,176 | $ | 0.69 | ||||||||||||||||
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Note that earnings per share amounts may not add due to rounding.
Adjusted EBITDA
Adjusted EBITDA is measured by taking net income as reported in accordance with GAAP, excluding investment income, interest expense, taxes, depreciation and amortization, and excluding acquisition and integration costs, inventorystep-up charges and contingent consideration expenses booked through our consolidated statements of comprehensive income. The following is a reconciliation of net income in accordance with GAAP to adjusted EBITDA for years ended December 31, 20162018 and 2015 (in thousands):2017:
| For the Years Ended December 31, | ||||||||||||||||
| Year ended December 31, | 2018 | 2017 | ||||||||||||||
| 2016 | 2015 | (Amounts in thousands) | ||||||||||||||
GAAP net income | $ | 11,681 | $ | 9,345 | $ | 16,617 | $ | 28,353 | ||||||||
Non-GAAP EBITDA adjustments to net income: | ||||||||||||||||
Investment income | (346 | ) | (136 | ) | (1,895 | ) | (371 | ) | ||||||||
Interest expense | 3,768 | 32 | 6,709 | 6,441 | ||||||||||||
Tax provision | 11 | 4,078 | 4,819 | (21,105 | ) | |||||||||||
Depreciation | 3,269 | 2,996 | 5,213 | 4,237 | ||||||||||||
Amortization | 2,052 | 1,600 | 10,565 | 6,215 | ||||||||||||
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EBITDA | 20,435 | 17,915 | 42,028 | 23,770 | ||||||||||||
Other non-GAAP adjustments: | ||||||||||||||||
Acquisition costs | 2,214 | — | ||||||||||||||
Contingent consideration – fair value adjustments | 3,242 | 4,083 | ||||||||||||||
Acquisition and integration costs | 2,928 | 7,519 | ||||||||||||||
Inventorystep-up charges | — | 3,816 | ||||||||||||||
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Adjusted EBITDA | $ | 25,891 | $ | 21,998 | $ | 44,956 | $ | 35,105 | ||||||||
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Liquidity and capital resourcesCapital Resources
We have financed our operations primarily through revenues derived from product sales, research grants, proceeds and royalties from license arrangements, the issuance of the Notes in May 2016 and the issuance of senior convertible notescommon stock in May 2016.our July 2017 public offering. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue.
At December 31, 2016,2018, we had cash and cash equivalents of $193.8 million compared to cash, cash equivalents and marketable securities of $141,780,000 compared to $73,407,000$173.8 million at December 31, 2015. In fiscal 2016 we utilized $8,767,000 of cash (net of cash received) in the Atoll Acquisition and $35,847,000 of cash (net of cash received) in the TangenX Acquisition.2017. A deposit for our leased office spacein Waltham, Massachusetts of $450,000 is$0.5 million was classified as restricted cash and iswas not included in cash and marketable securities totals for December 31, 2016 or2016. There were no restrictions on cash for December 31, 2015.2018 and 2017.
In July 2017, we completed a public offering in which 2,807,017 shares of our common stock were sold to the public at a price of $42.75 per share. The underwriters were granted an option, which they exercised in full, to purchase an additional 421,052 shares of our common stock. The total proceeds from this offering, net of underwriting discounts, commissions and other offering expenses, totaled $129.3 million.
On AprilAugust 1, 2016, pursuant to the terms2017, we completed our acquisition of a Share Purchase Agreement dated as of March 31, 2016, Repligen Sweden AB, our wholly-owned subsidiary, acquired Atoll from UV-Cap GmbH & Co. KG (the “Seller”). Under the terms of the Share Purchase Agreement, Repligen Sweden paid to the Seller in considerationSpectrum for all of the equity interests in Atoll a purchase price of €7.8$112.8 million ($8.8 million) in cash (net of cash received) and 538,700 shares of our common stock. The Share Purchase Agreement includes a future contingent payment by Repligen Sweden to the Seller consisting of €1.0 million ($1.1 million) in cash if Atoll’s revenue increases by a specified amount from calendar year 2015 to calendar year 2016.
On May 24, 2016, we received net proceeds of $111,070,000 from the issuance of our 2.125% Convertible Senior Notes due 2021 (the “Notes”). The Notes bear interest at the rate of 2.125% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016.
The Notes will mature on June 1, 2021, unless earlier repurchased, redeemed or converted in accordance with their terms. Prior to March 1, 2021, the Notes will be convertible at the option of holders of the Notes only upon satisfaction of certain conditions and during certain periods, and thereafter, the Notes will be convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, holders of the Notes will receive6,153,995 unregistered shares of the Company’s common stock, cash or a combination thereof, atstock.
During the Company’s election.
The Company will not havefourth quarter of 2018, the right to redeem the Notes prior to June 5, 2019, but may redeem the Notes, at its option, in whole or in part, on any business day on or after June 5, 2019 and prior to the maturity date if the last reported saleclosing price of the Company’s common stock has been at leastexceeded 130% of the conversion price then in effectof the Notes for at leastmore than 20 trading days (whether or not consecutive) during anyof the last 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption. The redemption price will be equal to 100%days of the principal amountquarter. As a result, the Notes are convertible at the option of the principal amountholders of the Notes to be redeemed plus accruedduring the first quarter of 2019. The Notes have a face value of $115.0 million and unpaid interest to, but excluding,a carrying value of $103.5 million and are classified as current liabilities on the redemption date.
On December 14, 2016, pursuant to the terms of a Share Purchase Agreement datedCompany’s consolidated balance sheet as of December 14, 2016, we acquired TangenX Technology Corporation (“TangenX”), from Novasep SAS31, 2018. It is the Company’s policy and John Connors. Underintent to settle the termsface value of the Share Purchase Agreement, we paid $35.9 millionNotes in cash (netand any excess conversion premium in shares of cash received) in consideration for allour common stock. Between the end of the equity interests in TangenX.fourth quarter and the date of this filing, none of the Notes have been converted by the holders of such Notes.
Cash flows
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Cash provided by (used in) | Year ended December 31, 2016 | Increase / (Decrease) | Year ended December 31, 2015 | Increase / (Decrease) | Year ended December 31, 2014 | |||||||||||||||||||||||||||||||||||
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| 2018 | 2017 | 2016 | $ Change | $ Change | ||||||||||||||||||||||||||||||||||||
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Operating activities | $ | 7,521 | $ | (7,532 | ) | $ | 15,053 | $ | (3,348 | ) | $ | 18,401 | $ | 32,770 | $ | 17,451 | $ | 7,521 | $ | 15,319 | $ | 9,930 | ||||||||||||||||||
Investing activities | (49,194 | ) | (53,985 | ) | 4,791 | 24,583 | (19,792 | ) | (14,037 | ) | (98,696 | ) | (49,194 | ) | 84,659 | (49,502 | ) | |||||||||||||||||||||||
Financing activities | 112,113 | 111,346 | 767 | (913 | ) | 1,680 | 3,407 | 129,945 | 112,113 | (126,538 | ) | 17,832 | ||||||||||||||||||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,077 | ) | 2,376 | (2,299 | ) | (4,453 | ) | 4,675 | ||||||||||||||||||||||||||||||||
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Net increase in cash, cash equivalents and restricted cash | $ | 20,063 | $ | 51,076 | $ | 68,141 | $ | (31,013 | ) | $ | (17,065 | ) | ||||||||||||||||||||||||||||
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Operating activities
For fiscal2018, our operating activities provided cash of $32.8 million reflecting net income of $16.6 million andnon-cash charges totaling $30.3 million primarily related to depreciation, amortization,non-cash interest expense, deferred tax expense and stock-based compensation charges. An increase in receivables consumed $8.7 million of cash and was primarily driven by the 37%year-to-date increase in revenues. An increase in inventory levels to accommodate future revenue growth consumed $4.0 million of cash, payment of accrued liabilities consumed $1.4 million of cash and an increase in other assets used $1.8 million. This utilization of cash is partially offset by $2.3 million of cash provided by an increase in accounts payable due to the timing of payments to vendors. The remaining cash flow used in operations resulted from net unfavorable changes in various other working capital accounts.
For 2017, our operating activities provided cash of $17.5 million, reflecting net income of $28.4 million offset by netnon-cash charges totaling $3.4 million comprised mainly of depreciation, amortization, stock-based compensation charges and deferred tax benefits. Increases in accounts receivable consumed $6.9 million of cash, which is based on timing of revenues billed to and payments from customers. Decreases in accounts payable and accrued liabilities consumed $1.2 million of cash due to timing of payments to vendors.
For 2016, our operating activities provided cash of $7,521,000$7.5 million reflecting net income of $11,681,000$11.7 million andnon-cash charges totaling $11,345,000$11.3 million comprised mainly of depreciation, amortization, stock-based compensation charges, deferred tax benefits and the revaluation of contingent consideration. Increases in accounts receivable and inventories consumed $9,385,000$9.4 million of cash. Decreases in accounts payable and accrued liabilities consumed $5,840,000 of cash.
For fiscal 2015, our operating activities provided cash of $15,053,000 reflecting net income of $9,345,000 and non-cash charges totaling $12,158,000 including depreciation, amortization, stock-based compensation charges, deferred tax changes and the revaluation of contingent consideration. Increases in accounts payable and long-term liabilities provided an additional $5,139,000 of cash. Increases in accounts receivable, inventories and prepaid expenses and other current assets consumed $10,155,000 of cash. Decreases in accrued liabilities consumed $1,592,000 of cash.
For fiscal 2014, our operating activities provided cash of $18,401,000 reflecting net income of $8,170,000 and non-cash charges totaling $8,188,000 including depreciation, amortization, stock-based compensation charges, deferred tax asset valuation allowance changes and the revaluation of contingent consideration. Decreases in royalties and other receivables and increases in accounts payable provided an additional $6,557,000 and $2,288,000 of cash. Increases in accounts receivable, inventories and prepaid expenses and other current assets consumed $3,277,000 of cash. Decreases in accrued liabilities and long term liabilities consumed $3,525,000$5.8 million of cash.
Investing activities
Our investing activities consumed $14.0 million of cash, including $12.8 million for capital expenditures. Of those expenditures, $2.1 million represented capitalized costs related to ourinternal-use software. In addition, a capitalized payment for developed technology of $1.3 million was paid to Navigo in 2018 to assist in expanding our proteins product offerings through a development agreement.
For fiscal 2016,2017, our investing activities consumed $49,194,000$98.7 million of cash. We used $8,767,000$112.8 million in cash (net of cash received) for the Atoll Acquisition and $35,847,000our acquisition of Spectrum. Fixed asset additions consumed $5.5 million, as we continued to increase our manufacturing capacity. Net redemptions of marketable securities provided $19.6 million of cash in 2017.
For 2016, our investing activities consumed $49.2 million of cash. We used $8.8 million in cash (net of cash received) for the TangenX Acquisition.our acquisition of Atoll and $35.8 million (net of cash received) for our acquisition of TangenX. Fixed asset additions consumed $4,325,000,$4.3 million, as we increased the manufacturing capacity of our facilities in the United States and Sweden. Net purchases of marketable securities consumed $300,000$0.3 million of cash in fiscal 2016.
In fiscal 2015, our investing activities provided $4,791,000 of cash, comprised of $7,419,000 of net redemptions of marketable securities, offset by $2,628,000 of fixed asset additions.
In fiscal 2014, our investing activities consumed $19,792,000 of cash, comprised of $21,236,000 for the Refine Acquisition, $5,602,000 of fixed asset additions as we completed the second phase of our Waltham facility expansion and a $250,000 increase in restricted cash related to our amended lease for our Waltham facility, partially offset by $7,296,000 of net redemptions of marketable securities.
Financing activities
In 2018, our financing activities provided $3.4 million of cash. We received proceeds of $3.4 million from stock option exercises, partially offset by cash outlays of $11,000 related to the partial conversion of the Notes in the first quarter of 2018.
In July 2017, we received net proceeds of $129.3 million from the issuance of common stock. In May 2016, we received net proceeds of $111,070,000$111.1 million from the issuance of our senior convertible notes. Exercises of stock options provided cash receipts of $1,841,000, $866,000$2.4 million and $1,680,000$1.8 million in fiscal2017 and 2016, 2015 and 2014, respectively. Cash payments to Atoll and Refine and BioFlash in 20162017 totaled $4,105,000,$5.1 million, of which $798,000$1.7 million related to the fair value of these liabilities as of the respective acquisition dates and is included as part of financing activities. PaymentsCash payments to Refine and BioFlash in 2015 related to achieving 2014 sales goals2016 totaled $1,000,000,$4.1 million, of which $99,000$0.8 million related to the fair value of this liabilitythese liabilities as of the respective acquisition datedates and is included as part of financing activities. The remaining amounts are included as an offset to our cash provided by operating activities.
Off-balance sheet arrangements Sheet Arrangements
We do not have any special purpose entities oroff-balance sheet financing arrangements.
Contractual obligationsObligations
As of December 31, 2016,2018, we had the following fixed obligations and commitments (in thousands):commitments:
| Payments Due By Period | Total | Less than one year | One to three years | Three to five years | Over five years | |||||||||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years | (Amounts in thousands) | |||||||||||||||||||||||||||||||||||
Convertible senior notes | $ | 114,989 | $ | 114,989 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||
Operating lease obligations | $ | 14,304 | $ | 2,523 | $ | 5,075 | $ | 4,970 | $ | 1,736 | 18,034 | 4,021 | 6,862 | 3,529 | 3,622 | |||||||||||||||||||||||||
Purchase obligations(1) | 10,008 | 10,008 | — | — | — | 29,043 | 29,043 | — | — | — | ||||||||||||||||||||||||||||||
Contingent consideration(2) | 6,119 | 6,119 | — | — | — | |||||||||||||||||||||||||||||||||||
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Total | $ | 30,431 | $ | 18,650 | $ | 5,075 | $ | 4,970 | $ | 1,736 | $ | 162,066 | $ | 148,053 | $ | 6,862 | $ | 3,529 | $ | 3,622 | ||||||||||||||||||||
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| (1) | Primarily represents purchase orders for the procurement of raw material for manufacturing. |
The table excludes a liability for uncertain tax positions totaling $2.9 million since we cannot currently make a reliable estimate of the period in which the liability will be payable, if ever. Please see Note 7,“Income Taxes,”to our consolidated financial statements for more information.
Capital requirementsRequirements
Our future capital requirements will depend on many factors, including the following:
the expansion of our bioprocessing business;
the ability to sustain sales and profits of our bioprocessing products;
our ability to acquire additional bioprocessing products;
the extent of any share repurchase activity; and
the success of any proposed financing efforts.
Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 24 months. We expect operating expenses
in the year ending December 31, 20172019 to increase as we continue to expand our bioprocessing business. We expect to incur continued spending related to the development and expansion of our bioprocessing product lines and expansion of our commercial capabilities for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property, plant and equipment, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, and continued investment in our intellectual property portfolio.
We plan to continue to invest in our bioprocessing business and in key research and development activities associated with the development of new bioprocessing products. We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of any such acquisition-related financing needs or lower demand for our products, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt funding. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, if at all.
Net operating loss carryforwardsOperating Loss Carryforwards
At December 31, 2016,2018, we had utilized our remaining $19.5 million of net operating loss carryforwards of approximately $48,550,000 andcarryforwards. We had business tax credits carryforwards of approximately $2,187,000$2.9 million available to reduce future federal income taxes, if any. The net operating loss and business tax credits carryforwards will continue to expire at various dates through December 2036.2038. Net operating loss carryforwards and available tax credits are subject to review and possible adjustment by the Internal Revenue Service, state and foreign jurisdictions and may be limited in the event of certain changes in the ownership interest of significant stockholders.
Foreign earningsEarnings
As of December 31, 2018, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $72.4 million. Because $58.0 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the 2017 Tax Act, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. At December 31, 2016,2018, we have not provided for U.S. income taxes or foreign withholding taxes on outside basis differences of our foreign subsidiaries, of approximately $43,679,000 as we have the ability and intent to indefinitely reinvest the undistributed earnings of Repligen Sweden, Repligen GmbH and Repligen Singapore Pte. Ltd.,our foreign subsidiaries, and there are no needs for such earnings in the U.S.United States that would contradict our plan to indefinitely reinvest.
Effects of inflationInflation
Our assets are primarily monetary, consisting of cash, cash equivalents and marketable securities. Because of their liquidity, these assets are not directly affected by inflation. Since we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest rate riskRate Risk
We have historically held investments in commercial paper, U.S. Government and agency securities as well as corporate bonds and other debt securities. As a result, we arehave been exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer or otherwise. We do not have any such investments as of December 31, 2018. As a result, a hypothetical 100 basis point increase in interest rates would have no effect on our cash position as of December 31, 2018.
We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. A hypothetical 100 basis point increase in interest rates would result in an approximate $64,000 decrease in the fair value of our investments as of December 31, 2016. We believe however, that the conservative nature of our investments mitigates our interest rate exposure, and our investment policy limits the amount of our credit exposure to any one issue, issuer (with the exception of U.S. agency obligations) and type of instrument. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is limited.
Foreign exchange riskExchange Risk
Transactions byThe reporting currency of the Company is U.S. dollars, and the functional currency of each of our subsidiary, Repligen Sweden, may be denominated inforeign subsidiaries is its respective local currency. Our foreign currency exposures include the Swedish krona,kronor, Euro, British pound, sterling, U.S. dollars, or in Euros whileChinese yuan, Japanese yen, Singapore dollar, South Korean won and Indian rupee; of these, the entity’s functionalprimary foreign currency isexposures are the Swedish krona. Transactions by our subsidiary, Repligen GmbH, may be denominated in Euros or U.S. dollars while the entity’s functional currency is the Euro. Certain sales transactions related to XCell ATF System products are denominated in foreign currencies.kronor, Euro and British pound. Exchange gains or losses resulting from the translation between the transactional currency and the functional currency of Repligen Sweden, Repligen GmbH and XCell ATF System product sales are included in our consolidated statements of operations. The functional currency of the Company is U.S. dollars.net income. Fluctuations in exchange rates may adversely affect our results of operations, financial position and cash flows. We currently do not seek to hedge this exposure to fluctuations in exchange rates.
Although a majority of our contracts are denominated in U.S. dollars, 40%28% and 33%23% of total revenues during fiscal 20162018 and 2015,2017, respectively, were denominated in foreign currencies while 22%15% and 23%24% of our costs and expenses during fiscal 20162018 and 2015,2017, respectively, were denominated in foreign currencies, primarily operating expenses associated with cost of revenue, sales and marketing and general and administrative. In addition, 26%24% and 43%18% of our consolidated tangible assets were subject to foreign currency exchange fluctuations as of each of December 31, 20162018 and 2015,2017, respectively, while 2%6% and 21%8% of our consolidated liabilities were exposed to foreign currency exchange fluctuations as of each of December 31, 20162018 and 2015,2017, respectively.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Financial statements and supplementary data required by Item 8 are set forth at the pages indicated in Item 15(a) below and are incorporated herein by reference.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures.
The Company’s management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) or15d-15(e) under the Exchange Act and as required by paragraph (b) of Rules13a-15 or
15d-15 under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
(b) Report of Management on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined inRule 13a-15(f) and15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.2018. In making this assessment, management used the criteria established inInternal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO).
Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Atoll GmbH acquired on April 1, 2016 or TangenX Technology Corporation acquired on December 14, 2016, which are included in the December 31, 2016 consolidated financial statements of Repligen Corporation and constituted $70,569,000 of total assets as of December 31, 2016 and $3,543,000 of revenues for the year then ended.
Subject to the foregoing, based on this assessment, our management concluded that, as of December 31, 2016,2018, our internal control over financial reporting is effective based on those criteria. Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form10-K, has issued an attestation report on our internal control over financial reporting as of December 31, 2016.2018.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(c) Attestation Report of the Independent Registered Public Accounting Firm.
Our independent registered public accounting firm that audited the financial statements included in this annual report has issued an attestation report on our internal controls over financial reporting. This report appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of Repligen Corporation:
Opinion on Internal Control over Financial Reporting
We have audited Repligen Corporation’s internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Repligen Corporation’sCorporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying 10-K, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Atoll GmbH acquired on April 1, 2016 or TangenX Technology Corporation acquired on December 14, 2016, which are included in the December 31, 2016 consolidated financial statements of Repligen Corporation and constituted $70,569,000 of total assets as of December 31, 2016 and $3,543,000 of revenues for the year then ended. Our audit of internal control over financial reporting of Repligen Corporation also did not include an evaluation of the internal control over financial reporting of Atoll GmbH or TangenX Technology Corporation.
In our opinion, Repligen Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Repligen Corporation as of December 31, 2016 and 2015, and
the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 of Repligen Corporation and our report dated February 22, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 23, 2017March 1, 2019
(d) Changes in Internal Control Over Financial Reporting
We acquired AtollThere have been no changes in April 2016 and TangenX in December 2016. The financial results of Atoll and TangenX are included in our consolidated financial statements as of December 31, 2016 and for the year then ended and represented approximately $70,569,000 of our total assets as of December 31, 2016 and $3,543,000 of revenues for the year ended December 31, 2016. As these acquisitions occurred during 2016, the scope of our assessment of our internal control over financial reporting does not include Atoll and TangenX. This exclusion isidentified in accordanceconnection with the SEC’s general guidanceevaluation required by paragraph (d) of Securities Exchange Act Rule13a-15 or Rule15d-15 that an assessment of a recently acquired business may be omitted from our scopeoccurred in the year of acquisition.
Except as otherwise described above, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterthree months ended December 31, 20162018 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this Annual Report on Form10-K:
(a) (1)Financial Statements:
The financial statements required by this item are submitted in a separate section beginning on page 4253 of this Report, as follows:
| Page | ||||
Consolidated Balance Sheets as of December 31, | ||||
(a) (2)Financial Statement Schedules:
None.
(a) (3)Exhibits:
The Exhibits which are filed as part of this Annual Report or which are incorporated by reference are set forth in the Exhibit Index hereto.
EXHIBIT INDEX
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| Lease Between Repligen Corporation as Tenant and West Seyon LLC as Landlord, 35 Seyon Street, Waltham, MA | |||
| Strategic Supplier Alliance Agreement dated January 28, 2010 by and between Repligen Corporation and GE HealthcareBio-Sciences | |||
| Strategic Supplier Alliance Agreement – Contract Manufacturing, by and between GE HealthcareBio-Sciences AB and Repligen Sweden AB (assuccessor-in-interest to Novozymes Biopharma Sweden AB), dated as of July 7, 2011 | |||
| Lease Between Repligen Sweden AB (assuccessor-in-interest to Novozymes Biopharma Sweden AB) as Tenant andi-parken i Lund AB as Landlord, St. Lars Vag 47, 220 09 Lund, Sweden (filed as Exhibit 10.18 to Repligen Corporation’s Transition Report on Form10-K for the year ended December 31, 2011 and incorporated herein by reference). | |||
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| Repligen Corporation Amended and Restated 2012 Stock Option and Incentive Plan (filed as Exhibit 99.1 to Repligen Corporation’s FormS-8 filed on June 2, 2014 and incorporated herein by reference). | ||
| Repligen CorporationNon-Employee Directors’ Deferred Compensation Plan. (filed as Exhibit 10.16 to Repligen Corporation’s Annual Report on Form10-K for the year ended December 31, 2014 and incorporated by reference). | ||
| Letter Agreement, dated as of June 10, 2014, by and between Repligen Corporation and Jon K. Snodgres (filed as Exhibit 10.1 to Repligen Corporation’s Current Report on Form8-K filed on July 15, 2014 and incorporated herein by reference). | ||
| Employment Agreement, dated as of February 26, 2015, by and between Repligen Corporation and Tony J. Hunt (filed as Exhibit 10.1 to Repligen Corporation’s Current Report on Form8-K/A filed on March 2, 2015 and incorporated herein by reference). | ||
| # | Confidential treatment obtained as to certain portions. |
| * | Management contract or compensatory plan or arrangement. |
| + | Filed herewith. |
The exhibits listed above are not contained in the copy of the Annual Report on Form10-K distributed to stockholders. Upon the request of any stockholder entitled to vote at the 20152019 annual meeting, the Registrant will furnish that person without charge a copy of any exhibits listed above. Requests should be addressed to Repligen Corporation, 41 Seyon Street, Waltham, MA 02453.
| ITEM 16. | 10-K SUMMARY |
We may voluntarily include a summary of information required by Form10-K under this Item 16. We have elected not to include such summary information.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| REPLIGEN CORPORATION | ||||||
| Date: | By: | /S/ TONY J. HUNT | ||||
Tony J. Hunt President and Chief Executive Officer | ||||||
POWER OF ATTORNEY
KNOW ALL MENPERSONS BY THESE PRESENTS, that each person whose signature appears below hereby makes, constitutes and appoints Tony J. Hunt and Jon K. Snodgres with full power to act without the other, his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments to this Form10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto saidattorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that saidattorney-in-fact and agents of any of them, or any substitute or substitutes, lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/S/ TONY J. HUNT Tony J. Hunt | President, Chief Executive Officer and Director (Principal executive officer) | |||
/S/ JON K. SNODGRES Jon K. Snodgres | Chief Financial Officer (Principal financial and accounting officer) | |||
/S/ KAREN DAWES Karen Dawes | Chairperson of the Board | |||
/S/ NICOLAS M. BARTHELEMY Nicolas M. Barthelemy | Director | |||
/S/ GLENN L. COOPER Glenn L. Cooper, M.D. | Director | |||
/S/ JOHN G. COX John G. Cox | Director | |||
/S/ GLENN P. MUIR Glenn P. Muir | Director | |||
/S/ THOMAS F. RYAN, JR. Thomas F. Ryan, Jr. | Director | |||
| Page | ||||
Consolidated Balance Sheets as of December 31, | ||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of Repligen Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Repligen Corporation (the Company) as of December 31, 20162018 and 2015,2017, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. These2018, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Repligen Corporationthe Company at December 31, 20162018 and 2015,2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016,2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Repligen Corporation’sthe Company’s internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017March 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002
Boston, Massachusetts
February 23, 2017March 1, 2019
REPLIGEN CORPORATION
(Amounts in thousands, except share data)
| (in thousands, except share data) | December 31, 2016 | December 31, 2015 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 122,233 | $ | 54,092 | ||||
Marketable securities | 19,547 | 17,682 | ||||||
Accounts receivable, less reserve for doubtful accounts of $23 and $31, respectively | 15,194 | 11,300 | ||||||
Royalties and other receivables | 839 | 82 | ||||||
Inventories, net | 24,696 | 17,998 | ||||||
Prepaid expenses and other current assets | 1,644 | 2,098 | ||||||
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Total current assets | 184,153 | 103,252 | ||||||
Property, plant and equipment, net | 14,956 | 13,801 | ||||||
Long-term marketable securities | — | 1,633 | ||||||
Intangible assets, net | 29,806 | 12,755 | ||||||
Goodwill | 59,548 | 14,346 | ||||||
Restricted cash | 450 | 450 | ||||||
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Total assets | $ | 288,913 | $ | 146,237 | ||||
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Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,061 | $ | 6,724 | ||||
Accrued liabilities | 16,014 | 12,057 | ||||||
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Total current liabilities | 21,075 | 18,781 | ||||||
Convertible senior notes, net | 95,272 | — | ||||||
Other long-term liabilities | 3,802 | 4,708 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Common stock, $.01 par value, 80,000,000 shares authorized, 33,844,074 shares at December 31, 2016 and 32,949,353 shares at December 31, 2015 issued and outstanding | 338 | 329 | ||||||
Additional paid-in capital | 242,036 | 202,527 | ||||||
Accumulated other comprehensive loss | (13,749 | ) | (8,566 | ) | ||||
Accumulated deficit | (59,861 | ) | (71,542 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 168,764 | 122,748 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 288,913 | $ | 146,237 | ||||
|
|
|
| |||||
| December 31, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 193,822 | $ | 173,759 | ||||
Accounts receivables, less reserve for doubtful accounts of $227 and $58 at December 31, 2018 and December 31, 2017, respectively | 33,015 | 27,585 | ||||||
Royalties and other receivables | 136 | 153 | ||||||
Unbilled receivables | 2,602 | — | ||||||
Inventories, net | 42,263 | 39,004 | ||||||
Prepaid expenses and other current assets | 3,901 | 2,281 | ||||||
|
|
|
| |||||
Total current assets | 275,739 | 242,782 | ||||||
Property, plant and equipment, net | 32,180 | 22,417 | ||||||
Intangible assets, net | 135,438 | 144,753 | ||||||
Goodwill | 326,735 | 327,333 | ||||||
Deferred tax assets | 4,355 | — | ||||||
Other assets | 174 | 6,234 | ||||||
|
|
|
| |||||
Total assets | $ | 774,621 | $ | 743,519 | ||||
|
|
|
| |||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 10,489 | $ | 7,282 | ||||
Accrued liabilities | 15,865 | 17,929 | ||||||
Convertible senior notes, current portion | 103,488 | — | ||||||
|
|
|
| |||||
Total current liabilities | 129,842 | 25,211 | ||||||
Convertible senior notes, net | — | 99,250 | ||||||
Deferred tax liabilities | 25,086 | 25,167 | ||||||
Other liabilities, long-term | 4,125 | 2,343 | ||||||
|
|
|
| |||||
Total liabilities | 159,053 | 151,971 | ||||||
|
|
|
| |||||
Commitments and contingencies (Note 9) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Common stock, $0.01 par value; 80,000,000 shares authorized; 43,917,378 shares at December 31, 2018 and 43,587,079 shares at December 31, 2017 issued and outstanding | 439 | 436 | ||||||
Additionalpaid-in capital | 642,590 | 628,983 | ||||||
Accumulated other comprehensive loss | (11,893 | ) | (6,363 | ) | ||||
Accumulated deficit | (15,568 | ) | (31,508 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 615,568 | 591,548 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 774,621 | $ | 743,519 | ||||
|
|
|
| |||||
The accompanying notes are an integral part of these consolidated financial statements.
REPLIGEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share data)
| (in thousands, except share and per share data) | Years ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Revenue: | ||||||||||||
Product revenue | $ | 104,441 | $ | 83,537 | $ | 60,431 | ||||||
Royalty and other revenue | 100 | — | 3,117 | |||||||||
|
|
|
|
|
| |||||||
Total revenue | 104,541 | 83,537 | 63,548 | |||||||||
Operating expenses: | ||||||||||||
Cost of product revenue | 47,117 | 35,251 | 28,022 | |||||||||
Cost of royalty and other revenue | — | — | — | |||||||||
Research and development | 7,355 | 5,740 | 5,609 | |||||||||
Selling, general and administrative | 30,853 | 24,699 | 17,154 | |||||||||
Contingent consideration – fair value adjustments | 3,242 | 4,083 | 2,072 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 88,567 | 69,773 | 52,857 | |||||||||
|
|
|
|
|
| |||||||
Income from operations | 15,974 | 13,764 | 10,691 | |||||||||
Investment income | 346 | 136 | 309 | |||||||||
Interest expense | (3,768 | ) | (32 | ) | (50 | ) | ||||||
Other income (expense) | (860 | ) | (445 | ) | 188 | |||||||
|
|
|
|
|
| |||||||
Income before income taxes | 11,692 | 13,423 | 11,138 | |||||||||
Income tax provision | 11 | 4,078 | 2,968 | |||||||||
|
|
|
|
|
| |||||||
Net income | $ | 11,681 | $ | 9,345 | $ | 8,170 | ||||||
|
|
|
|
|
| |||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.35 | $ | 0.28 | $ | 0.25 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 0.34 | $ | 0.28 | $ | 0.25 | ||||||
|
|
|
|
|
| |||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 33,572,883 | 32,881,940 | 32,497,657 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 34,098,898 | 33,577,091 | 33,263,667 | |||||||||
|
|
|
|
|
| |||||||
Other comprehensive income: | ||||||||||||
Unrealized gain (loss) on investments | 6 | 22 | (28 | ) | ||||||||
Foreign currency translation loss | (5,189 | ) | (2,815 | ) | (7,743 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 6,498 | $ | 6,552 | $ | 399 | ||||||
|
|
|
|
|
| |||||||
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
Revenue: | ||||||||||||
Products | $ | 193,891 | $ | 141,089 | $ | 104,441 | ||||||
Royalty and other revenue | 141 | 147 | 100 | |||||||||
|
|
|
|
|
| |||||||
Total revenue | 194,032 | 141,236 | 104,541 | |||||||||
|
|
|
|
|
| |||||||
Costs and operating expenses: | ||||||||||||
Cost of product revenue | 86,531 | 67,050 | 47,117 | |||||||||
Research and development | 15,821 | 8,672 | 7,355 | |||||||||
Selling, general and administrative | 65,692 | 51,509 | 30,853 | |||||||||
Contingent consideration – fair value adjustments | — | — | 3,242 | |||||||||
|
|
|
|
|
| |||||||
Total costs and operating expenses | 168,044 | 127,231 | 88,567 | |||||||||
|
|
|
|
|
| |||||||
Income from operations | 25,988 | 14,005 | 15,974 | |||||||||
|
|
|
|
|
| |||||||
Other income (expenses): | ||||||||||||
Investment income | 1,895 | 371 | 346 | |||||||||
Interest expense | (6,709 | ) | (6,441 | ) | (3,768 | ) | ||||||
Other income (expenses) | 262 | (687 | ) | (860 | ) | |||||||
|
|
|
|
|
| |||||||
Other expenses, net | (4,552 | ) | (6,757 | ) | (4,282 | ) | ||||||
|
|
|
|
|
| |||||||
Income before income taxes | 21,436 | 7,248 | 11,692 | |||||||||
Income tax provision (benefit) | 4,819 | (21,105 | ) | 11 | ||||||||
|
|
|
|
|
| |||||||
Net income | $ | 16,617 | $ | 28,353 | $ | 11,681 | ||||||
|
|
|
|
|
| |||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.38 | $ | 0.74 | $ | 0.35 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 0.37 | $ | 0.72 | $ | 0.34 | ||||||
|
|
|
|
|
| |||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 43,767 | 38,234 | 33,573 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 45,471 | 39,150 | 34,099 | |||||||||
|
|
|
|
|
| |||||||
Net income | $ | 16,617 | $ | 28,353 | $ | 11,681 | ||||||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustment | (5,530 | ) | 7,381 | (5,189 | ) | |||||||
Unrealized gain on marketable securities | — | 5 | 6 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 11,087 | $ | 35,739 | $ | 6,498 | ||||||
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
REPLIGEN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share data)
| (in thousands, except share data) | Common Stock | Additional Paid- in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Stockholders’ Equity | |||||||||||||||||||
| Number of Shares | Amount | |||||||||||||||||||||||
Balance, December 31, 2013 | 31,195,041 | $ | 312 | $ | 187,051 | $ | 1,911 | $ | (105,150 | ) | $ | 84,124 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income | 8,170 | 8,170 | ||||||||||||||||||||||
Unrealized loss on investments | (28 | ) | (28 | ) | ||||||||||||||||||||
Foreign currency translation adjustment | (7,743 | ) | (7,743 | ) | ||||||||||||||||||||
Share-based compensation expense | 1,766 | 1,766 | ||||||||||||||||||||||
Shares issued in acquisition | 215,285 | 2 | 3,998 | 4,000 | ||||||||||||||||||||
Exercise of stock options and vesting of restricted stock | 633,348 | 7 | 1,674 | 1,681 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, December 31, 2014 | 32,774,374 | $ | 328 | $ | 198,064 | $ | (5,773 | ) | $ | (80,887 | ) | $ | 111,732 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income | 9,345 | 9,345 | ||||||||||||||||||||||
Unrealized gain on investments | 22 | 22 | ||||||||||||||||||||||
Foreign currency translation adjustment, net | (2,815 | ) | (2,815 | ) | ||||||||||||||||||||
Share-based compensation expense | 3,598 | 3,598 | ||||||||||||||||||||||
Exercise of stock options and vesting of restricted stock | 174,979 | 1 | 865 | 866 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, December 31, 2015 | 32,949,353 | $ | 329 | $ | 202,527 | $ | (8,566 | ) | $ | (71,542 | ) | $ | 122,748 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income | 11,681 | 11,681 | ||||||||||||||||||||||
Unrealized gain on investments | 6 | 6 | ||||||||||||||||||||||
Shares issued in acquisition | 538,700 | 5 | 14,130 | 14,135 | ||||||||||||||||||||
Payment of contingent consideration in stock | 34,803 | — | 875 | 875 | ||||||||||||||||||||
Conversion option of convertible notes, net of issuance costs of $639,000 | 18,072 | 18,072 | ||||||||||||||||||||||
Foreign currency translation adjustment, net | (5,189 | ) | (5,189 | ) | ||||||||||||||||||||
Share-based compensation expense | 4,595 | 4,595 | ||||||||||||||||||||||
Exercise of stock options and vesting of restricted stock | 321,218 | 4 | 1,837 | 1,841 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, December 31, 2016 | 33,844,074 | $ | 338 | $ | 242,036 | $ | (13,749 | ) | $ | (59,861 | ) | $ | 168,764 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||
| Number of Shares | Par Value | |||||||||||||||||||||||
Balance at December 31, 2015 | 32,949,353 | $ | 329 | $ | 202,527 | $ | (8,566 | ) | $ | (71,542 | ) | $ | 122,748 | |||||||||||
Net income | — | — | — | — | 11,681 | 11,681 | ||||||||||||||||||
Exercise of stock options and vesting of restricted stock | 321,218 | 4 | 1,837 | — | — | 1,841 | ||||||||||||||||||
Unrealized gain on investments | — | — | — | 6 | — | 6 | ||||||||||||||||||
Issuance of common stock pursuant to the Atoll GmbH acquisition | 538,700 | 5 | 14,130 | — | — | 14,135 | ||||||||||||||||||
Payment of contingent consideration in stock | 34,803 | — | 875 | — | — | 875 | ||||||||||||||||||
Conversion option of convertible notes, net of issuance costs of $639 | — | — | 18,072 | — | — | 18,072 | ||||||||||||||||||
Stock-based compensation expense | — | — | 4,595 | — | — | 4,595 | ||||||||||||||||||
Translation adjustment | — | — | — | (5,189 | ) | — | (5,189 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2016 | 33,844,074 | 338 | 242,036 | (13,749 | ) | (59,861 | ) | 168,764 | ||||||||||||||||
Net income | — | — | — | — | 28,353 | 28,353 | ||||||||||||||||||
Exercise of stock options and vesting of restricted stock | 330,185 | 3 | 2,348 | — | — | 2,351 | ||||||||||||||||||
Unrealized gain on investments | — | — | — | 5 | — | 5 | ||||||||||||||||||
Issuance of commons stock pursuant to the acquisition of Spectrum Lifesciences, LLC | 6,153,995 | 62 | 247,513 | — | — | 247,575 | ||||||||||||||||||
Payment of contingent consideration in stock | 30,756 | 1 | 1,062 | — | — | 1,063 | ||||||||||||||||||
Proceeds from issuance of common stock, net of issuance costs of $8,691 | 3,228,069 | 32 | 129,277 | — | — | 129,309 | ||||||||||||||||||
Stock-based compensation expense | — | — | 6,747 | — | — | 6,747 | ||||||||||||||||||
Translation adjustment | — | — | — | 7,381 | — | 7,381 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2017 | 43,587,079 | 436 | 628,983 | (6,363 | ) | (31,508 | ) | 591,548 | ||||||||||||||||
Net income | — | — | — | — | 16,617 | 16,617 | ||||||||||||||||||
Issuance of common stock for debt conversion | 2 | 0 | 0 | — | — | 0 | ||||||||||||||||||
Exercise of stock options and vesting of restricted stock | 330,297 | 3 | 3,415 | — | — | 3,418 | ||||||||||||||||||
Stock-based compensation expense | — | — | 10,192 | — | — | 10,192 | ||||||||||||||||||
Cumulative effect of accounting changes | — | — | — | — | (677 | ) | (677 | ) | ||||||||||||||||
Translation adjustment | — | — | — | (5,530 | ) | — | (5,530 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2018 | 43,917,378 | $ | 439 | $ | 642,590 | $ | (11,893 | ) | $ | (15,568 | ) | $ | 615,568 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
REPLIGEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| (In thousands) | Years ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income: | $ | 11,681 | $ | 9,345 | $ | 8,170 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 5,334 | 4,594 | 4,020 | |||||||||
Non-cash interest expense | 2,274 | — | — | |||||||||
Stock-based compensation expense | 4,595 | 3,598 | 1,766 | |||||||||
Deferred tax expense (benefit) | (4,092 | ) | (118 | ) | 295 | |||||||
Loss on revaluation of contingent consideration | 3,242 | 4,083 | 2,072 | |||||||||
Gain on sale of fixed assets | (15 | ) | — | — | ||||||||
Loss on disposal of assets | 7 | 1 | 35 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (3,222 | ) | (3,729 | ) | (1,597 | ) | ||||||
Royalties and other receivables | (652 | ) | 158 | 6,557 | ||||||||
Inventories | (6,163 | ) | (6,149 | ) | (860 | ) | ||||||
Prepaid expenses and other current assets | 612 | (277 | ) | (820 | ) | |||||||
Accounts payable | (1,802 | ) | 3,024 | 2,288 | ||||||||
Accrued liabilities | (4,038 | ) | (1,592 | ) | (2,489 | ) | ||||||
Long-term liabilities | (240 | ) | 2,115 | (1,036 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 7,521 | 15,053 | 18,401 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities: | ||||||||||||
Purchases of marketable securities | (23,700 | ) | (20,168 | ) | (27,508 | ) | ||||||
Redemptions of marketable securities | 23,400 | 27,587 | 34,804 | |||||||||
Acquisition of assets of Atoll GmbH, net of cash acquired | (8,767 | ) | — | — | ||||||||
Acquisition of assets of TangenX Technology Corporation, net of cash acquired | (35,847 | ) | — | — | ||||||||
Acquisition of assets of Refine Technology, LLC | — | — | (21,236 | ) | ||||||||
Increase of restricted cash | — | — | (250 | ) | ||||||||
Proceeds from sale of fixed assets | 45 | — | — | |||||||||
Purchases of property, plant and equipment | (4,325 | ) | (2,628 | ) | (5,602 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) investing activities | (49,194 | ) | 4,791 | (19,792 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of senior convertible notes, net of issuance costs | 111,070 | — | — | |||||||||
Exercise of stock options | 1,841 | 866 | 1,680 | |||||||||
Payments of contingent consideration | (798 | ) | (99 | ) | — | |||||||
|
|
|
|
|
| |||||||
Net cash provided by financing activities | 112,113 | 767 | 1,680 | |||||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (2,299 | ) | (1,882 | ) | (4,756 | ) | ||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 68,141 | 18,729 | (4,467 | ) | ||||||||
Cash and cash equivalents, beginning of period | 54,092 | 35,363 | 39,830 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of period | $ | 122,233 | $ | 54,092 | $ | 35,363 | ||||||
|
|
|
|
|
| |||||||
Supplemental information: | ||||||||||||
Income taxes paid | $ | 3,993 | $ | 4,948 | $ | 2,547 | ||||||
|
|
|
|
|
| |||||||
Payment of contingent consideration in common stock | $ | 875 | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
Common stock tendered for acquisition of Atoll GmbH | $ | 14,135 | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Business Acquisitions: | ||||||||||||
Fair value of tangible assets acquired | 1,420 | — | 1,175 | |||||||||
Fair value of accounts receivable | 1,267 | — | 1,647 | |||||||||
Fair value of other assets | 183 | — | 184 | |||||||||
Liabilities assumed | (3,662 | ) | — | (365 | ) | |||||||
Fair value of stock issued | (14,135 | ) | — | (4,000 | ) | |||||||
Cost in excess of fair value of assets acquired (Goodwill) | 46,505 | — | 13,199 | |||||||||
Acquired identifiable intangible assets | 19,829 | — | 9,100 | |||||||||
Deferred tax liabilities, net | (5,841 | ) | — | — | ||||||||
In-process research and development | — | — | 1,600 | |||||||||
|
|
|
|
|
| |||||||
| 45,566 | — | 22,540 | ||||||||||
Less accrued contingent consideration | (952 | ) | — | (1,370 | ) | |||||||
Working capital adjustment, reflected in other receivables as of December 31, 2014 | — | — | 66 | |||||||||
|
|
|
|
|
| |||||||
Net cash paid for business acquisitions | 44,614 | — | 21,236 | |||||||||
|
|
|
|
|
| |||||||
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 16,617 | $ | 28,353 | $ | 11,681 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 15,778 | 10,507 | 5,334 | |||||||||
Non-cash interest expense | 4,248 | 3,977 | 2,274 | |||||||||
Stock-based compensation expense | 10,192 | 6,747 | 4,595 | |||||||||
Deferred tax expense | 71 | (24,679 | ) | (4,092 | ) | |||||||
Loss on revaluation of contingent consideration | — | — | 3,242 | |||||||||
Other | (3 | ) | 64 | (8 | ) | |||||||
Changes in operating assets and liabilities, excluding impact of acquisitions: | ||||||||||||
Accounts receivable | (6,101 | ) | (6,888 | ) | (3,222 | ) | ||||||
Royalties and other receivables | 7 | 644 | (652 | ) | ||||||||
Unbilled receivables | (2,602 | ) | — | — | ||||||||
Inventories | (4,042 | ) | 605 | (6,163 | ) | |||||||
Prepaid expenses and other assets | (1,769 | ) | (1,304 | ) | 612 | |||||||
Accounts payable | 2,266 | 807 | (1,802 | ) | ||||||||
Accrued expenses | (1,398 | ) | (1,993 | ) | (4,038 | ) | ||||||
Long-term liabilities | (494 | ) | 611 | (240 | ) | |||||||
|
|
|
|
|
| |||||||
Total cash provided by operating activities | 32,770 | 17,451 | 7,521 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities: | ||||||||||||
Purchases of marketable securities | — | (47 | ) | (23,700 | ) | |||||||
Redemption of marketable securities | — | 19,600 | 23,400 | |||||||||
Additions to capitalized software costs | (2,147 | ) | — | — | ||||||||
Developed technology intangible asset payment | (1,255 | ) | — | — | ||||||||
Acquisition of Spectrum Lifesciences, Inc., net of cash acquired | — | (112,795 | ) | — | ||||||||
Acquisition of Atoll GmbH, net of cash acquired | — | — | (8,767 | ) | ||||||||
Acquisition of TangenX Technology Corporation, net of cash acquired | — | — | (35,847 | ) | ||||||||
Proceeds from sale of fixed asset | — | — | 45 | |||||||||
Purchases of property, plant and equipment | (10,635 | ) | (5,454 | ) | (4,325 | ) | ||||||
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Total cash used in investing activities | (14,037 | ) | (98,696 | ) | (49,194 | ) | ||||||
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Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of senior convertible notes, net of issuance costs | — | — | 111,070 | |||||||||
Proceeds from issuance of common stock, net of issuance costs | — | 129,309 | — | |||||||||
Exercise of stock options | 3,418 | 2,351 | 1,841 | |||||||||
Repayment of senior convertible notes | (11 | ) | — | — | ||||||||
Payments of contingent consideration | — | (1,715 | ) | (798 | ) | |||||||
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Total cash provided by financing activities | 3,407 | 129,945 | 112,113 | |||||||||
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Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,077 | ) | 2,376 | (2,299 | ) | |||||||
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| |||||||
Net increase in cash, cash equivalents and restricted cash | 20,063 | 51,076 | 68,141 | |||||||||
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| |||||||
Cash, cash equivalents and restricted cash, beginning of period | 173,759 | 122,683 | 54,542 | |||||||||
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Cash, cash equivalents and restricted cash, end of period | $ | 193,822 | $ | 173,759 | $ | 122,683 | ||||||
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Supplemental disclosure of cash flow information: | ||||||||||||
Income taxes paid | $ | 4,046 | $ | 4,021 | $ | 3,993 | ||||||
Interest paid | $ | 2,444 | $ | 2,444 | $ | 1,222 | ||||||
Supplemental disclosure ofnon-cash investing and financing activities: | ||||||||||||
Non-cash effect of adoption of ASU2016-16 | $ | 5,609 | $ | — | $ | — | ||||||
Payment of contingent consideration in common stock | $ | — | $ | 1,063 | $ | 875 | ||||||
Common stock tendered for acquisition of Spectrum, Inc. | $ | — | $ | 247,575 | $ | — | ||||||
Common stock tendered for acquisition of Atoll GmbH | $ | — | $ | — | $ | 14,135 | ||||||
Property, plant and equipment related to lease incentives | $ | 2,270 | $ | — | $ | — | ||||||
Business Acquisitions: | ||||||||||||
Fair value of tangible assets acquired | $ | — | $ | 19,709 | $ | 1,420 | ||||||
Fair value of accounts receivable | — | 5,075 | 1,267 | |||||||||
Fair value of other assets | — | 1,718 | 183 | |||||||||
Liabilities assumed | — | (7,698 | ) | (3,662 | ) | |||||||
Fair value of stock issued | — | (247,575 | ) | (14,135 | ) | |||||||
Cost in excess of fair value of assets acquired (Goodwill) | — | 265,519 | 46,505 | |||||||||
Acquired identifiable intangible assets | — | 120,080 | 19,829 | |||||||||
Deferred tax liabilities, net | — | (43,608 | ) | (5,841 | ) | |||||||
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| — | 113,220 | 45,566 | ||||||||||
Less accrued contingent consideration | — | — | (952 | ) | ||||||||
Less working capital adjustment | — | (425 | ) | — | ||||||||
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Net cash paid for business acquisitions | $ | — | $ | 112,795 | $ | 44,614 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
REPLIGEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Organization and Nature of Business |
Repligen Corporation (NASDAQ:RGEN) is a bioprocessing company focused on the development, manufacture and commercialization of highly innovative products used to improve the interconnected phases of the biological drug manufacturing process. The Company’s portfolio includes protein products (Protein A affinity ligands, cell culture growth factors), chromatography products (OPUSpre-packed columns, chromatography resins, ELISA kits), and filtration products (XCell ATF Systems, SiusSIUS TFF cassettes)cassettes, KrosFlo filters, modules and systems). The Company’s bioprocessing products are sold to major life sciences companies, biopharmaceutical development companies and contract manufacturing organizations worldwide. The Protein A ligands and growth factor products that the Company manufactures are components of chromatography resins and cell culture media, respectivelyrespectively.
The Company is the leading manufacturer of Protein A ligands, a critical component of Protein A resins that are the industry standard for downstream separation and purification of monoclonal antibody-based therapeutics. The Company’s growth factors are used in upstream processes to accelerate cell growth and productivity in a bioreactor. The Company’s innovative line of OPUS chromatography columns, used in downstream processes for bench-scale through clinical-scale purification needs, are deliveredpre-packed with its customers’ choice of resin and volume. The Company’s XCell ATF Systems, available in stainless steel andsingle-use configurations, continuously eliminate waste from a bioreactor, to accelerate and increase productivity in upstream processes.Single-use Sius SIUS TFF cassettes and hardware are used for biologic drug concentration in downstream processes. KrosFlo filters and systems are used in the filtration, isolation, purification and concentration of biologics. Repligen’s corporate headquarters are in Waltham, Massachusetts (USA) and its manufacturing facilities are located in Waltham, Massachusetts; Shrewsbury, Massachusetts;Massachusetts (until June 2019); Marlborough, Massachusetts, Rancho Dominguez, California; Houston, Texas; Irving, Texas; Lund, Sweden; and Weingarten, Germany.
The Company is subject to a number of risks typically associated with companies in the biotechnology industry. These risks principally include the Company’s dependence on key customers, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with the FDA and other governmental regulations and approval requirements, as well as the ability to grow the Company’s business and obtain adequate funding to finance this growth.
| 2. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions by management affect the Company’s revenue recognition for multiple element arrangements, allowance for doubtful accounts, the net realizable value of inventory, estimated fair value of cost method investments, valuations and purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets, estimated fair values of intangible assets and goodwill, amortization methods and periods, warranty reserves, certain accrued expenses, stock-based compensation, fair value estimates of contingent consideration, contingent liabilities, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its
estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Repligen Sweden AB, Repligen GmbH, TangenX Technology CorporationSpectrum LifeSciences LLC and its subsidiaries (“Spectrum,” acquired on August 1, 2017) and Repligen Singapore Pte. Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year balances have changed to reflect current year presentation.
Foreign Currency
The Company translates the assets and liabilities of its foreign subsidiary at rates in effect at the end of the reporting period. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments, including adjustments related to the Company’s intercompany loan with Repligen Sweden AB and Repligen Sweden’sSweden AB’s intercompany loan with Repligen GmbH, are remeasured at each period end and included in accumulated other comprehensive income.
Revenue Recognition
Product Sales
The Company’sWe generate revenue recognition policy is to recognize revenues from product sales and services in accordance with ASC 605, Revenue Recognition. These standards require that revenues are recognized when persuasive evidence of an arrangement exists, product delivery, including customer acceptance, has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Determination of whether these criteria have been met are based on management’s judgments primarily regarding the fixed nature of the fee charged for the product delivered and the collectability of those fees. The Company has a few longstanding customers who comprise the majority of revenue and have excellent payment histories and therefore the Company does not require collateral. The Company has had no significant write-offs of uncollectible invoices in the periods presented. When more than one element such as equipment, consumables, and services are contained in a single arrangement, the Company allocates revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a stand-alone basis. The selling price of the undelivered elements is determined by the price charged when the element is sold separately, or in cases when the item is not sold separately, by third-party evidence of selling price or management’s best estimate of selling price.
The Company’s product revenues are from the sale of bioprocessing products, equipment devices, and related consumables used with these equipment devices to customers in the life science and biopharmaceutical industries. On product sales to end customers, Under ASC 606, “Revenue from Contracts with Customers,”revenue is recognized netwhen, or as, obligations under the terms of discounts,a contract are satisfied, which occurs when bothcontrol of the titlepromised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method or the most likely amount method, depending on the facts and riskcircumstances relative to the contract. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of loss have transferredcumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of December 31, 2018.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The Company recognizes product revenue under the terms of each customer agreement upon transfer of control to the customer, as determined by the shipping terms provided there are no uncertainties regarding acceptance, and all obligations have been completed. Generally, our product arrangements for equipment sales are multiple element arrangements, and may include services, such as installation and training, and multiple products, such as consumables and spare parts. In accordance with ASC 605-25, based on terms and conditions of the product arrangements, the Company believes that these services and undelivered products can be accounted for separately from the delivered product element as the delivered products have value to our customers onwhich occurs at a standalone basis. Accordingly, revenue for services not yet performed at the time of product shipment are deferred and recognized as such services are performed. The relative selling price of any undelivered products is also deferred at the time of shipment and recognized as revenue when these products are delivered. For product sales to distributors, the Company recognizes revenue for both equipment and consumables upon delivery to the distributor unless direct shipment to the end user is requested. In this case, revenue is recognized upon delivery to the end user’s location. In general, distributors are responsible for shipment to the end customer along with installation, training and acceptance of the equipment by the end customer. Sales to distributors are not contingent upon resale of the product.point in time.
At the time of sale, the Company also evaluates the need to accrue for warranty and sales returns. The supply agreements the Company has with its customers and the related purchase orders identify the terms and conditions
of each sale and the price of the goods ordered. Due to the nature of the sales arrangements, inventory produced for sale is tested for quality specifications prior to shipment. Since the product is manufactured to order and in compliance with required specifications prior to shipment, the likelihood of sales return, warranty or other issues is largely diminished. Furthermore, there is no customer right of return in our sales agreements. Sales returns and warranty issues are infrequent and have not had a material impact on the Company’s financial statements historically.
Shipping and handling fees are recorded as a component of product revenue, with the associated costs recorded as a component of cost of product revenue.
The Scripps Research Institute
On April 6, 2007, the Company entered into an exclusive worldwide commercial license agreement (“Scripps License Agreement”) with The Scripps Research Institute (“Scripps”). Pursuant to the License Agreement, the Company obtained a license to use, commercialize and sublicense certain patented technology and improvements thereon, owned or licensed by Scripps, relating to compounds that may have utility in treating Friedreich’s ataxia, an inherited neurodegenerative disease.
Pursuant to the Scripps License Agreement, the Company agreed to pay Scripps an initial license fee of $300,000, certain royalty and sublicense fees and, in the event that the Company achieved specified developmental and commercial milestones, certain additional milestone payments. Total future milestone payments, if all milestones had been achieved, would have been approximately $4,300,000. In addition, the Company issued Scripps and certain of its designees 87,464 shares of the Company’s common stock, which had a value of $300,000 on the date of issuance.
In connection with the Scripps License Agreement, the Company issued warrants to an individual at Scripps to purchase up to 150,000 shares of common stock. No expense was recorded related to these warrants through December 31, 2014, as the vesting of these warrants was contingent upon certain performance conditions that were not satisfied. During the year ending December 31, 2014, the warrant’s seven-year term expired.
As of January 2014, all rights and obligations have been transferred to BioMarin.
Sale of Intellectual Property to BioMarin
In January 2014, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with BioMarin Pharmaceutical Inc. (“BioMarin”) to sell Repligen’s histone deacetylase inhibitor (HDACi) portfolio. Pursuant to the terms of the Asset Purchase Agreement, the Company received $2 million from BioMarin as an upfront payment on January 30, 2014 and a $125,675 payment on September 3, 2014 upon completion of the Technology Transfer. The Company is entitled to receive up to $160 million in potential future milestone payments for the development, regulatory approval and commercial sale of portfolio compounds included in the agreement. These potential milestone payments are approximately 37% related to clinical development and 63% related to initial commercial sales in specific geographies. In addition, Repligen is eligible to receive royalties on sales of therapeutic products originating from the HDACi portfolio. The royalty rates are tiered and begin in the mid-single-digits for the first HDACi portfolio product and for the first non-HDACi portfolio product with lesser amounts for any backup products developed under the Asset Purchase Agreement. Repligen’s receipt of these royalties is subject to customary offsets and deductions. There are no refund provisions in this agreement. The Company recognized $2.1 million of revenue in the fiscal year ended December 31, 2014 related to the transfer of the HDACi technology under the Asset Purchase Agreement. Any milestones earned upon specified clinical development or commercial sales events or future royalty payments, under the Asset Purchase Agreement will be recognized as revenue when they are earned.
Activities under this agreement were evaluated in accordance with ASC 605-25 to determine if they represented a multiple element revenue arrangement. The Company identified the following deliverables in the BioMarin agreement:
Two criteria must be met in order for a deliverable to be considered a separate unit of accounting. The first criterion requires that the delivered item or items have value to the customer on a stand-alone basis. The second criterion, which relates to evaluating a general right of return, is not applicable because such a provision does not exist in the Asset Purchase Agreement. The deliverables outlined above were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting. Factors considered in this determination included, among other things, BioMarin’s right under the agreement to assign the Transferred Assets, whether any other vendors sell the items separately and if BioMarin could use the delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the multiple-element arrangements guidance addresses how to allocate the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based on their relative selling price.
The Company identified the arrangement consideration to allocate among the units of accounting as the $2.0 million non-refundable up-front payment and the $125,675 payment to be received upon completion of the Technology Transfer. The Company excluded the potential milestone payments provided for in the Asset Purchase Agreement from the arrangement consideration as they were not considered fixed or determinable at the time the Asset Purchase Agreement was signed. Because Repligen had not sold these items on a standalone basis previously, Repligen had no vendor-specific objective evidence of selling price. Furthermore, Repligen did not have detailed third-party evidence of selling price, and as a result we used our best estimate of selling price for each item. In determining these prices, Repligen considered what Repligen would be willing to sell the items for on a standalone basis, what the market would bear for such items and what another party might charge for these items.
The up-front arrangement consideration allocated to the Transferred Assets was recognized upon execution of the Asset Purchase Agreement as the risks and rewards associated with the Transferred Assets transferred at that time. The Company used a discounted cash flow analysis to determine the value of the Transferred Assets. Key assumptions in the analysis included: the estimated market size for a compound targeted at Friedreich’s ataxia, the estimated remaining costs of development and time to commercialization, and the probability of successfully developing and commercializing the program. Based on this analysis, the Company allocated $2,115,000 to the value of the Transferred Assets. However, as the recognized revenue is limited to the non-contingent consideration received, the Company recognized $2,000,000, the amount of the up-front payment, as revenue in the three months ended March 31, 2014.
The estimated selling price of the Technology Transfer items was approximately $300,000 resulting in consideration allocation of approximately $11,000. However, as this item was not delivered prior to March 31, 2014, the Company did not recognize any revenue related to the Technology Transfer in the three months ended March 31, 2014. Repligen received the payment and recognized $125,675 of other revenues in September 2014 upon completion of the Technology Transfer.
The Company believes that a change in the key assumptions used to determine best estimate of selling price for each of the deliverables would not have a significant effect on the allocation of arrangement consideration.
In addition to the $2.1 million up-front payment, the Company is also eligible to receive up to $160 million in potential milestone payments from BioMarin comprised of:
The Company evaluated the potential milestones in accordance with ASC 605-28, which allows an entity to make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This evaluation included an assessment of the risks that must be overcome to achieve the respective milestone as well as whether the achievement of the milestone was due in part to our initial clinical work, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, assuming all other revenue recognition criteria are met.
The Company believes that the $60 million of specified clinical and regulatory milestone payments are substantive. Therefore, any such milestones achieved will be recognized as revenue when earned.
Any milestones achieved upon specified commercial sales events or future royalty payments are considered contingent revenue under the Asset Purchase Agreement, and will be recognized as revenue when they are earned as there are no undelivered elements remaining and no continuing performance obligations under the arrangement.
Sale of SecreFlo
On December 23, 2014, the Company sold its synthetic human secretin line, SecreFlo, to Innovate Biopharmaceuticals, Inc., or Innovate, pursuant to an asset purchase agreement. Under the terms of the agreement, Repligen received a nominal upfront payment and is eligible to receive royalties on net sales of qualified products for a period beginning on the first commercial sale of such product through the earlier of the expiration of the regulatory exclusivity period for the product or 10 years from its first commercial sale.
Pfizer License Agreement
In December 2012, the Company entered into an exclusive worldwide licensing agreement (the “License Agreement”) with Pfizer Inc. (“Pfizer”) to advance the spinal muscular atrophy program, or SMA program. Pursuant to the terms of the License Agreement, the Company received $5 million from Pfizer as an upfront payment on January 22, 2013, a $1 million milestone payment on September 4, 2013 and a $1 million milestone payment on December 28, 2014. On January 26, 2015, Pfizer notified the Company that they were terminating the License Agreement for convenience, effective as of April 26, 2015.
Therapeutics Licensing Agreements
Activities under licensing agreements are evaluated in accordance with ASC 605-25 to determine if they represent a multiple element revenue arrangement. The Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting. The Company accounts for those components as separate units of accounting if the following two criteria are met:
Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the licensee could use the delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the Company allocates the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based on their relative selling price. Revenue is recognized for each unit of accounting when the appropriate revenue recognition criteria are met.
Future milestone payments, if any, under a license agreement will be recognized under the provisions of ASC 605-28, which the Company adopted on January 1, 2011. The Company has elected to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is substantive if:
The commercial milestone payments and royalty payments received under license agreements, if any, will be recognized as revenue when they are earned.
There have been no material changes to the Company’s initial estimates related to revenue recognition in any periods presented in the accompanying consolidated financial statements.
Risks and Uncertainties
The Company evaluates its operations periodically to determine if any risks and uncertainties exist that could impact its operations in the near term. The Company does not believe that there are any significant risks which have not already been disclosed in the consolidated financial statements. A loss of certain suppliers could temporarily disrupt operations, although alternate sources of supply exist for these items. The Company has mitigated these risks by working closely with key suppliers, identifying alternate sources and developing contingency plans.
Cash, Cash Equivalents, Restricted Cash and Marketable Securities
Cash and cash equivalents include cash on hand and on deposit and highly liquid investments in money market mutual funds. All cash equivalents are carried at cost, which approximates fair value. Restricted cash represents cash that is restricted as to withdrawal or usage. In 2011, the Company issued a letter of credit in lieu of a security deposit for its leased facility in Waltham, Massachusetts, which was collateralized by a certificate of deposit held by the bank that issued the letter of credit. This certificate of deposit was classified as restricted cash in the accompanying consolidated balance sheets. As of December 31, 2016, the letter of credit was $0.5 million, the balance of restricted cash as of December 31, 2016. During 2017, the issuing bank no longer required collateral to secure the letter of credit. As a result, the Company released the funds from restricted cash.
We adopted ASU2016-18,“Statement of Cash Flows (Topic 230): Restricted Cash,”on January 1, 2018, which changed the presentation of our consolidated statements of cash flows and related disclosures for all periods presented. Accordingly, the following is a summary of our cash, cash equivalents, and restricted cash total as presented in our consolidated statements of cash flows for the years ended December 31, 2018, 2017 and 2016:
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Cash and cash equivalents | $ | 193,822 | $ | 173,759 | $ | 122,233 | ||||||
Restricted cash | — | — | 450 | |||||||||
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Total cash, cash equivalents, and restricted cash | $ | 193,822 | $ | 173,759 | $ | 122,683 | ||||||
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At December 31, 2016, the Company’s investments included money market funds and short-term marketable securities. AtThere were no such investments as of December 31, 2015, the Company’s investments included money market funds as well as short-term2018 and long-term marketable securities.2017. Short-term marketable securities are investments with original maturities of greater than 90 days. Long-term marketable securities are securities with maturities of greater than one year at the original date of purchase. The average remaining contractual maturity of marketable securities at December 31, 2016 is approximately 3.9 months.
Investments in debt securities consisted of the following at December 31, 2016 (in thousands):
| Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | |||||||||||||
Marketable securities: | ||||||||||||||||
U.S. Government and agency securities | $ | 807 | $ | — | $ | — | $ | 807 | ||||||||
Corporate and other debt securities | 18,745 | 2 | (7 | ) | 18,740 | |||||||||||
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Total | $ | 19,552 | $ | 2 | $ | (7 | ) | $ | 19,547 | |||||||
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There were no long-term marketable securities as of December 31, 2016.
At December 31, 2016, the Company’s investments included fifteen debt securities in unrealized loss positions with a total unrealized loss of approximately $7,000 and a total fair market value of approximately $9,758,000. All investments with gross unrealized losses have been in unrealized loss positions for less than 12 months. The unrealized losses were caused primarily by current economic and market conditions. There was no change in the credit risk of the securities. The Company does not intend to sell any investments in an unrealized loss position, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. There were no realized gains or losses on the investments for the fiscal years ended December 31, 2016, 20152018, 2017 and 2014.2016.
Investments in debt securities consisted of the following at December 31, 2015 (in thousands):
| Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | |||||||||||||
Marketable securities: | ||||||||||||||||
U.S. Government and agency securities | $ | 7,029 | $ | — | $ | (6 | ) | $ | 7,023 | |||||||
Corporate and other debt securities | 10,659 | 7 | (7 | ) | 10,659 | |||||||||||
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| 17,688 | 7 | (13 | ) | 17,682 | ||||||||||||
Long-term marketable securities: | ||||||||||||||||
U.S. Government and agency securities | 838 | — | (2 | ) | 836 | |||||||||||
Corporate and other debt securities | 800 | — | (3 | ) | 797 | |||||||||||
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| 1,638 | — | (5 | ) | 1,633 | ||||||||||||
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Total | $ | 19,326 | $ | 7 | $ | (18 | ) | $ | 19,315 | |||||||
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The contractual maturities of debt securities at December 31, 2016 were as follows (in thousands):
| Amortized Cost | Fair Value | |||||||
Due in 1 year or less | $ | 19,552 | $ | 19,547 | ||||
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| $ | 19,552 | $ | 19,547 | |||||
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Fair Value Measurement
In determining the fair value of its assets and liabilities, the Company uses various valuation approaches. The Company employs a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and
are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:
Level 1 – | Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. | |
Level 2 – | Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly. | |
Level 3 – | Valuations based on inputs that are unobservable and significant to the overall fair value measurement. | |
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.
The Company’s fixed income investments are comprised of obligations of U.S. government agencies, corporate debt securities and other interest bearing securities. These investments have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices provided by third party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by the pricing services asAs of December 31, 2016.
The following fair value hierarchy table presents information about each major category of the Company’s assets measured at fair value2018, cash and cash equivalents on our consolidated balance sheet includes $126.6 million in a money market account. These funds are valued on a recurring basis as of December 31, 2016 (in thousands):using Level 1 inputs.
| Fair value measurement at reporting date using: | ||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 81,819 | $ | — | $ | — | $ | 81,819 | ||||||||
U.S. Government and agency securities | 808 | — | — | 808 | ||||||||||||
Corporate and other debt securities | — | 18,740 | — | 18,740 | ||||||||||||
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Total | $ | 82,627 | $ | 18,740 | $ | — | $ | 101,367 | ||||||||
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Liabilities: | ||||||||||||||||
Contingent consideration – short-term | — | — | 6,119 | 6,119 | ||||||||||||
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Total | $ | — | $ | — | $ | 6,119 | $ | 6,119 | ||||||||
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As of December 31, 2016,2018 and 2017, the Company hashad no other assets or liabilities for which fair value measurement is either required or has been elected to be applied, other than the liabilities for contingent consideration recorded in connection with the Refine and Atoll business combinations. The Company entered into a settlement agreement and remitted all remaining contingent consideration to BioFlash Partners, LLC (“BioFlash”) in the third quarter of 2016. The contingent consideration related to Refine is valued based on actual 2016 XCell ATF sales. The contingent consideration related to Atoll is valued based on achieving 2016 sales growth metrics. These valuations are Level 3 valuations, as the primary inputs are unobservable.
Changes in the fair value of contingent consideration in the year ended December 31, 2016 are primarily attributable to contingent consideration recorded at the date of the Atoll Acquisition in the amount of €836,000 (approximately $928,000), an increase to the expected 2016 Refine milestone payment of $3,048,000, an increase to the expected 2016 Atoll milestone payment of €164,000 (approximately $182,000), a $4,350,000 milestone payment to Refine, a $130,000 minimum royalty payment made to BioFlash, and a final settlement payment of $500,000 to BioFlash, of which $301,000 was previously accrued as contingent consideration and $199,000 was recorded to selling, general and administrative expenses.
The following table provides a rollforward of the fair value of contingent consideration (in thousands):
Balance at December 31, 2015 | $ | 6,788 | ||
Additions | 928 | |||
Payments | (4,781 | ) | ||
Foreign currency translation adjustments | (58 | ) | ||
Changes in fair value | 3,242 | |||
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Balance at December 31, 2016 | $ | 6,119 | ||
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The following table provides quantitative information associated with the fair value measurement of the Company’s contingent consideration related to Refine using Level 3 inputs (in thousands):
| Fixed Earn-out | Variable Earn-out | Accrued Balance | ||||||||||
2016 | 4,250 | 1,300 | 5,067 | |||||||||
The significant unobservable input used in the fair value measurement of Refine’s contingent consideration is actual 2016 revenues. The fair value of the 2016 contingent payment was increased by $3,048,000 during the year as forecasted revenues increased.
As of December 31, 2016, the fair value of Atoll’s contingent consideration is €1,000,000 (approximately $1,052,000). The significant unobservable input used in the fair value measurement was actual 2016 revenue growth compared to 2015. The initial valuation of contingent consideration upon the Atoll Acquisition in April 2016 resulted in a fair value of €836,000 (approximately $928,000). The estimated fair value of the contingent payment was increased by €164,000 (approximately $182,000) based on Atoll achieving the targeted revenue growth in 2016.applied.
In May 2016, the Company issued $115$115.0 million aggregate principal amount of the Notes due June 1, 2021. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016. As of December 31, 2016,2018, the carrying value of the Notes was $95.3$103.5 million, net of unamortized discount, and the fair value of the Notes was approximately $135.6$184.6 million. The fair value of the Notes is a Level 1 valuation and was determined based on the most recent trade activity of the Notes as of December 31, 2016.2018. The Notes are discussed in more detail in Note 10, “Convertible“Convertible Senior Notes.Notes””to these consolidated financial statements
There were no remeasurements to fair value during the year ended December 31, 20162018 of financial assets and liabilities that are not measured at fair value on a recurring basis.
Inventories
Inventories relate to the Company’s bioprocessing business. The Company values inventory at cost or, if lower, fair marketnet realizable value, using thefirst-in,first-out method. The Company reviews its inventories at least quarterly and records a provision for excess and obsolete inventory based on its estimates of expected sales volume, production capacity and expiration dates of raw materials,work-in-process and finished products. Expected sales volumes are determined based on supply forecasts provided by key customers for the next 3 to 12 months. The
Company writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. Manufacturing of bioprocessing finished goods is done to order and tested for quality specifications prior to shipment. Reserves for excess and obsolete inventory were $435,000 and $343,000 as of December 31, 2016 and 2015, respectively. The reserve balance at December 31, 2016 and 2015 is sufficient to cover excess or obsolete inventory for the consolidated Company.
A change in the estimated timing or amount of demand for the Company’s products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying financial statements, there have been no material adjustments related to a revised estimate of inventory valuations.
Work-in-process and finished products inventories consist of material, labor, outside processing costs and manufacturing overhead.
Inventories consistLease Accounting
Certain of the following (in thousands):Company’s operating leases where the Company is the lessee provide for minimum annual payments that increase over the life of the lease. The aggregate minimum annual payments are expensed on the straight-lined basis beginning when the Company takes possession of the property and extending over the term of the related lease, including renewal options when the exercise of the option is reasonably assured as an economic penalty may be incurred if the option is not exercised. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays” and lessor-paid tenant improvements.
| December 31, 2016 | December 31, 2015 | |||||||
Raw Materials | $ | 14,954 | $ | 10,671 | ||||
Work-in-process | 2,789 | 1,586 | ||||||
Finished products | 6,953 | 5,741 | ||||||
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Total | $ | 24,696 | $ | 17,998 | ||||
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Accrued Liabilities
The Company estimates accrued liabilities by identifying services performed on the Company’s behalf, estimating the level of service performed and determining the associated cost incurred for such service as of each balance sheet date. For example, the Company would accrue for professional and consulting fees incurred with law firms, audit and accounting service providers and other third partythird-party consultants. These expenses are determined by either requesting those service providers to estimate unbilled services at each reporting date for services incurred or tracking costs incurred by service providers under fixed fee arrangements.
The Company has processes in place to estimate the appropriate amounts to record for accrued liabilities, which principally involve the applicable personnel reviewing the services provided. In the event that the Company does not identify certain costs that have begun to be incurred or the Company under or over-estimates the level of services performed or the costs of such services, the reported expenses for that period may be too low or too high. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services often require the exercise of judgment. The Company makes these judgments based upon the facts and circumstances known at the date of the financial statements.
Income Taxes
Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company accounts for uncertain tax positions using a “more-likely-than-not”“more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of
tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates this tax position on a quarterly basis. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
Property, Plant & Equipment
Property, Plant & Equipment is recorded at cost less allowances for depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the asset as follows:
Classification | Estimated Useful Life | |
Buildings | Thirty years | |
Leasehold improvements | Shorter of the term of the lease or estimated useful life | |
Equipment | Three to | |
Furniture and fixtures | Three to eight years |
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares and dilutive common share equivalents then outstanding. Potential common share equivalents consist of restricted stock awards and the incremental common shares issuable upon the exercise of stock options and warrants. Under the treasury stock method, unexercised “in-the-money”“in-the-money” stock options are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common shares at the average market price during the period. Share-based payment awards that entitle their holders to receivenon-forfeitable dividends before vesting are considered participating securities and are included in the calculation of basic and diluted earnings per share. There are no such participating securities as of December 31, 2018.
A reconciliation of basic and diluted share amounts is as follows:
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Numerator: | ||||||||||||
Net income | $ | 11,681,000 | $ | 9,345,000 | $ | 8,170,000 | ||||||
Denominator: | ||||||||||||
Basic weighted average common shares outstanding | 33,572,883 | 32,881,940 | 32,497,657 | |||||||||
Weighted average common stock equivalents from assumed exercise of stock options and restricted stock awards | 526,015 | 695,151 | 766,010 | |||||||||
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Diluted weighted average common shares outstanding | 34,098,898 | 33,577,091 | 33,263,667 | |||||||||
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Basic net income per common share | $ | 0.35 | $ | 0.28 | $ | 0.25 | ||||||
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Diluted net income per common share | $ | 0.34 | $ | 0.28 | $ | 0.25 | ||||||
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| 2018 | 2017 | 2016 | ||||||||||
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Net income | $ | 16,617 | $ | 28,353 | $ | 11,681 | ||||||
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Weighted average shares used in computing net income per share - basic | 43,767 | 38,234 | 33,573 | |||||||||
Effect of dilutive shares: | ||||||||||||
Stock options and restricted stock awards | 581 | 441 | 526 | |||||||||
Convertible senior notes | 1,123 | 475 | — | |||||||||
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Dilutive potential common shares | 1,704 | 916 | 526 | |||||||||
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Weighted average shares used in computing net income per share - diluted | 45,471 | 39,150 | 34,099 | |||||||||
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Earnings per share: | ||||||||||||
Basic | $ | 0.38 | $ | 0.74 | $ | 0.35 | ||||||
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Diluted | $ | 0.37 | $ | 0.72 | $ | 0.34 | ||||||
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At December 31, 2016,2018, there were outstanding options to purchase 1,236,586998,226 shares of the Company’s common stock at a weighted average exercise price of $12.05$27.54 per share.share and 705,413 shares of common stock issuable upon the vesting of restricted stock units (“RSUs”). For the fiscal year ended December 31, 2016, 381,6862018, 479,854 shares of the
Company’s common stock were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and were therefore, anti-dilutive.
As provided by the terms of the indenture underlying the senior convertible notes, the Company has a choice to settle the conversion obligation for the Convertible Notes in cash, shares or any combination of the two. The Company currently intends to settle the par value of the Convertible Notes in cash and any excess conversion premium in shares. The Company applies the provisions of ASC 260,“Earnings Per Share,Share”, Subsection10-45-44, to determine the diluted weighted average shares outstanding as it relates to the conversion spread on its convertible notes. Accordingly, the par value of the Convertible Notes willis not be included in the calculation of diluted income per share, but the dilutive effect of the conversion premium will beis considered in the calculation of diluted net income per share using the treasury stock method. The dilutive impact of the Company’s convertible notesConvertible Notes is based on the difference between the Company’s current period average stock price and the conversion price of the convertible notes, provided there is a premium. Pursuant to this accounting standard, there is no dilution from the accreted principal of the Convertible Notes.
At December 31, 2015,2017, there were outstanding options to purchase 1,240,935734,940 shares of the Company’s common stock at a weighted average exercise price of $10.44$20.80 per share.share and 505,235 shares of common stock issuable upon the vesting of RSUs. For the fiscal year ended December 31, 2015,
196,2092017, 317,923 shares of the Company’s common stock were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and were therefore, anti-dilutive.
At December 31, 2014,2016, there were outstanding options to purchase 1,225,1171,236,586 shares of the Company’s common stock at a weighted average exercise price of $8.31$12.05 per share. For the fiscal year ended December 31, 2014, 307,4752016, 381,686 shares of the Company’s common stock were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and were therefore, anti-dilutive.
Segment Reporting
The Company views its operations, makes decisions regarding how to allocate resources and manages its business as one operating segment.segment and two reporting units. As a result, the financial information disclosed herein represents all of the material financial information related to the Company’s principal operating segment.Company.
The following table represents product revenues by product line (in thousands):line:
| December 31, 2016 | December 31, 2015 | December 31, 2014 | For the Years Ended December 31, | |||||||||||||||||||||
| 2018 | 2017(1) | 2016(2,3) | ||||||||||||||||||||||
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Chromatography products | $ | 45,326 | $ | 36,309 | $ | 29,520 | ||||||||||||||||||
Filtration products | 90,586 | 49,050 | 19,774 | |||||||||||||||||||||
Protein products | $ | 54,716 | $ | 52,938 | $ | 43,674 | 54,375 | 53,969 | 54,716 | |||||||||||||||
Filtration products | 19,774 | (2) | 15,676 | 6,739 | (1) | |||||||||||||||||||
Chromatography products | 29,520 | (3) | 14,613 | 9,811 | ||||||||||||||||||||
Other | 431 | 310 | 207 | 3,604 | 1,761 | 431 | ||||||||||||||||||
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Total product revenues | $ | 104,441 | $ | 83,537 | $ | 60,431 | ||||||||||||||||||
Total product revenue | $ | 193,891 | $ | 141,089 | $ | 104,441 | ||||||||||||||||||
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| (1) | 2017 revenue for filtration, chromatography and other products includes revenue related to |
| (2) | 2016 revenue for filtration products includes revenue related to |
| (3) | 2016 revenue for chromatography products includes revenue related to |
Revenue from protein products includes the Company’sour Protein A ligands and cell culture growth factors. Revenue from filtration products includes the Company’sour XCell ATF Systems and consumables as well as our KrosFlo and SiusSIUS filtration products. Revenue from chromatography products includes the Company’sour OPUS and OPUS PD chromatography columns, chromatography resins and ELISA test kits. Other revenue primarily consists of revenue from the sale of operating room products to hospitals as well as freight revenues.revenue.
The following table represents the Company’s total revenue by geographic area (based on the location of the customer):
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Sweden | 29 | % | 37 | % | 38 | % | ||||||
United States | 39 | % | 28 | % | 33 | % | ||||||
United Kingdom | 7 | % | 17 | % | 20 | % | ||||||
Other | 25 | % | 18 | % | 9 | % | ||||||
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Total | 100 | % | 100 | % | 100 | % | ||||||
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Revenue by customers’ geographic locations: North America Europe APAC Other Total revenue For the Years Ended December 31, 2018 2017 2016 48 % 43 % 39 % 40 % 46 % 54 % 12 % 11 % 7 % 0 % 0 % 0 % 100 % 100 % 100 %
The following table represents the Company’s total assets by geographic area (in thousands):area:
| December 31, 2016 | December 31, 2015 | |||||||
United States | $ | 209,728 | $ | 91,881 | ||||
Sweden | 53,089 | 54,313 | ||||||
Germany | 26,056 | — | ||||||
Singapore | 40 | 43 | ||||||
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Total | $ | 288,913 | $ | 146,237 | ||||
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| 2018 | 2017 | |||||||
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Total assets by geographic locations: | ||||||||
North America | $ | 665,833 | $ | 654,673 | ||||
Europe | 104,750 | 85,169 | ||||||
APAC | 4,038 | 3,677 | ||||||
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Total assets by geographic location | $ | 774,621 | $ | 743,519 | ||||
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The following table represents the Company’s long-lived assets by geographic area (in thousands):area:
| December 31, 2016 | December 31, 2015 | |||||||
United States | $ | 77,039 | $ | 36,350 | ||||
Sweden | 5,180 | 6,635 | ||||||
Germany | 22,541 | — | ||||||
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Total | $ | 104,760 | $ | 42,985 | ||||
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There were no long-lived assets in Singapore as of December 31, 2016 and 2015.
| December 31, | ||||||||
| 2018 | 2017 | |||||||
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Long-lived assets by geographic locations: | ||||||||
North America | $ | 464,253 | $ | 465,453 | ||||
Europe | 29,426 | 34,430 | ||||||
APAC | 848 | 854 | ||||||
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Total long-lived assets by geographic location | $ | 494,527 | $ | 500,737 | ||||
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Concentrations of Credit Risk and Significant Customers
Financial instruments that subject the Company to significant concentrations of credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivable. Per the Company’s investment policy, cash equivalents and marketable securities are invested in financial instruments with high credit ratings and credit exposure to any one issue, issuer (with the exception of U.S. treasury obligations) and type of instrument is limited. At December 31, 20162018 and 2015,2017, the Company had no investments associated with foreign exchange contracts, options contracts or other foreign hedging arrangements.
Concentration of credit risk with respect to accounts receivable is limited to customers to whom the Company makes significant sales. While a reserve for the potentialwrite-off of accounts receivable is maintained, the
Company has not written off any significant accounts to date. To control credit risk, the Company performs regular credit evaluations of its customers’ financial condition.
Revenue from significant customers as a percentage of the Company’s total revenue is as follows:
| Years ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||||||
MilliporeSigma | 15 | % | 18 | % | 28 | % | ||||||||||||||||||
GE Healthcare | 29 | % | 37 | % | 38 | % | 15 | % | 21 | % | 29 | % | ||||||||||||
MilliporeSigma | 28 | % | 29 | % | 33 | % | ||||||||||||||||||
Significant accounts receivable balances as a percentage of the Company’s total trade accounts receivable and royalties and other receivable balances are as follows:
| December 31, 2016 | December 31, 2015 | |||||||
GE Healthcare | 26 | % | 13 | % | ||||
MilliporeSigma | 8 | % | 32 | % | ||||
Bioprocessing Customer C | 1 | % | 21 | % | ||||
GE Healthcare MilliporeSigma December 31, 2018 2017 17 % 11 % 11 % 19 %
Goodwill, Other Intangible Assets and Acquisitions
Acquisitions
Total consideration transferred for acquisitions is allocated to the assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Any excess of the fair value of the net tangible and intangible assets acquired over the purchase price is recognized in the statement of operations.operations and comprehensive income. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made and the extent of royalties to be earned in excess of the defined minimum royalties. Management updates these estimates and the related fair value of contingent consideration at each reporting period. Changes in the fair value of contingent consideration are recorded in the consolidated statements of operations.operations and comprehensive income.
The Company uses the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimatingafter-tax cash flows attributable to these assets over their respective useful lives and then discounting theseafter-tax cash flows back to a present value. The Company bases its assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, etc. Discount rates used to arrive at a present value as of the date of acquisition are based on the time value of money and certain industry-specific risk factors.
Goodwill
Goodwill is not amortized and is reviewed for impairment at least annually.annually at the reporting unit level. There was no evidence of impairment to goodwill at December 31, 2016.2018 and 2017. There were no goodwill impairment charges during the fiscal years ended December 31, 2016, 20152018, 2017 and 2014.2016.
Intangible Assets
Intangible assets are amortized over their useful lives using the estimated economic benefit method, as applicable, and the amortization expense is recorded within cost of product revenue and selling, general and administrative expense in the statements of operations.operations and comprehensive income. Intangible assets and their related useful lives are reviewed at least annually to determine if any adverse conditions exist that would indicate
the carrying value of these assets may not be recoverable. More frequent impairment assessments are conducted if certain conditions exist, including a change in the competitive landscape, any internal decisions to pursue new or different technology strategies, a loss of a significant customer, or a significant change in the marketplace, including changes in the prices paid for our products or changes in the size of the market for our products. If impairment indicators are present, the Company determines whether the underlying intangible asset is recoverable through estimated future undiscounted cash flows. If the asset is not found to be recoverable, it is written down to the estimated fair value of the asset based on the sum of the future discounted cash flows expected to result from the use and disposition of the asset. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company continues to believe that its intangible assets are recoverable at December 31, 2016.2018.
Intangible assets consisted of the following at December 31, 2016 (in thousands):
| Gross Carrying Amount | Accumulated Amortization | Weighted Average Useful Life (in years) | ||||||||||
Technology – developed | $ | 12,911 | $ | (1,468 | ) | 17 | ||||||
Patents | 240 | (208 | ) | 8 | ||||||||
Customer relationships | 22,555 | (4,995 | ) | 11 | ||||||||
Trademark/ tradename | 711 | — | — | |||||||||
Other intangibles | 84 | (24 | ) | 2 | ||||||||
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Total intangible assets | $ | 36,501 | $ | (6,695 | ) | 13 | ||||||
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Intangible assets consisted of the following at December 31, 2015 (in thousands):
| Gross Carrying Amount | Accumulated Amortization | Weighted Average Useful Life (in years) | ||||||||||
Technology – developed | $ | 3,295 | $ | (1,026 | ) | 12 | ||||||
In process research and development | 1,600 | — | — | |||||||||
Patents | 240 | (177 | ) | 8 | ||||||||
Customer relationships | 11,805 | (3,682 | ) | 9 | ||||||||
Trademark/ tradename | 700 | — | — | |||||||||
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Total intangible assets | $ | 17,640 | $ | (4,885 | ) | 10 | ||||||
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Amortization expense for amortized intangible assets was approximately $2,052,000, $1,600,000 and $1,425,000 for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, the Company expects to record the approximate amortization expense (in thousands):
Year Ending | Amortization Expense | |||
December 31, 2017 | $ | 2,845 | ||
December 31, 2018 | 2,657 | |||
December 31, 2019 | 2,624 | |||
December 31, 2020 | 2,311 | |||
December 31, 2021 | 2,022 | |||
Stock Based Compensation
The Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award and recognizes it as expense over the employee’s requisite service period on a straight-line basis. The Company records the expense for share-based awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates whether the achievement of a performance-based milestone is probable as of the reporting date. The Company has no awards that are subject to market conditions. The Company recognizes stock-based compensation expense based upon options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted by an amount of estimated forfeitures.
The Company uses the Black-Scholes option pricing model to calculate the fair value of share-based awards on the grant date. The following assumptions are used in calculating the fair value of share-based awards:
Expected term – The expected term of options granted represents the period of time for which the options are expected to be outstanding. For purposes of estimating the expected term, the Company has aggregated all individual option awards into one group as the Company does not expect substantial differences in exercise behavior among its employees.
Expected volatility – The expected volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of options granted. The Company determines the expected volatility based primarily upon the historical volatility of the Company’s common stock over a period commensurate with the option’s expected term.
Risk-free interest rate – The risk-free interest rate is the implied yield available on U.S. Treasuryzero-coupon issues with a remaining term equal to the option’s expected term on the grant date.
Expected dividend yield – The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.
Estimated forfeiture rates – The Company has applied, based on an analysis of its historical forfeitures, annual forfeiture rates of 8% for awards granted tonon-executive level employees, 3% for awards granted to executive level employees and 0% for awards granted tonon-employee members of the Board of Directors to all unvested stock options as of December 31, 2014.2018. The Company reevaluates this analysis periodically and adjusts these estimated forfeiture rates as necessary. Ultimately, the Company will only recognize expense for those shares that vest.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2018, 2017 and 2016 was $0.2 million, $0.2 million and $0.4 million, respectively.
Recent Accounting Standards Updates
We consider the applicability and impact of all Accounting Standards Updates on our condensed consolidated financial statements. Updates not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations. Recently issued Accounting Standards Updates which we feel may be applicable to us are as follows:
Recently Issued Accounting PronouncementsStandard Updates – Not Yet Adopted
In April 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”) No. 2015-03, “Interest2016-02, “Leases (Topic 842).”ASU2016-02, along with subsequent ASUs issued to clarify certain provisions of ASU2016-02 (collectively known as “ASC 842”), establishes aright-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Certain qualitative and quantitative disclosures are also required. The Company will adopt ASU2016-02 and related amendments on January 1, 2019 using an optional method allowed with the issuance of ASU2018-11,“Leases – ImputationTargeted Improvements (Topic 842),” in July 2018. ASU2018-11 gives entities the option to not provide comparative period financial statements and instead apply the transition requirements as of Interest (Topic 835): Simplifying the Presentationeffective date of Debt Issuance Costs.” ASU 2015-03 requires that debt issuancethe new standard. Pursuant to additional guidance under ASC 842, the Company will also elect the optional package of practical expedients, which will allow the Company to not reassess: (i) whether expired or existing contracts contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs relatedfor any existing leases. ASC 842 also allow entities to make certain policy elections, some of which the Company plans to elect, including a recognized debt liability be presented inpolicy to not record short-term leases on the balance sheet as mentioned above. The Company is currently working through the implementation of transition-related controls and finalizing accounting elections. Although the Company is still assessing the potential impact this standard will have on its consolidated financial statements and disclosures, the Company currently estimates total ROU assets to be within the range of approximately $12 million to $14 million and lease liabilities to be within the range of approximately $16 million to $18 million upon adoption, before considering deferred taxes. The difference between the two ranges is due to approximately $4 million of unamortized lease incentives and deferred rent at the Company’s Marlborough and Waltham facilities as of December 31, 2018. The Company does not expect the adoption of ASC 842 to have a direct deductionmaterial impact on the consolidated statements of operations or consolidated statements of cash flows.
In February 2018, the FASB issued ASU2018-02,“Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the carrying amountoption to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of that debt liability. The ASU becamethe Tax Cuts and Jobs Act (the “Act”). For all entities, the guidance is effective for public entities for fiscal years beginning after December 15, 2015.2018, and interim periods within those fiscal years. Entities can choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The Company appliedwill adopt this guidance on January 1, 2019 and does not expect its adoption to have a material impact on the amended presentationits consolidated financial statements.
In August 2018, the FASB issued ASU2018-13,“Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.”ASU2018-13 includes amendments that aim to improve the effectiveness of fair value measurement disclosures. The amendments in this guidance modify the disclosure requirements on fair value measurements based on the concepts in conjunction with its issuanceFASB Concepts Statement,“Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements,” including the consideration of convertible senior notescosts and benefits. The amendments become effective for the Company in the second quarteryear ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
In August 2018, the FASB issued ASU2018-15,“Intangibles – Goodwill and Other –Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract.”ASU2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include aninternal-use software license). The guidance also requires the entity to expense the capitalized implementation costs of 2016.a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The guidance becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
In November 2018, the FASB issued ASU2018-18,“Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.”ASU2018-18 clarifies the interaction between Topic 808,“Collaborative Arrangements,”and Topic 606,“Revenue from Contracts with Customers,”by making targeted improvements to US GAAP for collaborative arrangements and providing guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. This includes improving comparability in the presentation of revenue for certain transactions between collaborative arrangement participants by allowing presentation of the units of account in collaborative arrangements that are within the scope of Topic 606 together with revenue accounted for under Topic 606. The guidance becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
Recently Issued Accounting Standard Updates – Adopted During the Period
In May 2014, the FASB issuedASU No. 2014-09, “Revenue“Revenue from Contracts with Customers (Topic 606),” (“ASC 606”) which supersedes the revenue recognition requirements in Accounting Standards Codification TopicASC 605,“Revenue Recognition,” and creates a new Topic 606,“Revenue from Contracts with Customers.” Two adoption methods are permitted: retrospectively to all prior reporting periods presented, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application. The adoption of this ASU will includeincluded updates as provided under ASU2015-14, “Revenue“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”; ASU2016-08, “Revenue“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU2016-10, “Revenue“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; and ASU2016-12, “Revenue“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The Company intends to adoptadopted the provisions of TopicASC 606 using the modified retrospective method effective January 1, 2018, and it has formed a project team to assess and implement2018. See Note 4,“Revenue Recognition”,below for further discussion of the effects of this new standard. The Company has not made a determinationstandard on the impact to itsCompany’s consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value, and options that currently exist for market value be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective prospectively for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements, as it currently does not measure any inventory at market value.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The accounting applied by a lessor is largely unchanged from that applied under the current standard. The standard must be adopted using a modified retrospective transition approach and provides for certain practical expedients. The ASU is effective for public entities for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company has not yet completed its assessment of the impact of the new standard on its consolidated financial statements; however, the Company anticipates that it will recognize right-of-use assets and lease liabilities for leases on its current facilities.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which aims to simplify several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification of certain items on the statement of cash flows and accounting for forfeitures. The ASU is effective for public entities for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company intends to adopt the provisions of this ASU as of January 1, 2017; the Company does not expect the impact of this new standard to have a material effect on its 2017 consolidated financial statements, as the Company will not be required to change its accounting treatment of forfeitures, classification of current awards or cash flow disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “Statement“Statement of Cash Flows (Topic 203): Classification of Certain Cash Receipts and Cash Payments”.Payments.” ASU No. 2016-15 addresses eight specific cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively with early adoption permitted. The Company currently classifieshas historically classified payments up to the amount of its contingent consideration liability recognized at the date of its acquisitionsacquisition as financing activities, with additional payments classified as operating activities. As a result,Because the Company does not expecthas classified its contingent consideration payments as required by this standard, the adoption of this standard did not have any impact on its consolidated financial statements when applied on a retrospective basis.
In October 2016, the FASB issued ASU2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” ASU2016-16 requires that the income tax consequences of an intra-entity asset transfer other than inventory are recognized at the time of the transfer. An entity will continue to recognize the income tax consequences of an intercompany transfer of inventory when the inventory is sold to a third party. The Company adopted this standard on a modified-retrospective basis on January 1, 2018. See Note 7,“Income Taxes”,below for a discussion of the impact of this ASU 2016-15on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU2016-18,“Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that the statement of cash flows explain the change during the period in the total cash, which is inclusive of cash and cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. The Company adopted this standard on a retrospective basis on January 1, 2018. The adoption resulted in an increase to cash, cash equivalents and restricted cash of $450,000 in the statement of cash flows at December 31, 2016 and September 30, 2017. The Company did not hold any restricted cash at December 31, 2018 or December 31, 2017.
In January 2017, the FASB issuedASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this standard as of January 1, 2018, and the adoption of ASU2017-01 did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU2017-04,“Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. ASU2017-04 requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on a prospective basis beginning on January 1, 2020, with early adoption permitted. The Company adopted this standard as of January 1, 2018, and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
| 3. | Acquisitions |
AcquisitionsSpectrum LifeSciences, LLC
Atoll GmbH
On AprilAugust 1, 2016,2017, the Company’s subsidiary Repligen Sweden acquired Atoll GmbH (“Atoll”) from UV-Cap GmbH & Co. KG (the “Seller”)Company completed the acquisition of Spectrum pursuant to a Share Purchasethe terms of an Agreement (the “Share Purchase Agreement”),and Plan of Merger and Reorganization, dated as of March 31, 2016June 22, 2017 (such acquisition, the “Atoll“Spectrum Acquisition”), by.
Spectrum is a diversified filtration company with a differentiated portfolio of hollow fiber cartridges, benchtop to commercial scale filtration and among Repligen Sweden, the Seller,perfusion systems and the Company, in its capacity as guarantora broad portfolio of the obligations of Repligen Sweden under the Share Purchase Agreement. The Atoll Acquisition was subject to certain closing conditions that did not occur until April 1, 2016. Paymentdisposable andsingle-use solutions. Spectrum’s products are primarily used for the Atoll Acquisition was denominated in Euros but is reflected here in U.S. dollarsfiltration, isolation, purification and concentration of monoclonal antibodies, vaccines, recombinant proteins, diagnostic products and cell therapies where the company offers both standard and customized solutions to its bioprocessing customers.
Spectrum’s filtration products include its KrosFlo® line of hollow fiber cartridges, tangential flow filtration (“TFF”) systems andsingle-use flow path consumables, as well as its Spectra/Por® portfolio of laboratory dialysis products and itsPro-Connex®single-use hollow fiberModule-Bag-Tubing sets. Outside of filtration, Spectrum products include Spectra/Chrom® liquid chromatography products for presentation purposes.
In connection withresearch applications. These bioprocessing products account for the Atoll Acquisition, the Company issued and contributed 538,700 sharesmajority of the Company’s common stock, par valueSpectrum revenues. Spectrum also offers a line of $0.01 per share valued at $14.1 million (the “Stock Consideration”) to Repligen Sweden through a transfer by the Company on behalf of Repligen Sweden to fulfill Repligen Sweden’s obligation to deliver the Stock Consideration under the Share Purchase Agreement. The issuance of the Stock Consideration was not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. The Stock Consideration was based on the fair value of the Company’s common stock on April 1, 2016.
This acquisition strengthened Repligen’s bioprocessing business by adding a complementary extension to an existing product line while expanding its direct sales presence worldwide. On September 20, 2016, Atoll changed its name to Repligen GmbH.
The Atoll Acquisition was accounted for as a purchase of a business under ASC 805, “Business Combinations.” The total purchase price of the Atoll Acquisition was $25.3 million, consisting of an upfront cash payment of $10.2 million, less $74,000 as a result of the final determination of working capital, issuance of the Stock Consideration, and a future potential milestone payment of $1.1 million if specific revenue growth targets are met for 2016. The $1.1 million potential contingent consideration had an initial probability weighted fair value at the time of the closing of the Atoll Acquisition of approximately $952,000.operating room products.
Consideration Transferred
The Company accounted for the AtollSpectrum Acquisition as thea purchase of a business under U.S. GAAP.ASC 805,“Business Combinations.” The Spectrum Acquisition was funded through payment of $122.9 million in cash, the issuance of 6,153,995 unregistered shares of the Company’s common stock totaling $247.6 million and a working capital adjustment of $0.4 million for a total purchase price of $370.9 million. Under the acquisition method of accounting, the assets of AtollSpectrum were recorded as of the acquisition date, at their respective
fair values, and consolidated with those of Repligen.the Company. The fair value of the net assets acquired was approximately $25.3$370.9 million.
The preparation of theconsideration and purchase price information has been prepared using a valuation that required the use of significant assumptions and estimates.estimates in its preparation. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However,reasonable; however, actual results may differ from these estimates.
The total consideration transferred follows (in(amounts in thousands):
Cash consideration, less $74 of working capital adjustments | $ | 10,176 | ||
Value of common stock issued | 14,138 | |||
Estimated fair value of contingent consideration | 952 | |||
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Total consideration transferred | $ | 25,266 | ||
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Cash consideration | $ | 122,932 | ||
Equity consideration | 247,575 | |||
Working capital adjustment | 425 | |||
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Net assets acquired | $ | 370,932 | ||
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The fair value of contingent consideration was determined based upon a probability weighted analysis of expected future milestone and settlement payments to be made to the Seller. The Company could make a contingent consideration payment of $1.1 million if specific revenue growth targets are met for 2016. The liability for contingent consideration is included in current liabilities on the consolidated balance sheets. Because the contingent consideration relates only to 2016 sales growth, no further remeasurement of this liability is required as of December 31, 2016. See Note 9—Accrued Liabilities for further details.
Acquisition relatedAcquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company has incurred $1,279,000$2.9 million and $7.1 million in transactionintegration costs related to the Atoll Acquisition. The transactionSpectrum Acquisition in 2018 and 2017, respectively. These costs are primarily included in selling, general and administrative expenses in the consolidated statements of operations.operations and comprehensive income.
Fair Value of Net Assets Acquired
The allocation of purchase price was based onamounts recorded for the fair value of assets acquired and liabilities assumedin the Spectrum Acquisition are final, based on the facts and circumstances that existed as of Aprilthe August 1, 2016.2017, the acquisition date. The components and allocation of the purchase price consists of the following amounts (in(amounts in thousands):
Cash and cash equivalents | $ | 1,409 | $ | 10,137 | ||||
Accounts receivable | 697 | 5,075 | ||||||
Inventory | 155 | 13,502 | ||||||
Other current assets | 169 | |||||||
Prepaid expenses and other assets | 616 | |||||||
Fixed assets | 114 | 6,004 | ||||||
Deferred tax assets | 1,102 | |||||||
Customer relationships | 5,318 | 78,400 | ||||||
Developed technology | 2,175 | 38,560 | ||||||
Non-competition agreements | 57 | |||||||
Trademark and trade name | 11 | |||||||
Deferred tax assets | 885 | |||||||
Accounts payable and other liabilities assumed | (599 | ) | ||||||
Trademark and tradename | 2,160 | |||||||
Non-compete agreements | 960 | |||||||
Goodwill | 265,722 | |||||||
Accounts payable | (1,335 | ) | ||||||
Unrecognized tax benefit | (576 | ) | ||||||
Accrued liabilities | (5,787 | ) | ||||||
Deferred tax liabilities | (2,202 | ) | (43,608 | ) | ||||
Goodwill | 17,077 | |||||||
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Net assets acquired | $ | 25,266 | ||||||
Fair value of net assets acquired | $ | 370,932 | ||||||
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Of the consideration paid, $5.3$78.4 million represents the fair value of customer relationships that will be amortized over the weighted average determined useful life of 1315 years, and $2.2 million represents the fair value of developed technology
that will be amortized over a determined useful life of 14 years. $57,000 represents the fair value of non-competition agreements and $11,000 represents the fair value of trademarks and trade names that will be amortized over a determined useful life of 2 years. The aforementioned intangible assets will be amortized on a straight-line basis.
The goodwill of $17.1 million represents future economic benefits expected to arise from synergies from combining operations, utilizing the Company’s existing sales infrastructure to increase market presence and the extension of existing customer relationships.
TangenX Technology Corporation
On December 14, 2016, the Company acquired TangenX Technology Corporation (“TangenX”), pursuant to the terms of the Share Purchase Agreement, dated as of December 14, 2016 (the “Share Purchase Agreement”), by and among the Company and TangenX (such acquisition, the “TangenX Acquisition”). The Company acquired all outstanding shares and the business of TangenX, including TangenX’s innovative single-use Sius line of tangential flow filtration (“TFF”) cassettes and hardware used in downstream biopharmaceutical manufacturing processes.
Sius TFF is used in the filtration of biological drugs, complimenting Repligen’s OPUS line of pre-packed chromatography columns used in downstream purification. Pursuant to the Share Purchase Agreement, Repligen acquired all of the outstanding shares of TangenX, as well as certain assets and liabilities.
The TangenX Acquisition was accounted for as a purchase of a business under ASC 805, “Business Combinations.” The total purchase price of the TangenX Acquisition was $37.1 million in cash.
Consideration Transferred
The Company accounted for the TangenX Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of TangenX were recorded as of the acquisition date, at their respective fair values, and consolidated with those of Repligen. The fair value of the net assets acquired was approximately $37.1 million.
The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.
The total consideration transferred follows (in thousands):
Cash consideration | $ | 37,532 | ||
Less: working capital adjustment | (467 | ) | ||
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Net assets acquired | $ | 37,065 | ||
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Acquisition related costs are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred. The Company incurred $935,000 in transaction costs related to the TangenX Acquisition. The transaction costs are included in 2016 selling, general and administrative expenses in the consolidated statements of operations.
Fair Value of Net Assets Acquired
The allocation of purchase price was based on the fair value of assets acquired and liabilities assumed as of December 14, 2016. The components and allocation of the purchase price consists of the following amounts (in thousands):
Cash and cash equivalents | $ | 1,218 | ||
Accounts receivable | 459 | |||
Other receivables | 111 | |||
Inventory | 936 | |||
Other current assets | 50 | |||
Fixed assets, net | 215 | |||
Customer relationships | 6,192 | |||
Developed technology | 6,044 | |||
Non-competition agreements | 21 | |||
Trademark and trade name | 11 | |||
Accounts payable and other liabilities assumed | (3,083 | ) | ||
Deferred tax liabilities | (4,525 | ) | ||
Goodwill | 29,416 | |||
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Net assets acquired | $ | 37,065 | ||
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The allocation of the purchase price related to this acquisition is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets, and preliminary estimates of the fair value of liabilities assumed. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized.
Of the consideration paid, $6.2 million represents the fair value of customer relationships that will be amortized over the determined useful life of 13 years and $6.0$38.6 million represents the fair value of developed technology that will be amortized over a determined useful life of 20 years. $21,000$1.0 million represents the fair value ofnon-competition agreements that will be amortized over a determined life of 53 years. $11,000$2.2 million represents the fair value of trademarks and trade names that will be amortized over a determined useful life of 2 to 20 years. The aforementioned intangible assets will be amortized on a straight-line basis.
The goodwill of $29.4$265.7 million represents future economic benefits expected to arise from synergies from combining operations and commercial organizations to increase market presence and the extension of existing customer relationships. None of the goodwill recorded is expected to be deductible for income tax purposes.
Revenue, Net Income and Pro Forma Presentation
The Company recorded revenue from TangenXSpectrum of approximately $119,000$19.4 million from December 15, 2016August 1, 2017 through December 31, 2016.2017. The Company has included the operating results of TangenXSpectrum in its consolidated statements of operations and comprehensive income since the December 15, 2016August 1, 2017 acquisition date. The following table presents unaudited supplemental pro forma information as if the TangenXSpectrum Acquisition had occurred as of January 1, 2015 (in2017 (amounts in thousands, except per share data):
| December 31, 2016 | December 31, 2015 | |||||||
Total revenue | 110,228 | 88,437 | ||||||
Net income | 5,744 | 13,208 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.17 | $ | 0.40 | ||||
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Diluted | $ | 0.17 | $ | 0.39 | ||||
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Total revenue Net income (loss) Earnings (loss) per share: Basic Diluted December 31, 2017 $ 162,913 $ 17,220 $ 0.41 $ 0.40
The unaudited pro forma information for the yearyears ended December 31, 2016 and 20152017 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. Unaudited pro forma net income for year ended December 31, 20162017 was adjusted to exclude acquisition-related transaction costs, nonrecurring expenses related to the fair value adjustments associated with the acquisition and income tax benefits resulting from the acquisition. In addition, the unaudited pro forma net income for the year ended December 31, 20162017 was adjusted to include incremental amortization of intangible assets. These items have been factored to the unaudited pro forma net income for the year ended December 31, 2016. The unaudited pro forma net income for the year ended December 31, 2015 was adjusted to include these acquisition-related transaction costs, expenses related to the fair value adjustments, amortization of intangible assets, and income tax benefits resulting from the acquisition.2017.
These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments to reflect the pro forma results of operations as if the acquisition had occurred as of the beginning of the periods presented, such as fair value adjustments to inventory and increased amortization for the fair value of acquired intangible assets. The pro forma information does not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
Refine Technology, LLC
| 4. | Revenue Recognition |
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On June 2, 2014, pursuantThe Company adopted ASC 606 on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the practical expedient in paragraph ASC606-10-65-1-(f)-4, which did not have a material effect on the cumulative impact of adopting ASC 606. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The impact to the termsCompany’s consolidated financial statements as a result of applying ASC 606 was immaterial. Deferred revenue resulting from contracts with customers is included in accrued expenses on the Company’s consolidated balance sheet.
Disaggregation of Revenue
Revenues for the years ended December 31, 2018, 2017 and 2016 were as follows (amounts in thousands, except percentages):
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Product Revenue | $ | 193,891 | $ | 141,089 | $ | 104,441 | ||||||
Royalty and other income | 141 | 147 | 100 | |||||||||
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Total revenue | $ | 194,032 | $ | 141,236 | $ | 104,541 | ||||||
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When disaggregating revenue, the Company considered all of the Asset Purchase Agreement, dated aseconomic factors that may affect its revenues. Because all of June 2, 2014 (the “Asset Purchase Agreement”), byits revenues are from bioprocessing customers, there are no differences in the nature, timing and among the Company, Refine Technology, LLC (a limited liability company formed under the lawsuncertainty of the StateCompany’s revenues and cash flows from any of New Jersey) (“Refine”),its product lines. However, given that the members of Refine Technology, LLC, Jerry Shevitz, Refine Technology Sales LLC (a limited liability company formed underCompany’s revenues are generated in different geographic regions, factors such as regulatory and geopolitical factors within those regions could impact the lawsnature, timing and uncertainty of the StateCompany’s revenues and cash flows. In addition, a significant portion of New Jersey)the Company’s revenues are generated from two customers; therefore, economic factors specific to these two customers could impact the nature, timing and Refine Technology Sales Asia PTE. LTD. (a limited private company organizeduncertainty of the Company’s revenues and cash flows.
Disaggregated revenue from contracts with customers by geographic region can be found in Note 2.,“Summary of Significant Accounting Policies – Segment Reporting,” above.
Revenue from significant customers is as follows (amounts in thousands):
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
MilliporeSigma | $ | 29,843 | $ | 25,061 | $ | 28,856 | ||||||
GE Healthcare | $ | 29,616 | $ | 30,150 | $ | 30,366 | ||||||
Filtration Products
The Company’s Filtration product line generates revenue through the sale of KrosFlo® hollow fiber (“HF”) TFF membranes and modules, ProConnex®single-use flow path connectors, flat sheet TFF cassettes and hardware, and XCell™ alternating tangential flow (“ATF”) devices and related consumables.
The Company markets the KrosFlo line of HF cartridges and TFF systems and the ProConnex line ofsingle-use flow path connectors which were acquired as part of the Spectrum Acquisition. These products are used in the Republicfiltration, isolation, purification and concentration of Singapore),biologics and diagnostic products. Sales of large-scale systems generally include components and consumables as well as training and installation services at the request of the customer. Because the initial sale of components and consumables are necessary for the operation of the system, such items are combined with the systems as a single performance obligation. Training and installation services do not significantly modify or customize these systems and therefore represent a distinct performance obligation.
The Company’s other Filtration product offerings are not highly interdependent of one another and are therefore considered distinct products that represent separate performance obligations. Revenue on these products is generally recognized at a point in time upon transfer of control to the customer. The Company acquiredinvoices the businesscustomer for the installation and training services in an amount that directly corresponds with the value to the customer of Refine, including Refine’s Alternating Tangential Flow (“ATF”)the Company’s performance to date; therefore, revenue recognized is based on the amount billable to the customer in accordance with the practical expedient under ASC606-10-55-18.
The Company also markets flat sheet TFF cassettes and hardware. TFF is a rapid and efficient method for separation and purification of biomolecules that is widely used in laboratory, process development and process scale applications in biopharmaceutical manufacturing. The Company’ssingle-use SIUS™ TFF cassettes and hardware are not highly interdependent of one another and are therefore considered distinct products that represent separate performance obligations. SIUS TFF product revenue is generally recognized at a point in time upon transfer of control to the customer.
The Company also markets the XCell™ ATF System, a market-leadingtechnologically advanced filtration device used in upstream processes to significantly increase product yieldcontinuously remove cellular metabolic waste products during the course of a fermentation step ofrun, freeing healthy cells to continue producing the biologic drug manufacturing process (the “Refine Business”of interest. ATF Systems typically include a filtration system and consumables (i.e., tube devices, metal stands) as well as training and installation services at the acquisitionrequest of the Refine Business, the “Refine Acquisition”). Pursuant to the Asset Purchase Agreement, Repligen purchased allcustomer. The filtration system and consumables are considered distinct products and therefore represent separate performance obligations. First time purchasers of the assets related to Refine’s ATFsystems typically purchase a controller that is shipped with the tube device(s) and metal stand(s). The controller is not considered distinct as it is a proprietary product that is highly interdependent with the filtration system; therefore, the controller is combined with the filtration system and assumed certain specified liabilities related to Refine’s ATF system. This acquisition strengthened Repligen’s bioprocessing business by adding a complementary product line while expanding its direct sales presence worldwide. The transaction was accounted for as a purchasesingle performance obligation. The training and installation services do not significantly modify or customize the ATF system and therefore represent a distinct performance obligation. ATF system product revenue related to the filtration system (including the controller if applicable) and consumables is generally recognized at a point in time upon transfer of a business under ASC 805, Business Combinations.control to the customer. ATF system service revenue related to training and installation services is generally recognized over time, as the customer simultaneously receives and consumes the benefits as the Company performs. The terms ofCompany invoices the acquisition includedcustomer for the installation and training services in an upfront cash payment of approximately $21,236,000 less approximately $66,000 as a result ofamount that directly corresponds with the final determination of working capital, issuance of 215,285 sharesvalue to the customer of the Company’s $0.01 par value common stock valued at $4,000,000, future potential milestone payments totaling upperformance to $10,900,000 if specific sales targets are met fordate; therefore, revenue recognized is based on the years 2014, 2015 and 2016, and future potential payments upamount billable to $7,500,000 out of any amounts that might be receivedthe customer in connectionaccordance with the resolution, withdrawalpractical expedient under ASC606-10-55-18.
Chromatography Products
The Company’s Chromatography product line includes a number of products used in the downstream purification and quality control of biological drugs. The majority of chromatography revenue relates to the OPUSpre-packed chromatography column line and Protein A chromatography resins. OPUS columns typically consist of the outer hardware of the column with a resin as ordered by the customer packed inside of the column. OPUS columns may also be ordered without the packed resin. In either scenario, the OPUS column and resin are not interdependent of one another and are therefore considered distinct products that represent separate performance obligations. Chromatography product revenue is generally recognized at a point in time upon transfer of control to the customer.
Protein Products
The Company’s Protein product line generates revenue through the sale of Protein A ligands and growth factors. Protein A ligands are an essential component of Protein A chromatography resins (media) used in the purification
of virtually all monoclonal antibody (“mAb”)-based drugs on the market or settlementin development. The Company manufactures multiple forms of Protein A ligands under long-term supply agreements with major life sciences companies, who in turn sell their Protein A chromatography media to end users (biopharmaceutical manufacturers). The Company also manufactures growth factors for sale under long-term supply agreements with certain life sciences companies as well as direct sales to its customers. Each protein product is considered distinct and therefore represents a separate performance obligation. Protein product revenue is generally recognized at a point in time upon transfer of control to the customer.
Other Products
The Company’s other products include operating room products sold to hospitals. Other product revenue is generally recognized at a point in time upon transfer of control to the customer.
Transaction Price Allocated to Future Performance Obligations
Remaining performance obligations represents the transaction price of contracts for which work has not been performed or has been partially performed. The Company’s future performance obligations relate primarily to the installation and training of certain patent disputesof its systems sold to customers. These performance obligations are completed within one year of receipt of a purchase order from its customers. Accordingly, the Company has elected to not disclose the value of these unsatisfied performance obligations as provided under ASC606-10-50-14.
Contract Balances from Contracts with Customers
The following table provides information about receivables and deferred revenue from contracts with customers as of December 31, 2018 (amounts in thousands):
| 2018 | ||||
Balances from contracts with customers only: | ||||
Accounts receivable | $ | 33,015 | ||
Deferred revenue | 1,290 | |||
Revenue recognized during the three-month period ending December 31, 2018 relating to: | ||||
The beginning deferred revenue balance | $ | 422 | ||
Changes in pricing related to products or services satisfied in previous periods | — | |||
The timing of revenue recognition, billings and cash collections results in the accounts receivables and deferred revenue balances on the Company’s consolidated balance sheets. There were no impairment losses on receivables during the year ending December 31, 2018.
A contract asset is created when the Company satisfies a third party. The $10,900,000 potential contingent consideration had an initial probability weighted fair value at acquisition of $1,370,000. The $7,500,000 potential contingent consideration had onlyperformance obligation by transferring a nominal probability weighted fair value at acquisition. In additionpromised good to the initialcustomer. Contract assets may represent conditional or unconditional rights to consideration. The right is conditional, and recorded as a contract asset, if the Company must first satisfy another performance obligation in the contract before it is entitled to payment from the customer. Contract assets are transferred to billed receivables once the right becomes unconditional. If the Company has the unconditional right to receive consideration approximately $774,000 was paidfrom the customer, the contract asset is accounted for as a billed receivable and presented separately from other contract assets. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due.
When consideration is received, or such consideration is unconditionally due, from a customer prior to Refine following the acquisition under a Transition Services Agreement under which certain employees of Refine providedtransferring goods or services to the Company in supportcustomer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the Refine Business. As these payments were contingent upon future service, they were recognized as operating expense, ratably whileproducts or services is transferred to the services were provided.customer and all revenue recognition criteria have been met.
Consideration TransferredCosts to Obtain or Fulfill a Customer Contract
The Company’s sales commission structure is based on achieving revenue targets. The commissions are driven by revenue derived from customer purchase orders which are short term in nature.
Applying the practical expedient in paragraph340-40-25-4, the Company accounted forrecognizes the Refine Acquisitionincremental costs of obtaining contracts as an expense when incurred if the purchaseamortization period of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of the Refine Business were recorded as of the acquisition date, at their respective fair values, and consolidated with those of Repligen. The fair value of the net assets acquired was approximately $26,540,000.
The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.
The total consideration transferred follows (in thousands):
Cash consideration, less $66 of working capital adjustments | $ | 21,170 | ||
Value of common stock issued | 4,000 | |||
Estimated fair value of contingent consideration | 1,370 | |||
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Total consideration transferred | $ | 26,540 | ||
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The fair value of contingent consideration was determined based upon a probability weighted analysis of expected future milestone and settlement payments to be made to the seller. The Company paid $4,350,000 to Refine in 2016 for achievements of sales targets met in 2015 and $1,000,000 to Refine in 2015 for achievements of sales targets met in 2014, and could make payments of up to $9,900,000 if specific sales targets are met in 2015 and 2016. In addition, the Company could pay Refine up to $7,500,000 out of any receipts that might be received in connection with the resolution, withdrawalotherwise would have recognized is one year or settlement of certain patent disputes with a third party. The liability for contingent consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. Please see Note 9 – Accrued Liabilities for further details.
Acquisition related costs are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred. The Company incurred approximately $818,000 in transaction costs related to the Refine Acquisition. The transactionless. These costs are included in 2014 selling, general, and administrative expenses inexpenses. When shipping and handling costs are incurred after a customer obtains control of the consolidated statements of operations.products, the Company accounts for these as costs to fulfill the promise and not as a separate performance obligation.
| 5. | Goodwill and Other Intangible Assets |
Fair Value of Net Assets AcquiredGoodwill
The allocation ofGoodwill represents the difference between the purchase price was based onand the estimated fair value of identifiable assets acquired and liabilities assumed as of June 2, 2014. The componentsassumed. Goodwill acquired in a business combination and allocation of the purchase price consists of the following amounts (in thousands):
Accounts receivable | $ | 1,647 | ||
Inventory | 1,003 | |||
Other current assets | 184 | |||
Fixed assets | 85 | |||
Customer relationships | 6,400 | |||
Developed technology | 2,000 | |||
In process research and development (“IPR&D”) | 1,600 | |||
Trademark and trade name | 700 | |||
Accounts payable and other liabilities assumed | (431 | ) | ||
Goodwill | 13,352 | |||
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Net assets acquired | $ | 26,540 | ||
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Of the consideration paid, $6,400,000 represents the fair value of customer relationships that will be amortized over the determined useful life of 10 years and $2,000,000 represents the fair value of developed technology that will be amortized over a determined useful life of 15 years. $700,000 represents the fair value of trademark and trade name determined to have an indefinite useful life and is not subject to amortization.
$1,600,000 of the consideration paid represents the fair value of acquired IPR&D projects that are considered identifiable assets as of the acquisition date. Those assets are considered indefinite lived until efforts associatedamortized, but instead is tested for impairment at least annually in accordance with the projects are completed or abandoned. The major acquired technology IPR&D relates to the development of a single use system product extension to the XCell ATF System business. The Company launched its XCell ATF single-use product line in the third quarter of 2016. The Company performed an assessment of the in-process research and development assets and their estimated useful lives to determine if any circumstances exist that would result in an impairment. The Company has determined that the fair value of these intangible assets exceeds their carrying values and are therefore not impaired; accordingly, the Company reclassified in-process research and development intangible assets to developed technology and began to amortize these intangible assets in the third quarter of 2016.
The excess of the purchase price over the fair value of tangible and intangible assets acquired was recorded to goodwill. The goodwill recognized is attributable to expected synergies that the Company will realize from this acquisition. This goodwill is deductible for tax purposes over the next 15 years.
Revenue, Net Income and Pro Forma Presentation
The Company recorded revenue from Refine of $6,793,000 from June 2, 2014 through December 31, 2014. The segregation of Refine’s net income is administratively impractical, as the Company operates as one operating segment and does not separately allocate expenses. The Company has included the operating results of Refine in its fiscal 2016, 2015 and 2014 consolidated statements of operations since the June 2, 2014 acquisition date.ASC 350. The following table presents 2014 unaudited supplemental pro forma information as ifrepresents the Refine Acquisition had occurred as of January 1, 2014 (in thousands, except per share data):
| December 31, 2014 | ||||
Total revenue | $ | 67,330 | ||
Net income | 9,493 | |||
Earnings per share: | ||||
Basic | $ | 0.28 | ||
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Diluted | $ | 0.27 | ||
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The unaudited pro forma information for the year-ended December 31, 2014 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. Unaudited pro forma net income for year-ended December 31, 2014 was adjusted to exclude acquisition-related transaction costs. In addition, the unaudited pro forma net income for the year-ended December 31, 2014 was adjusted to exclude nonrecurring expenses related to the fair value adjustments associated with the acquisition of Refine that were recorded by the Company.
These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments to reflect the pro forma results of operations as if the acquisition had occurred as of the beginning of the periods presented, such as fair value adjustments to inventory and increased amortization for the fair value of acquired intangible assets. The pro forma information does not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
Goodwill
The changes in the carrying value of goodwill for the yearyears ended December 31, 2016 is as follows (in2018 and 2017 (amounts in thousands):
Balance at December 31, 2015 | $ | 14,346 | ||
Goodwill arising from the Atoll Acquisition | 17,077 | |||
Goodwill arising from the TangenX Acquisition | 29,416 | |||
Foreign currency adjustments on goodwill from the Atoll Acquisition | (1,291 | ) | ||
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Balance at December 31, 2016 | $ | 59,548 | ||
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Balance as of December 31, 2016 | $ | 59,548 | ||
Goodwill adjustment related to TangenX acquisition | 85 | |||
Acquisition of Spectrum Lifesciences, LLC | 265,519 | |||
Cumulative translation adjustment | 2,181 | |||
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Balance as of December 31, 2017 | $ | 327,333 | ||
Goodwill adjustment related to Spectrum Lifesciences, LLC acquisition | 203 | |||
Cumulative translation adjustment | (801 | ) | ||
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Balance as of December 31, 2018 | $ | 326,735 | ||
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During each of the fourth quarters of 2018, 2017 and 2016, we completed our annual impairment assessments and concluded that goodwill was not impaired in any of those years.
Other Intangible Assets
Intangible assets, except for the ATF tradename, are amortized over their useful lives using the estimated economic benefit method, as applicable, and the amortization expense is recorded within selling, general and administrative expense in the Company’s statements of operations and comprehensive income. The ATF tradename areis not amortized. The Company reviews its indefinite-lived intangible assets not subject to amortization to determine if adverse conditions exist or a change in circumstances exists that would indicate an impairment. Intangible assets and their related useful lives are reviewed at least annually to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. More frequent impairment assessments are conducted if certain conditions exist, including a change in the competitive landscape, any internal decisions to pursue new or different technology strategies, a loss of a significant customer, or a significant change in the marketplace, including changes in the prices paid for our products or changes in the size of the market for our products. An impairment results if the carrying value of the asset exceeds the estimated fair value of the asset. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company continues to believe that its intangible assets are recoverable at December 31, 2016.2018.
Intangible assets, net consisted of the following at December 31, 2018:
| December 31, 2018 | ||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Useful Life (in years) | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Finite-lived intangible assets: | ||||||||||||||||
Technology - developed | $ | 53,315 | $ | (5,942 | ) | $ | 47,373 | 19 | ||||||||
Patents | 240 | (240 | ) | — | 8 | |||||||||||
Customer relationships | 101,460 | (16,609 | ) | 84,851 | 14 | |||||||||||
Trademarks | 2,160 | (159 | ) | 2,001 | 20 | |||||||||||
Other intangibles | 1,061 | (548 | ) | 513 | 3 | |||||||||||
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Total finite-lived intangible assets | 158,236 | (23,498 | ) | 134,738 | 16 | |||||||||||
Indefinite-lived intangible asset: | ||||||||||||||||
Trademarks | 700 | — | 700 | — | ||||||||||||
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Total intangible assets | $ | 158,936 | $ | (23,498 | ) | $ | 135,438 | |||||||||
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Income tax dataIntangible assets consisted of the following at December 31, 2017:
| December 31, 2017 | ||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Useful Life (in years) | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Finite-lived intangible assets: | ||||||||||||||||
Technology - developed | $ | 51,801 | $ | (3,201 | ) | $ | 48,600 | 19 | ||||||||
Patents | 240 | (238 | ) | 2 | 8 | |||||||||||
Customer relationships | 102,120 | (9,636 | ) | 92,484 | 14 | |||||||||||
Trademarks | 2,160 | (47 | ) | 2,113 | 20 | |||||||||||
Other intangibles | 1,063 | (209 | ) | 854 | 3 | |||||||||||
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Total finite-lived intangible assets | 157,384 | (13,331 | ) | 144,053 | 16 | |||||||||||
Indefinite-lived intangible asset: | ||||||||||||||||
Trademarks | 700 | — | 700 | — | ||||||||||||
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Total intangible assets | $ | 158,084 | $ | (13,331 | ) | $ | 144,753 | |||||||||
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Amortization expense for finite-lived intangible assets was $10.6 million, $6.2 million and $2.1 million for the years ended December 31, 2018, 2017 and 2016, 2015 and 2014 (inrespectively. As of December 31, 2018, the Company expects to record the following amortization expense (amounts in thousands):
| December 31, 2016 | December 31, 2015 | December 31, 2014 | ||||||||||
The components of income from operations before income taxes are as follows: | ||||||||||||
Domestic | $ | (4,882 | ) | $ | (2,490 | ) | $ | (1,152 | ) | |||
Foreign | 16,574 | 15,913 | 12,290 | |||||||||
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Total | $ | 11,692 | $ | 13,423 | $ | 11,138 | ||||||
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The current and deferred components of the provision for income taxes on operations are as follows: | ||||||||||||
Current | $ | 4,077 | $ | 3,745 | $ | 2,480 | ||||||
Deferred | (4,066 | ) | 333 | 488 | ||||||||
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Total | $ | 11 | $ | 4,078 | $ | 2,968 | ||||||
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The jurisdictional components of the provision for income taxes on operations are as follows: | ||||||||||||
Federal | $ | (3,809 | ) | $ | 295 | $ | 214 | |||||
State | (207 | ) | 276 | (67 | ) | |||||||
Foreign | 4,027 | 3,507 | 2,821 | |||||||||
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Total | $ | 11 | $ | 4,078 | $ | 2,968 | ||||||
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For the Years Ended December 31, | Estimated Amortization Expense | |||
2019 | $ | 10,536 | ||
2020 | 9,955 | |||
2021 | 9,464 | |||
2022 | 9,462 | |||
2023 | 9,462 | |||
2024 and thereafter | 85,859 | |||
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Total | $ | 134,738 | ||
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| 6. | Consolidated Balance Sheet Detail |
Inventories, net
Inventories, net consists of the following:
At
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| (Amounts in thousands) | ||||||||
Raw materials | $ | 24,937 | $ | 22,351 | ||||
Work-in-process | 5,185 | 4,083 | ||||||
Finished products | 12,141 | 12,570 | ||||||
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Total inventories, net | $ | 42,263 | $ | 39,004 | ||||
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Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| (Amounts in thousands) | ||||||||
Equipment maintenance and services | $ | 1,677 | $ | 1,091 | ||||
Prepaid taxes | 843 | 311 | ||||||
Prepaid insurance | 629 | 594 | ||||||
Deferred costs | 55 | 67 | ||||||
Other | 697 | 218 | ||||||
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Total prepaid expenses and other current assets | $ | 3,901 | $ | 2,281 | ||||
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Property, Plant and Equipment
Property, plant and equipment consist of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| (Amounts in thousands) | ||||||||
Land | $ | 1,023 | $ | 1,023 | ||||
Buildings | 764 | 764 | ||||||
Leasehold improvements | 16,259 | 15,673 | ||||||
Equipment | 24,092 | 21,904 | ||||||
Furniture and fixtures | 5,448 | 4,272 | ||||||
Construction in progress(1) | 12,906 | 2,581 | ||||||
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Total property, plant and equipment | 60,492 | 46,217 | ||||||
Less - Accumulated depreciation | (28,312 | ) | (23,800 | ) | ||||
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Total property, plant and equipment, net | $ | 32,180 | $ | 22,417 | ||||
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| (1) | Construction in progress as of December 31, 2018 includes $7.3 million for the buildout of our Marlborough facility, $2.1 million in capitalizedinternal-use software development costs and $2.1 million for a casting machine, among other projects. |
Depreciation expense totaled $5.2 million, $4.2 million and $3.3 million in the fiscal years ended December 31, 2018, 2017 and 2016, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| (Amounts in thousands) | ||||||||
Employee compensation | $ | 9,953 | $ | 9,560 | ||||
Taxes | 1,024 | 1,668 | ||||||
Royalty and license fees | 242 | 1,383 | ||||||
Accrued purchases | 683 | 1,191 | ||||||
Warranties | 546 | 598 | ||||||
Professional fees | 942 | 947 | ||||||
Deferred revenue | 1,290 | 960 | ||||||
Other | 1,185 | 1,622 | ||||||
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Total accrued liabilities | $ | 15,865 | $ | 17,929 | ||||
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| 7. | Income Taxes |
The components of income from operations before income taxes are as follows:
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Domestic | $ | (73 | ) | $ | (6,709 | ) | $ | (4,882 | ) | |||
Foreign | 21,509 | 13,957 | 16,574 | |||||||||
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Income from operations before income taxes | $ | 21,436 | $ | 7,248 | $ | 11,692 | ||||||
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The components of the income tax provision (benefit) from operations are as follows:
| For the Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Current and deferred components of the tax provision (benefit) from operations: | ||||||||||||
Current | $ | 4,354 | $ | 3,624 | $ | 4,077 | ||||||
Deferred | 465 | (24,729 | ) | (4,066 | ) | |||||||
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Total | $ | 4,819 | $ | (21,105 | ) | $ | 11 | |||||
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Jurisdictional components of the tax provision (benefit) from operations: | ||||||||||||
Federal | $ | (393 | ) | $ | (24,012 | ) | $ | (3,809 | ) | |||
State | 718 | (438 | ) | (207 | ) | |||||||
Foreign | 4,494 | 3,345 | 4,027 | |||||||||
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Total | $ | 4,819 | $ | (21,105 | ) | $ | 11 | |||||
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During 2018, the Company hadutilized its remaining U.S. net operating loss carryforwards of approximately $48,550,000 in$19.5 million. At December 31, 2018, the U.S., net operating loss carryforwards of approximately €2,287,000 (approximately $2,407,000) in Germany,Company had federal business tax credit carryforwards of $1,745,000$2.9 million and state business tax credit carryforwards of approximately $442,000$0.4 million available to reduce future domestic income taxes, if any. The net operating loss and business tax credits carryforwards will continue to expire at various dates through December 2036.2038. The net operating loss and business tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.
The components of deferred income taxes are as follows:
| December 31, 2016 | December 31, 2015 | |||||||
Deferred tax assets: | ||||||||
Temporary timing differences: | ||||||||
Stock compensation | $ | 1,722 | $ | 1,079 | ||||
Contingent consideration | 3,333 | 2,126 | ||||||
Other | 1,895 | 1,150 | ||||||
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Total temporary timing differences | 6,950 | 4,355 | ||||||
Net operating loss carryforwards | 12,284 | 12,389 | ||||||
Tax business credits carryforwards | 2,036 | 1,820 | ||||||
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Total deferred tax assets | 21,270 | 18,564 | ||||||
Valuation allowance | (9,979 | ) | (18,514 | ) | ||||
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Net deferred tax assets | $ | 11,291 | $ | 50 | ||||
Deferred tax liabilities: | ||||||||
Goodwill and intangible assets | $ | (7,346 | ) | $ | (501 | ) | ||
Conversion option on convertible notes | (6,048 | ) | — | |||||
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Total deferred tax liabilities | $ | (13,394 | ) | $ | (501 | ) | ||
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Net deferred tax liabilities | $ | (2,103 | ) | $ | (451 | ) | ||
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| December 31, | ||||||||
| 2018 | 2017 | |||||||
| (Amounts in thousands) | ||||||||
Deferred tax assets: | ||||||||
Temporary timing differences: | ||||||||
Stock-based compensation expense | $ | 2,874 | $ | 1,662 | ||||
Contingent consideration | 2,263 | 2,196 | ||||||
Other | 2,632 | 1,704 | ||||||
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Total temporary timing differences | 7,769 | 5,562 | ||||||
Net operating loss carryforwards | — | 4,361 | ||||||
Tax business credits carryforwards | 2,004 | 1,265 | ||||||
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Total deferred tax assets | 9,773 | 11,188 | ||||||
Less: Valuation allowance | (131 | ) | (6 | ) | ||||
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Net deferred tax assets | 9,642 | 11,182 | ||||||
Deferred tax liabilities: | ||||||||
Goodwill | (1,076 | ) | (807 | ) | ||||
Acquired intangible assets | (26,903 | ) | (32,359 | ) | ||||
Conversion option on convertible notes | (2,394 | ) | (3,183 | ) | ||||
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Total deferred tax liabilities | (30,373 | ) | (36,349 | ) | ||||
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Total net deferred tax liabilities | $ | (20,731 | ) | $ | (25,167 | ) | ||
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The net change in the total valuation allowance for the year ended December 31, 2018 was an increase of $0.1 million. The net change in the total valuation allowance for the year ended December 31, 2017 was a decrease of $8,535,000$10.0 million which included the changes below. During the first quarter of 2017 the Company adopted ASU2016-09. ASU2016-09 states that previously unrecognized excess
tax benefits related to stock-based compensation should be recognized on a modified retrospective basis. As such, the Company increased its U.S. federal and state net operating loss carryovers by $5.1 million as of January 1, 2017 for previously unrecognized stock-based compensation excess tax benefits outstanding as of the beginning of the period. Because the Company maintained a full valuation allowance on its U.S. deferred tax assets at that date, the Company recorded a corresponding increase to the valuation allowance as of January 1, 2017. During the second quarter of 2017, the Company agreed to sell certain intellectual property to Repligen Sweden AB that allowed for the Company to utilize certain of its U.S. deferred tax assets. Accordingly, the Company reduced its valuation allowance on its U.S. deferred tax assets by $9.2 million. Additionally, in conjunction with the Spectrum Acquisition, the Company determined that its U.S. deferred tax assets were more likely than not to be realized after considering deferred tax liabilities related to the acquired intangible assets. Accordingly, the Company reduced its valuation allowance on its U.S. deferred tax assets by $5.9 million. The valuation allowance decreased by $8.5 million for the year ended December 31, 2016. U.S. jurisdiction deferred tax assets, previously subject to a valuation allowance, were initially recognized in 2016 due to the creation of a $4,525,000 deferred tax liability resulting from the TangenX Acquisition and a $6,514,000 deferred tax liability resulting from the issuance of the Company’s convertible senior notes, partially offset by increases in deferred tax assets derived from temporary timing differences. The $6,514,000 decrease to the valuation allowance was recorded to stockholder’s equity. The cumulative U.S. federal net operating loss includes $14,177,000 related to excess tax deductions from share-based payments, the tax benefit of which will be recognized as an increase to additional paid in capital when the deduction reduces current taxes payable. The valuation allowance increased by $1,216,000 for the year ended December 31, 2015 and increased by $727,000 for the year ended December 31, 2014. As of December 31, 2016,2018, the Company continues to believebelieves that realization of the remainder of its deferred tax assets beyond December 31, 2016 isrelated to capital loss carryovers and certain foreign tax credits are not more likely than not, and the Company continues to maintain its valuation allowance against its remainingthose U.S. deferred tax assets with the exception for certain state tax credits.assets.
The reconciliation of the federal statutory rate to the effective income tax rate for the fiscal years ended December 31, 2016, 20152018, 2017 and 20142016 is as follows (amounts in thousands):follows:
| Year Ended | ||||||||||||||||||||||||
| December 31, 2016 | December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||
Income before income taxes | $ | 11,692 | $ | 13,423 | $ | 11,138 | ||||||||||||||||||
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Expected tax at statutory rate | 3,975 | 34.0 | % | 4,564 | 34.0 | % | 3,787 | 34.0 | % | |||||||||||||||
Adjustments due to: | ||||||||||||||||||||||||
Difference between U.S. and foreign tax | (2,031 | ) | (17.4 | %) | (1,910 | ) | (14.2 | %) | (1,471 | ) | (13.2 | %) | ||||||||||||
State income and franchise taxes | (326 | ) | (2.8 | %) | 563 | 4.2 | % | 122 | 1.1 | % | ||||||||||||||
Business tax credits | (236 | ) | (2.0 | %) | (115 | ) | (0.9 | %) | — | — | ||||||||||||||
Permanent differences | 567 | 4.8 | % | 118 | 0.9 | % | (172 | ) | (1.5 | %) | ||||||||||||||
Change in valuation allowance | (1,981 | ) | (16.9 | %) | 1,216 | 9.1 | % | 727 | 6.5 | % | ||||||||||||||
Other | 43 | 0.4 | % | (358 | ) | (2.7 | %) | (25 | ) | (0.2 | %) | |||||||||||||
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Provision (benefit) for income taxes | $ | 11 | 0.1 | % | $ | 4,078 | 30.4 | % | $ | 2,968 | 26.7 | % | ||||||||||||
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Income before income taxes Expected tax at statutory rate Adjustments due to: Difference between U.S. and foreign tax State income and franchise tax Business tax credits Permanent differences: Stock-based compensation expense Transaction costs U.S. taxation of foreign earnings Executive compensation Other Change in U.S. federal tax rates Change in U.S. state tax rates Change in Netherlands tax rate Transition tax Uncertain tax provisions Change in valuation allowance Return to provision adjustments Other Income tax provision (benefit) In June 2015, the Company received a final assessment from the Massachusetts Department of Revenue (“DOR”) regarding an examination for the years ended March 31, 2010 and 2011 and the nine months ended December 31, 2011. This examination related to the qualification of Research and Development tax credits. The final settlement resulted in a payment to the DOR of approximately $141,000, inclusive of interest and penalties. For the Years Ended December 31, 2018 2017 2016 Amount % Amount % Amount % (Amounts in thousands, except percentages) $ 21,436 $ 7,248 $ 11,692 4,502 21.0 % 2,537 35.0 % 3,975 34.0 % 345 1.6 % (1,797 ) (24.8 %) (2,031 ) (17.4 %) (146 ) (0.7 %) (307 ) (4.2 %) (326 ) (2.8 %) (1,523 ) (7.1 %) (708 ) (9.8 %) (236 ) (2.0 %) (1,213 ) (5.7 %) (946 ) (13.1 %) 31 0.3 % — 0.0 % 1,232 17.0 % 156 1.3 % 2,190 10.2 % — 0.0 % — 0.0 % 367 1.7 % 265 3.7 % — 0.0 % 97 0.5 % 205 2.8 % 380 3.3 % — 0.0 % (12,839 ) (177.1 %) — 0.0 % 748 3.5 % (151 ) (2.1 %) — 0.0 % (388 ) (1.8 %) — 0.0 % — 0.0 % (1,338 ) (6.2 %) 3,266 45.1 % — 0.0 % 1,021 4.8 % 241 3.3 % — 0.0 % 125 0.6 % (12,164 ) (167.8 %) (1,981 ) (16.9 %) 33 0.2 % (161 ) (2.2 %) — 0.0 % (1 ) (0.1 %) 222 3.0 % 43 0.4 % $ 4,819 22.5 % $ (21,105 ) (291.2 %) $ 11 0.1 %
In December 2015, the Company reached a negotiated settlement with the DOR regarding an appeal of an assessment made in 2013 for the years ended March 31, 2008 and 2009. The primary issues in the appeal related to the sourcing of intellectual property settlements and the qualification of Research and Development tax credits. The final settlement resulted in a payment to the DOR of approximately $1,012,000, inclusive of interest. Of this amount, $926,000 had been provided for as a liability for an uncertain tax position as of September 30, 2015.
The Company’s tax returns are subject to examination by federal, state and international taxing authorities for the following periods:
Jurisdiction | Fiscal to | |||
United States – federal and state | ||||
Sweden | ||||
Germany | ||||
Netherlands | 2012-2018 | |||
At December 31, 2016, the Company had accumulated Federal research credits of $2,814,000 which were not recognized for financial statement purposes, as it was not more likely than not that the Company would have sufficient earnings to realize those benefits in addition to the benefits the Company may derive from use of its Net Operating Losses. However, given the past uncertainty at the state level regarding their sustainability under audit, the Company applied a reserve of $1,407,000 against these cumulative Federal research credits.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):benefits:
Unrecognized tax benefits at January 1, 2016 | 1,289 | |||
Gross increases – tax positions in prior period | 118 | |||
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Unrecognized tax benefits at December 31, 2016 | $ | 1,407 | ||
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| For the Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| (Amounts in thousands) | ||||||||
Balance of gross unrecognized tax benefits, beginning of period | $ | 1,806 | $ | 1,407 | ||||
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period | 1,062 | 199 | ||||||
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the prior period | — | 679 | ||||||
Gross amounts of decrease due to release | (16 | ) | (479 | ) | ||||
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Balance of gross unrecognized tax benefits, end of period | $ | 2,852 | $ | 1,806 | ||||
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The amountIncluded in the balance of unrecognized tax benefits atas of December 31, 20152018 are $2.9 million of tax benefits that, will impact ourif recognized, would affect the effective tax rate are $1,407,000. For the year endedrate.
As of December 31, 2016,2018, the Company recognized interesthas accumulated undistributed earnings generated by our foreign subsidiaries of approximately $72.4 million. Because $58.0 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the 2017 Tax Act, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and penalties of $16,000.
state taxes. At December 31, 2016, the Company has2018, we have not provided for U.S. income taxes or foreign withholding taxes on outside basis differences of our foreign subsidiaries, as we have the ability and intent to indefinitely reinvest the undistributed earnings of approximately $43,679,000our foreign subsidiaries, and there are no needs for such earnings in the United States that would contradict our plan to indefinitely reinvest.
ASU2016-16,“Intra-Entity Transfers of Assets Other Than Inventory,” requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences until the transfer was made with an outside party. The Company adopted the provisions of this ASU in the first quarter of 2018. The adoption resulted in a decrease of $5.7 million to other assets, a decrease of $5.0 million to deferred tax assets and a decrease of $0.7 million to accumulated deficit at January 1, 2018.
On December 22, 2017, President Trump signed into law H.R. 1/Public LawNo. 115-97, the tax legislation commonly known as it isthe Tax Cuts and Jobs Act (the “2017 Tax Act”). The Act made significant changes to federal tax law, including, but not limited to, a reduction in the federal income tax rate from 35% to 21%, taxation of certain global intangiblelow-taxed income, allowing for immediate expensing of qualified assets, stricter limits on deductions for interest and certain executive compensation, and aone-time transition tax on previously deferred earnings of certain foreign subsidiaries.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax
effects of H.R.1. The Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. During 2018, final adjustments noted below have been made to the provisional amounts recorded during 2017, and the Company has now completed its accounting for various tax impacts of the Act.
The Act lowered the Company’s current intentionU.S. statutory federal tax rate from 35% to permanently reinvest these21% effective January 1, 2018. The Company recorded a tax benefit of $12.8 million in the year ended December 31, 2017 for the reduction in its US deferred tax assets and liabilities resulting from the rate change. The accounting for this item is complete and no adjustments were made to this amount during 2018.
The Act included aone-time deemed repatriation transition tax whereby entities that are shareholders of a specified foreign corporation must include in gross income the undistributed and previously untaxed post-1986 earnings outsideand profits of the U.S. Itspecified foreign corporation. Our provisional amount recorded at December 31, 2017 increased our tax provision by $3.3 million. As of December 31, 2018, the accounting for this item is not practicalcomplete. For the three months ended December 31, 2018, the Company recorded a tax benefit of $1.3 million, as a result of refining our calculations of post-1986 earnings and profits for our foreign subsidiaries.
The Company is subject to estimatea territorial tax system under the additional taxes that may be payable upon repatriation.
Stockholders’ Equity |
Public Offering of Common Stock and Warrants
On April 6, 2007,July 3, 2017, the Company issued warrantscompleted a public offering in which 2,807,017 shares of its common stock were sold to the public at a price of $42.75 per share. The underwriters were granted an individual at Scrippsoption, which they exercised in full, to purchase up to 150,000an additional 421,052 shares of the Company’s common stock. The total proceeds from this offering, net of underwriting discounts, commissions and other offering expenses, totaled $129.3 million.
Stock Option and Incentive Plans
At our 2018 annual meeting of shareholders held on May 16, 2018, our shareholders approved the 2018 Stock Option and Incentive Plan (the “2018 Plan”). Under the 2018 Plan the number of shares of our common stock that are reserved and available for issuance shall be 2,778,000 plus the number of shares of common stock at $0.01 per share, as discussed in Note 10.available for issuance under our Amended and Restated 2012 Stock Option and Incentive Plan (the “2012 Plan”). The warrants have a seven-year termshares of common stock underlying any awards under the 2018 Plan, 2012 Plan and the Second Amended and Restated 2001 Repligen Corporation Stock Plan (the “2001 Plan,” and together with the 2018 Plan and 2012 Plan, the “Plans”) that are exercisable based on performance criteria as detailed in the warrant agreement during 2014. The warrant expired priorforfeited, canceled or otherwise terminated (other than by exercise) shall be added back to the performance criteria being achieved.shares of stock available for issuance under the 2018 Plan. At December 31, 2018, 2,874,751 shares were available for future grant under the 2018 Plan.
Stock-Based Compensation
The Company recorded stock-based compensation expense of approximately $4,595,000, $3,598,000$10.2 million, $6.7 million and $1,766,000$4.6 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively, for share-based awards granted under the Second Amended and Restated 2001 Repligen Corporation Stock Plan (the “2001 Plan”) and the Repligen Corporation 2012 Stock Option and Incentive Plan (the “2012 Plan,” and collectively with the 2001 Plan and the 1992 Repligen Corporation Stock Option Plan, the “Plans”).Plans.
The following table presents stock-based compensation expense in the Company’s consolidated statements of operations (in thousands):and comprehensive income:
| For the Years Ended December 31, | ||||||||||||||||||||||||
| Years ended December 31, | 2018 | 2017 | 2016 | |||||||||||||||||||||
| 2016 | 2015 | 2014 | (Amounts in thousands) | |||||||||||||||||||||
Cost of product revenue | $ | 341 | $ | 213 | $ | 128 | $ | 1,019 | $ | 704 | $ | 341 | ||||||||||||
Research and development | 537 | 336 | 185 | 917 | 481 | 537 | ||||||||||||||||||
Selling, general and administrative | 3,717 | 3,049 | 1,453 | 8,256 | 5,562 | 3,717 | ||||||||||||||||||
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Total | $ | 4,595 | $ | 3,598 | $ | 1,766 | ||||||||||||||||||
Total stock-based compensation | $ | 10,192 | $ | 6,747 | $ | 4,595 | ||||||||||||||||||
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During 2016, the Company modified certain stock option grants for its former senior vice president of research and development in conjunction with his retirement. As part of the April 2016 transition agreement, all outstanding equity awards continued to vest through December 31, 2016, and fifty percent (50%) of the option awards that are unvested on February 28, 2017 immediately vested and became exercisable as of that date. As a result of these modifications to his share-based payment arrangements, the Company incurred stock compensation expense of $292,000$0.3 million for the year ended December 31, 2016. This expense was recorded to research and development expense on the Company’s consolidated statement of operations.
During 2015, the Company modified certain stock option grants for its former presidentoperations and chief executive officer in conjunction with his retirement. As part of the January 2015 transition agreement, all outstanding equity awards continued to vest through December 31, 2015, and fifty percent (50%) of the option awards that are unvested on December 31, 2015 immediately vested and became exercisable as of that date. As a result of these modifications to his share-based payment arrangements, the Company incurred stock compensation expense of $826,000 for the year ended December 31, 2015. This expense was recorded to selling, general and administrative expense on the Company’s consolidated statement of operations.comprehensive income.
The 20122018 Plan allows for the granting of incentive and nonqualified options to purchase shares of common stock, restricted stock and other equity awards. Incentive options granted to employeesEmployee grants under the Plans generally vest over a threethree- to five-year period, with20%-33% vesting on the first anniversary of the date of grant and the remainder vesting in equal yearly installments thereafter. Nonqualified options issued tonon-employee directors and consultants under the Plans generally vest over one year. In the first quarter of 2018, to create a longer-term retention incentive, the Company’s Compensation Committee granted long-term incentive compensation awards to its Chief Executive Officer consisting of both stock options and restricted stock units (“RSUs”) that are subject to time-based vesting over nine years. Options granted under the Plans have a maximum term of ten years from the date of grant and generally, the exercise price of the stock options equals the fair market value of the Company’s common stock on the date of grant. At December 31, 2016,2018, options to purchase 1,236,586998,226 shares and 705,413 RSUs were outstanding under the Plans. At December 31, 2016, 1,821,576 shares were available for future grant under the 2012 Plan.
The Company uses the Black-Scholes option pricing model to calculate the fair value of share-basedstock option awards on the grant date.date, and the Company uses the value of the common stock as of the grant date to value RSUs. The Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. The Company recognizes expense on awards with service-based vesting over the employee’s requisite service period on a straight-line basis. In the third quarter of 2017, the Company issued performance stock units to certain employees related to the Spectrum Acquisition which are tied to the achievement of certain revenue and gross margin metrics and the passage of time. Additionally, in the first quarter of 2018, the Company issued performance stock units to certain individuals which are tied to the achievement of certain 2018 revenue metrics and the passage of time. The Company recognizes expense on performance-based awards over the vesting period based on the probability that the performance metrics will be achieved. The Company recognizes stock-based compensation expense for options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted for estimated forfeitures. The fair value of share-based awards granted during the years ended December 31, 2016, 20152018, 2017 and 20142016 were calculated using the following estimated assumptions:
| 2016 | 2015 | 2014 | For the Years Ended December 31, | |||||||||
Expected term (years) | 6.7 – 7.1 | 6.6 – 7.2 | 6.5 | |||||||||
Volatility | 50.85 – 51.01% | 50.09 – 51.89% | 51.00 – 51.71% | |||||||||
| 2018 | 2017 | 2016 | ||||||||||
Expected term (in years) | 5.5 – 7.5 | 6.1 | 6.7 – 7.1 | |||||||||
Expected volatility (range) | 45.14 – 50.87% | 51.48% | 50.85 – 51.01% | |||||||||
Risk-free interest rate | 1.51 – 2.37% | 1.67 – 2.03% | 1.88 – 2.11% | 2.63 – 2.96% | 1.88 – 1.99% | 1.51 – 2.37% | ||||||
Expected dividend yield | — | — | — | 0% | 0% | 0% | ||||||
Information regarding option activity for the year ended December 31, 20162018 under the Plans is summarized below:
| Options Outstanding | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | (in thousands) Aggregate Intrinsic Value | |||||||||||||
Options outstanding at December 31, 2015 | 1,054,584 | $ | 12.28 | |||||||||||||
Granted | 183,619 | 27.12 | ||||||||||||||
Exercised | (266,863 | ) | 7.72 | |||||||||||||
Forfeited/cancelled | (88,592 | ) | 10.97 | |||||||||||||
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Options outstanding at December 31, 2016 | 882,748 | $ | 16.88 | 6.75 | $ | 12,733 | ||||||||||
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Options exercisable at December 31, 2016 | 427,310 | $ | 11.11 | 5.23 | $ | 8,617 | ||||||||||
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Vested and expected to vest at December 31, 2016(1) | 837,660 | $ | 16.82 | 6.70 | $ | 12,140 | ||||||||||
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| Shares | Weighted average exercise price | Weighted- Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in Thousands) | |||||||||||||
Options outstanding at December 31, 2017 | 734,940 | $ | 20.80 | |||||||||||||
Granted | 449,678 | $ | 35.48 | |||||||||||||
Exercised | (176,804 | ) | $ | 19.31 | ||||||||||||
Forfeited/expired/cancelled | (9,588 | ) | $ | 29.71 | ||||||||||||
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Options outstanding at December 31, 2018 | 998,226 | $ | 27.54 | 7.19 | $ | 25,273 | ||||||||||
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Options exercisable at December 31, 2018 | 410,760 | $ | 18.53 | 4.96 | $ | 14,051 | ||||||||||
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Vested and expected to vest at December 31, 2018(1) | 953,454 | 7.10 | $ | 24,490 | ||||||||||||
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| (1) | Represents the number of vested options as of December 31, |
The aggregate intrinsic value in the table above represents the totalpre-tax intrinsic value (the difference between the closing price of the common stock on December 30, 2016,31, 2018, the last business day of 2016,2018, of $30.82$52.74 per share and the exercise price of eachin-the-money option) that would have been received by the option holders had all option holders exercised their options on December 31, 2016.2018. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 2015was $5.3 million, $5.3 million and 2014 was approximately $5,043,000, $3,638,000 and $9,656,000,$5.0 million, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 2015was $18.90, $16.94 and 2014 was $14.16, $16.05 and $9.45, respectively. The total fair value of stock options that vested during the years ended December 31, 2018, 2017 and 2016 2015was $2.3 million, $2.2 million and 2014 was approximately $1,713,000, $1,536,000 and $751,000,$1.7 million, respectively.
Information regarding restricted stock unitRSU activity for the year ended December 31, 20162018 under the Plans is summarized below:
| Options Outstanding | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | (in thousands) Aggregate Intrinsic Value | |||||||||||||
Restricted stock units outstanding at December 31, 2015 | 186,351 | $ | — | |||||||||||||
Granted | 251,384 | — | ||||||||||||||
Exercised | (63,017 | ) | — | |||||||||||||
Forfeited/cancelled | (20,880 | ) | — | |||||||||||||
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Restricted stock units outstanding at December 31, 2016 | 353,838 | $ | — | 9.01 | $ | 10,905 | ||||||||||
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Restricted stock units exercisable at December 31, 2016 | — | $ | — | — | $ | — | ||||||||||
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Vested and expected to vest at December 31, 2016(1) | 309,229 | $ | — | 9.01 | $ | 9,530 | ||||||||||
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| Shares | Weighted- Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in Thousands) | ||||||||||
Unvested at December 31, 2017 | 505,235 | |||||||||||
Awarded | 407,961 | |||||||||||
Vested | (153,383 | ) | ||||||||||
Forfeited/expired/cancelled | (54,400 | ) | ||||||||||
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Unvested at December 31, 2018 | 705,413 | 3.98 | $ | 37,203 | ||||||||
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Vested and expected to vest at December 31, 2018(1) | 652,543 | 3.26 | $ | 34,415 | ||||||||
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| (1) | Represents the number of vested |
The aggregate intrinsic value in the table above represents the totalpre-tax intrinsic value (equal to the closing price of the common stock on December 30, 2016,31, 2018, the last business day of 2016,2018, of $30.82$52.74 per share, as restricted stock unitsRSUs do not have an exercise price) that would have been received by the restricted stock unitRSU holders had all holders exercised on December 31, 2016.2018. The aggregate intrinsic value of restricted stock units exercisedRSUs vested during the years ended December 31, 2018, 2017 and 2016 2015was $6.2 million, $4.0 million and 2014 was approximately $1,671,000, $1,304,000 and $819,000,$1.7 million, respectively.
The weighted average grant date fair value of restricted stock unitsRSUs granted during the years ended December 31, 2018, 2017 and 2016 2015was $30.30, $26.03 and 2014 was $27.25, $29.07 and $16.79, respectively. The total fair value of restricted stock unitsRSUs that vested during the years ended December 31, 2018, 2017 and 2016 2015was $4.6 million, $4.0 million and 2014 was approximately $1,474,000, $781,000 and $333,000,$1.5 million, respectively.
As of December 31, 2016,2018, there was $9,555,000$27.1 million of total unrecognized compensation cost related to unvested share-based awards. This cost is expected to be recognized over a weighted average remaining requisite service period of 2.974.53 years. The Company expects 719,5791,195,236 unvested options and restricted stock unitsRSUs to vest over the next five years.
Commitments and Contingencies |
Lease Commitments
In 2001,January 2018, the Company entered into a ten-year lease agreement for approximately 25,000to rent a 63,761 square feetfoot manufacturing facility in Marlborough, Massachusetts. This facility is currently being transitioned to take over production of space located in Waltham,SIUS TFF from our Shrewsbury, Massachusetts facility. We expect this transition to be used for its corporate headquarters, manufacturing, researchfully completed by June 30, 2019. This lease expires on November 30, 2028 and development, and marketing and administrative operations. the total obligations related to this lease are included in the table below.
In July 2011,2017, as a result of the Spectrum Acquisition, the Company amended this agreementretained the obligation related to expand the lease to cover approximately 55,694 square feet and to extend the term of the lease by eleven years,manufacturing space in Rancho Dominguez, California, which expires on May 31, 2023. In connection with this lease agreement,July 15, 2020. The space is an approximately 54,000 square foot manufacturing facility which includes manufacturing, quality control and inventory areas as well as clean room suites. This space was expanded by approximately 15,000 square feet in November 2018 when the Company issued a letter of creditleased space in the amount of $200,000 to the lessor. The letter of credit is collateralized by a certificate of deposit held by the
bank that issued the letter of credit. The certificate of deposit is classified as restricted cash in the accompanying consolidated balance sheets.an adjacent building. This additional lease expires on November 30, 2025.
In March 2014, the Company entered into an amendment of its existing lease agreement to expand the rented space from 55,694approximately 56,000 to 75,594approximately 76,000 square feet at 41 Seyon Street, Waltham, Massachusetts. Pursuant to the terms of the amended lease, Repligen leased an additional 19,900 square feet (the “Expansion Space”) for a period of eight years and one month, commencing on August 1, 2014.
The amended lease provides for additional rent expense of approximately $361,000$0.4 million on an annualized basis. The amended lease also requiresrequired an increased security depositincrease to a letter of credit from $200,000$0.2 million to $450,000$0.5 million and continues to require the Company to pay a proportionate share of certain of the landlord’s annual operating costs and real estate taxes. In 2017, the issuing bank no longer required collateral to secure the letter of credit; as a result, the Company released the funds from restricted cash. Future minimum rental commitments under the amended lease as of December 31, 20162018 are $1,371,000$1.4 million for the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively.
In 2007,respectively, $1.3 million for the Company entered into a five-year lease agreement for approximately 2,500 square feet of space in Waltham, Massachusetts to provide for expanded manufacturing operations. Adjacent to this space, the Company entered into a two-year lease in 2008 for approximately 7,350 square feet of additional space to be used for expanded manufacturing and administrative operations. Both of these leases expired onyear ended December 31, 2012. The Company converted to a month-to-month basis2022 and $0.4 million for both sites. The Company terminated the lease onyear ending December 31, 2023 (until May 31, 2023, the 7,350 square feetexpiration date of space in the first quarter of 2015.lease).
The Company leases four adjacent buildings in Lund, Sweden totaling approximately 45,000 square feet of space used primarily for biologics manufacturing and administrative operations. The lease was renewed during 2016 and expires on December 31, 2021. Future minimum rental commitments under the amended lease as of December 31, 20162018 are $984,000$0.9 million for the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively.
Obligations undernon-cancelable operating leases, including the facility leases discussed above, as of December 31, 20162018 are approximately as follows (in(amounts in thousands):
Years Ending | Operating Leases | |||
December 31, 2017 | $ | 2,523 | ||
December 31, 2018 | 2,584 | |||
December 31, 2019 | 2,491 | |||
December 31, 2020 | 2,485 | |||
December 31, 2021 | 2,485 | |||
Thereafter | 1,736 | |||
|
| |||
Minimum lease payments | $ | 14,304 | ||
|
| |||
For the Years Ended December 31, | Operating Leases | |||
2019 | $ | 4,021 | ||
2020 | 3,599 | |||
2021 | 3,263 | |||
2022 | 2,213 | |||
2023 | 1,316 | |||
2024 and thereafter | 3,622 | |||
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| |||
Minimum operating lease payments | $ | 18,034 | ||
|
| |||
Rent expense charged to operations under operating leases was approximately $2,664,000, $2,619,000$4.4 million, $3.4 million and $2,735,000$2.6 million for the fiscal years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. As of December 31, 2016, 20152018, 2017 and 2014,2016, the Company had deferred rent liabilities of $1,792,000, $1,899,000$4.1 million, $1.7 million and $1,956,000,$1.8 million, respectively, related to the escalating rent provisions for the Waltham, headquarters.Massachusetts headquarters and the Company’s facilities in Rancho Dominguez, California and Marlborough, Massachusetts.
Licensing and Research Agreements
The Company licenses certain technologies that are, or may be, incorporated into its technology under several agreements and also has entered into several clinical research agreements which require the Company to fund certain research projects. Generally, the license agreements require the Company to pay annual maintenance fees and royalties on product sales once a product has been established using the technologies. The Company recorded researchResearch and development expenses associated with license agreements of approximately $5,000, $7,000 and $7,000were immaterial amounts for the years ended December 31, 2016, 20152018, 2017 and 2014, respectively.2016.
In October 2009, the CompanySeptember 2018, we entered into an exclusive worldwide commercial licensea collaboration agreement with FamiliesSartorius Stedim Biotech (“SSB”), a leading international supplier for the biopharmaceutical industry, to integrate XCell™ ATF cell retention control technology into Sartorius’s BIOSTAT® STR large-scale,single-use bioreactors to create novel perfusion-enabled bioreactors. As a result of Spinal Muscular Atrophy (see Note 2). Pursuantthis collaboration,end-users will stand to benefit from a single control system for 50L to 2,000L bioreactors used in perfusion cell culture applications. The single interface is designed to control cell growth, fluid management and cell retention in continuous and intensified bioprocessing and, ultimately, simplify the License Agreement dateddevelopment and manufacture of biotechnological drugs under current good manufacturing practices.
In June 2018, we secured an agreement with Navigo for the exclusiveco-development of multiple affinity ligands for which Repligen holds commercialization rights. We are manufacturing and have agreed to supply the first of these ligands,NGL-Impact™A, exclusively to Purolite Life Sciences (“Purolite”), who will pair our high-performance ligand with Purolite’s agarose jetting base bead technology used in their Jetted A50 Protein A resin product. We also signed a long-term supply agreement with Purolite forNGL-Impact A and other potential additional affinity ligands that may advance from our Navigo collaboration. The Navigo and Purolite agreements are supportive of our strategy to secure and reinforce our proteins business. We made payments to Navigo of $2.4 million in the year ended December 28, 2012, the Company transferred all rights31, 2018 in connection with this program, which are recorded to research and obligations related to the FSMA License Agreement to Pfizer. On January 26, 2015 Pfizer notified us that they were terminating the License Agreement, effective asdevelopment expenses in our consolidated statement of April 26, 2015.operations and comprehensive income.
Purchase Orders, Supply Agreements and Other Contractual Obligations
In the normal course of business, the Company has entered into purchase orders and other agreement with manufacturers, distributors and others. Outstanding obligations at December 31, 20162018 of approximately $10,008,000$29.0 million are expected to be completed within one year.
Prepaid expenses and other current assets consist of the following (in thousands):
| December 31, 2016 | December 31, 2015 | |||||||
Equipment maintenance and services | $ | 586 | $ | 689 | ||||
Prepaid VAT | 553 | 558 | ||||||
Prepaid insurance | 356 | 455 | ||||||
Deferred costs | 5 | 206 | ||||||
Prepaid taxes | 73 | 105 | ||||||
Interest receivable | 29 | 63 | ||||||
Other | 42 | 22 | ||||||
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| |||||
Total | $ | 1,644 | $ | 2,098 | ||||
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| |||||
Property, plant and equipment consist of the following (in thousands):
| December 31, 2016 | December 31, 2015 | |||||||
Leasehold improvements | $ | 14,592 | $ | 13,306 | ||||
Equipment | 15,214 | 13,758 | ||||||
Furniture and fixtures | 3,218 | 2,808 | ||||||
Construction in progress | 1,264 | 425 | ||||||
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| |||||
Total property, plant and equipment | 34,288 | 30,297 | ||||||
Less: accumulated depreciation | (19,332 | ) | (16,496 | ) | ||||
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| |||||
Property, plant and equipment, net | $ | 14,956 | $ | 13,801 | ||||
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| |||||
Depreciation expense totaled approximately $3,269,000, $2,996,000 and $2,594,000 in the fiscal years ended December 31, 2016, 2015 and 2014, respectively.
Accrued liabilities consist of the following (in thousands):
| December 31, 2016 | December 31, 2015 | |||||||
Employee compensation | $ | 5,586 | $ | 4,680 | ||||
Taxes | 1,692 | 166 | ||||||
Current portion of contingent consideration | 6,119 | 4,480 | ||||||
Professional fees | 411 | 269 | ||||||
Unearned revenue | 408 | 258 | ||||||
Other accrued expenses | 1,798 | 2,204 | ||||||
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| |||||
Total | $ | 16,014 | $ | 12,057 | ||||
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| |||||
| 10. | Convertible Senior Notes |
The carrying value of the Company’s convertible senior notes is as follows:
| December 31, 2016 | December 31, 2015 | December 31, | ||||||||||||||
2.125% Convertible Senior Notes due 2021: | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| (Amounts in thousands) | ||||||||||||||||
2.125% convertible senior notes due 2021: | ||||||||||||||||
Principal amount | $ | 115,000 | $ | — | $ | 114,989 | $ | 115,000 | ||||||||
Unamortized debt discount | (16,777 | ) | — | (9,781 | ) | (13,395 | ) | |||||||||
Unamortized debt issuance costs | (2,951 | ) | — | (1,720 | ) | (2,355 | ) | |||||||||
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Total convertible senior notes | $ | 95,272 | $ | — | $ | 103,488 | $ | 99,250 | ||||||||
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On May 24, 2016, the Company issued $115$115.0 million aggregate principal amount of its 2.125% Convertible Senior Notes due 2021 (the “Notes”).Notes. The net proceeds from the sale of the Notes, after deducting the underwriting discounts and commissions and other related offering expenses, were approximately $111.1 million. The Notes bear interest at the rate of 2.125% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016.
The Notes will mature on June 1, 2021, unless earlier repurchased, redeemed or converted in accordance with their terms. Prior to March 1, 2021, the Notes will be convertible at the option of holders of the Notes only upon satisfaction of certain conditions and during certain periods, and thereafter, the notesNotes will be convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, holders of the Notes will receive shares of the Company’s common stock, cash or a combination thereof, at the Company’s election. It is the Company’s current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company’s common stock.
Notes with a par value of $11,000 were submitted for conversion in the fourth quarter of 2017, and this conversion was settled in the first quarter of 2018. The conversion resulted in the issuance of a nominal-amount of shares of the Company’s common stock, and the Company recorded a loss of $1,000 on the conversion of these Notes.
During the fourth quarter of 2018, the closing price of the Company’s common stock continued to exceed 130% of the conversion price of the Notes for more than 20 trading days of the last 30 consecutive trading days of the quarter. As a result, the Notes are convertible at the option of the holders of the Notes during the first quarter of 2019, the quarter immediately following the quarter when the conditions were met, as stated in the terms of the Notes. These terms have been met each quarter since the second quarter of 2018 and, expecting to continue meeting these terms, the Company reclassified the carrying value of the Notes from long-term liabilities to current liabilities on the Company’s consolidated balance sheet as of June 30, 2018. As of December 31, 2018, the if- converted value of the Notes exceeded the aggregate principal amount by $69.6 million. As of the date of this filing, no Notes were converted by the holders of such Notes in the first quarter of 2019. In the event the closing price conditions are met in the first quarter of 2019 or a future fiscal quarter, the Notes will be convertible at a holder’s option during the immediately following fiscal quarter.
The conversion rate for the Notes will initially be 31.1813 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $32.07 per common share, and is subject to adjustment under the terms of the Notes. Holders of the Notes may require the Company to repurchase their Notes upon the occurrence of a fundamental change prior to maturity for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The Company will not have the right to redeem the Notes prior to June 5, 2019, but may redeem the Notes, at its option, in whole or in part, on any business day on or after June 5, 2019 and prior to the maturity date if the last
reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect
for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption. The redemption price will be equal to 100% of the principal amount of the principal amount of Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
The Notes contain customary terms and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the holders of at least 25% in aggregate principal amount of the outstanding Notes may declare 100% of the principal of, and any accrued and unpaid interest on, all of the Notes to be due and payable. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the Notes will become due and payable automatically. Notwithstanding the foregoing, the Notes provide that, to the extent the Company elects and for up to 270 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants consist exclusively of the right to receive additional interest on the Notes. The Company is not aware of any events of default, current events or market conditions that would allow holders to call or convert the Notes as of December 31, 2016.2018.
The cash conversion feature of the Notes required bifurcation from the Notes and was initially accounted for as an equity instrument classified to stockholders’ equity, as the conversion feature was determined to be clearly and closely related to the Company’s stock. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and asset base and with similar maturity, the Company estimated the implied interest rate, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $96,289,000$96.3 million upon issuance, calculated as the present value of implied future payments based on the $115 million aggregate principal amount. The equity component of the Notes was recognized as a debt discount, recorded in additionalpaid-in capital, and represents the difference between the aggregate principal of the Notes and the fair value of the Notes without conversion option on their issuance date. The debt discount is amortized to interest expense using the effective interest method over five years, or the life of the Notes. The Company assesses the equity classification of the cash conversion feature quarterly, and it is not remeasuredre-measured as long as it continues to meet the conditions for equity classification.
Interest expense recognized on the Notes in 2018 was $2.4 million, $3.6 million and $0.6 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. Interest expense recognized on the Notes during the year ended December 31, 20162017 includes $1,473,000, $1,934,000$2.4 million, $3.4 million and $340,000$0.6 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the Notes is 6.6%, which includes the interest on the Notes, amortization of the debt discount and debt issuance costs. As of December 31, 2016,2018, the carrying value of the Notes was approximately $95.3$103.5 million and the fair value of the principal was approximately $135.6$184.6 million. The fair value of the Notes was determined based on the most recent trade activity of the Notes as of December 31, 2016.2018.
| 11. | Accumulated Other Comprehensive Income (Loss) |
Changes in accumulated other comprehensive income (loss) consisted of the following for the years ended December 31, 20162018 and 2015 (in thousands):2017:
| Unrealized gain (loss) on investments | Foreign currency translation adjustment | Total | ||||||||||
Balance as of December 31, 2014 | (33 | ) | (5,740 | ) | (5,773 | ) | ||||||
Other comprehensive income (loss) | 22 | (2,815 | ) | (2,793 | ) | |||||||
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| |||||||
Balance as of December 31, 2015 | (11 | ) | (8,555 | ) | (8,566 | ) | ||||||
Other comprehensive income (loss) | 6 | (5,189 | ) | (5,183 | ) | |||||||
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Balance as of December 31, 2016 | $ | (5 | ) | $ | (13,744 | ) | $ | (13,749 | ) | |||
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| Foreign Currency Translation Adjustment | Changes in Fair Value of Available- for-Sale Investments | Accumulated Other Comprehensive Loss | ||||||||||
| (Amounts in thousands) | ||||||||||||
Balance as of December 31, 2016 | $ | (13,744 | ) | $ | (5 | ) | $ | (13,749 | ) | |||
Other comprehensive loss | 7,381 | 5 | 7,386 | |||||||||
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| |||||||
Balance as of December 31, 2017 | (6,363 | ) | — | (6,363 | ) | |||||||
Other comprehensive loss | (5,530 | ) | — | (5,530 | ) | |||||||
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Balance as of December 31, 2018 | $ | (11,893 | ) | $ | — | $ | (11,893 | ) | ||||
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| 12. | Employee Benefit Plans |
In the U.S.,United States, the Repligen Corporation 401(k) Savings and Retirement Plan (the “401(k) Plan”) is a qualified defined contribution plan in accordance with Section 401(k) of the Internal Revenue Code. All U.S. employees over the age of 21 are eligible to makepre-tax contributions up to a specified percentage of their compensation. Under the 401(k) Plan, the Company may, but is not obligated to match a portion of the employees’ contributions up to a defined maximum. The match is calculated on a calendar year basis. The Company matched approximately $184,000, $141,000$0.7 million, $0.5 million and $107,000$0.2 million in the fiscal years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
In Sweden, the Company contributes to a government-mandated occupational pension plan that is a qualified defined contribution plan. All employees in Sweden are eligible for this pension plan. The Company pays premiums to a third partythird-party occupational pension specialist who administers the pension plan. These premiums are based on various factors including each employee’s age, salary, employment history and selected benefits in the pension plan. When an employee terminates or retires, these premium payments cease for that employee and the Company has no further pension-related obligations for that employee. For the fiscal years ended December 31, 2016, 20152018, 2017 and 2014,2016, the Company contributed approximately $519,000, $485,000$0.6 million, $0.5 million and $493,000,$0.5 million, respectively, to the pension plan.
| 13. | Related Party Transactions |
In July 2017, in conjunction with the Spectrum Acquisition, the Board of Directors engaged one of the Company’s independent directors to serve as the chairperson of the Spectrum Integration Committee. In this role, this Director worked directly with the Company’s executive team on general integration strategy and focused on the integration of Spectrum’s operations and commercial organization with the Company. The Company recorded $0.2 million of expense for the year ended December 31, 2017 related to this director’s services.
Additionally, certain facilities leased by Spectrum are owned by the former owner of Spectrum, who currently holds greater than 10% of the Company’s outstanding common stock. The lease amounts paid to this shareholder were negotiated in connection with the Spectrum Acquisition. The Company has incurred rent expense totaling $0.7 million for the year ended December 31, 2018 related to these leases.
As part of the Spectrum Acquisition, the Company was responsible for filing all tax returns for Spectrum for the period from January 1, 2017 through July 31, 2017, the day before the Spectrum Acquisition. The Company was responsible for collecting any tax refunds from federal and state authorities and remitting these refunds to the former shareholders of Spectrum, including the former owner of Spectrum who currently holds greater than 10% of the Company’s outstanding common stock. During 2018, the Company collected $1.7 million of these tax
refunds, which the Company paid to the Spectrum shareholders during the fourth quarter of 2018, net of $0.2 million of expenses paid by the Company on behalf of Spectrum for tax preparation and other fees.
| 14. | Selected Quarterly Financial Data (Unaudited) |
The following table contains consolidated statementssets forth certain unaudited quarterly results of operations for 2018 and 2017. In the opinion of management, this information for eachhas been prepared on the same basis as the audited consolidated financial statements and all necessary adjustments, consisting only of the previous eight quarters. The Company believes that the following information reflects all normal recurring adjustments, necessary for a fair presentation ofhave been included in the amounts stated below to present fairly the quarterly information forwhen read in conjunction with the periods presented.audited consolidated financial statements and notes thereto included elsewhere in this Form10-K. The quarterly operating results for any quarter are not necessarily indicative of future results for any future period.of operations.
| December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | |||||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Product revenue | $ | 25,500 | $ | 24,677 | $ | 29,170 | $ | 25,094 | $ | 21,449 | $ | 19,814 | $ | 21,457 | $ | 20,816 | ||||||||||||||||
Royalty and other revenue | 100 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Total revenue | 25,600 | 24,677 | 29,170 | 25,094 | 21,449 | 19,814 | 21,457 | 20,816 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Cost of product revenue | 12,162 | 11,242 | 12,644 | 11,069 | 10,148 | 8,444 | 8,586 | 8,073 | ||||||||||||||||||||||||
Cost of royalty and other revenue | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Research and development | 2,040 | 1,886 | 1,890 | 1,539 | 1,431 | 1,490 | 1,252 | 1,568 | ||||||||||||||||||||||||
Selling, general and administrative | 8,568 | 7,127 | 8,140 | 7,018 | 6,473 | 5,959 | 6,242 | 6,024 | ||||||||||||||||||||||||
Contingent consideration – fair value adjustments | (75 | ) | 675 | 637 | 2,005 | 1,969 | 233 | 768 | 1,112 | |||||||||||||||||||||||
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Total operating expenses | 22,695 | 20,930 | 23,311 | 21,631 | 20,021 | 16,126 | 16,848 | 16,777 | ||||||||||||||||||||||||
Income from operations | 2,905 | 3,747 | 5,859 | 3,463 | 1,428 | 3,688 | 4,609 | 4,039 | ||||||||||||||||||||||||
Investment income | 112 | 97 | 76 | 61 | 44 | 37 | 19 | 36 | ||||||||||||||||||||||||
Interest expense | (1,570 | ) | (1,555 | ) | (638 | ) | (5 | ) | (8 | ) | (8 | ) | (8 | ) | (9 | ) | ||||||||||||||||
Other income (expense) | 119 | (75 | ) | 75 | (979 | ) | (270 | ) | (38 | ) | (269 | ) | 132 | |||||||||||||||||||
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Income before income taxes | 1,566 | 2,214 | 5,372 | 2,540 | 1,194 | 3,679 | 4,351 | 4,198 | ||||||||||||||||||||||||
Income tax provision (benefit) | 3,463 | 1,059 | 1,500 | 915 | 929 | 1,141 | 738 | 1,269 | ||||||||||||||||||||||||
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Net income (loss) | $ | 5,029 | $ | 1,155 | $ | 3,872 | $ | 1,625 | $ | 265 | $ | 2,538 | $ | 3,613 | $ | 2,929 | ||||||||||||||||
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Earnings per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.15 | $ | 0.03 | $ | 0.12 | $ | 0.05 | $ | 0.01 | $ | 0.08 | $ | 0.11 | $ | 0.09 | ||||||||||||||||
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Diluted | $ | 0.15 | $ | 0.03 | $ | 0.11 | $ | 0.05 | $ | 0.01 | $ | 0.08 | $ | 0.11 | $ | 0.09 | ||||||||||||||||
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Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 33,833 | 33,779 | 33,649 | 33,025 | 32,946 | 32,925 | 32,870 | 32,755 | ||||||||||||||||||||||||
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Diluted | 34,369 | 34,313 | 34,175 | 33,494 | 33,577 | 33,690 | 33,671 | 33,451 | ||||||||||||||||||||||||
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| For the Years Ended December 31, 2018 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||
Revenue | $ | 44,830 | $ | 47,731 | $ | 49,529 | $ | 51,942 | ||||||||
Gross profit | 25,162 | 26,643 | 27,346 | 28,350 | ||||||||||||
Operating expenses | 38,854 | 43,458 | 41,643 | 44,089 | ||||||||||||
Net income | 3,448 | 2,738 | 4,794 | 5,638 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.08 | $ | 0.06 | $ | 0.11 | $ | 0.13 | ||||||||
Diluted | $ | 0.08 | $ | 0.06 | $ | 0.10 | $ | 0.12 | ||||||||
| For the Years Ended December 31, 2017 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||
Revenue | $ | 30,590 | $ | 32,455 | $ | 36,580 | $ | 41,611 | ||||||||
Gross profit | 16,600 | 18,518 | 16,593 | 22,475 | ||||||||||||
Operating expenses | 24,914 | 26,982 | 36,986 | 38,349 | ||||||||||||
Net income | 3,068 | 8,438 | 4,669 | 12,178 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.09 | $ | 0.25 | $ | 0.11 | $ | 0.28 | ||||||||
Diluted | $ | 0.09 | $ | 0.24 | $ | 0.11 | $ | 0.27 | ||||||||
9592