UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended SeptemberJune 30, 20152016

OR

 

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

For the transition period from    to    

Commission File Number 000-14656

 

 

REPLIGEN CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 04-2729386

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

41 Seyon Street, Bldg. 1, Suite 100

Waltham, MA

 02453
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (781) 250-0111

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of OctoberJuly 29, 2015.2016.

 

Class

 

Number of Shares

Common Stock, par value $.01 per share 32,943,55333,786,517

 

 

 


Table of Contents

 

     PAGE 

PART I

 

FINANCIAL INFORMATION

  

Item 1.

 Unaudited Condensed Consolidated Financial Statements  
 

Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20152016 and December 31, 20142015

   3  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three- and Nine-MonthSix-Month Periods Ended SeptemberJune 30, 20152016 and 20142015

   4  
 

Condensed Consolidated Statements of Cash Flows for the Nine-MonthSix-Month Periods Ended SeptemberJune 30, 20152016 and 20142015

   5  
 

Notes to Unaudited Condensed Consolidated Financial Statements

   6  

Item 2.

 Management’s Discussion and Analysis of Financial Condition and Results of Operations   21  

Item 3.

 Quantitative and Qualitative Disclosures About Market Risk   2628  

Item 4.

 Controls and Procedures   2728  

PART II.II

 OTHER INFORMATION   2830  

Item 1.

 Legal Proceedings   2830  

Item 1A.

 Risk Factors   2830  

Item 2.

 Unregistered Sales of Equity Securities and Use of Proceeds   2831  

Item 3.

 Defaults Upon Senior Securities   2831  

Item 4.

 Mine Safety Disclosures   2831  

Item 5.

 Other Information   2831  

Item 6.

 Exhibits   2931  

Signatures

 3033  

REPLIGEN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share and per share data)  September 30,
2015
 December 31,
2014
 
(in thousands, except share data)  June 30,
2016
 December 31,
2015
 

Assets

      

Current assets:

      

Cash and cash equivalents

  $48,084   $35,363    $172,622   $54,092  

Marketable securities

   20,790   23,090     9,181   17,682  

Accounts receivable, less reserve for doubtful accounts of $52 and $41, respectively

   10,321   7,760  

Accounts receivable, less reserve for doubtful accounts of $19 and $31, respectively

   11,073   11,300  

Other receivables

   57   240     564   82  

Inventories

   15,899   12,384     23,197   17,998  

Deferred tax asset, net

   5   5  

Prepaid expenses and other current assets

   1,123   2,104     1,304   2,098  
  

 

  

 

   

 

  

 

 

Total current assets

   96,279   80,946     217,941   103,252  
  

 

  

 

 

Property, plant and equipment, at cost:

   

Leasehold improvements

   13,258   9,108  

Equipment

   13,513   13,116  

Furniture and fixtures

   2,722   2,270  

Construction in progress

   228   3,848  
  

 

  

 

 

Total property, plant and equipment, at cost

   29,721   28,342  

Less: Accumulated depreciation

   (15,748 (13,816
  

 

  

 

   

 

  

 

 

Property, plant and equipment, net

   13,973   14,526     13,707   13,801  

Long-term marketable securities

   1,651   3,550     —    1,633  

Intangible assets, net

   13,154   14,636     19,186   12,755  

Goodwill

   14,346   14,185     31,026   14,346  

Restricted cash

   450   450     450   450  
  

 

  

 

   

 

  

 

 

Total assets

  $139,853   $128,293    $282,310   $146,237  
  

 

  

 

   

 

  

 

 

Liabilities and stockholders’ equity

      

Current liabilities:

      

Accounts payable

  $2,951   $3,863    $7,688   $6,724  

Accrued liabilities

   12,758   6,819     13,662   12,057  
  

 

  

 

   

 

  

 

 

Total current liabilities

   15,709   10,682     21,350   18,781  

Convertible senior notes

   93,380    —   

Deferred tax liabilities

   1,978   451  

Other long-term liabilities

   2,693   5,879     1,878   4,257  

Commitments and contingencies (Note 11)

      

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, 32,943,553 shares at September 30, 2015 and 32,774,374 shares at December 31, 2014 issued and outstanding

   329   328  

Common stock, $.01 par value, 80,000,000 shares authorized, 33,691,278 shares at June 30, 2016 and 32,949,353 shares at December 31, 2015 issued and outstanding

   337   329  

Additional paid-in capital

   201,657   198,064     238,617   202,527  

Accumulated other comprehensive income (loss)

   (8,728 (5,773

Accumulated other comprehensive loss

   (9,184 (8,566

Accumulated deficit

   (71,807 (80,887   (66,046 (71,542
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   121,451   111,732     163,724   122,748  
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $139,853   $128,293    $282,310   $146,237  
  

 

  

 

   

 

  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

REPLIGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

(In thousands, except share and per share amounts)  Three months ended September 30, Nine months ended September 30, 
(in thousands, except share and per share data)  Three months ended June 30, Six months ended June 30, 
  2015 2014 2015 2014   2016 2015 2016 2015 

Revenue:

     

Product revenue

  $19,814   $15,152   $62,088   $45,038    $29,170   $21,457   $54,265   $42,274  

Royalty and other revenue

   —    126    —    2,117  
  

 

  

 

  

 

  

 

 

Total revenue

   19,814   15,278   62,088   47,155  

Operating expenses:

          

Cost of product revenue

   8,444   6,931   25,103   19,938     12,644   8,586   23,713   16,659  

Cost of royalty revenue

   —      —      —      —    

Research and development

   1,490   1,650   4,309   4,281     1,890   1,252   3,430   2,819  

Selling, general and administrative

   5,959   4,471   18,226   12,180     8,140   6,242   15,159   12,267  

Contingent consideration – fair value adjustments

   233   10   2,114   126     637   768   2,642   1,881  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total operating expenses

   16,126   13,062   49,752   36,525     23,311   16,848   44,944   33,626  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income from operations

   3,688   2,216   12,336   10,630     5,859   4,609   9,321   8,648  

Investment income

   37   64   92   250     76   19   137   56  

Interest expense

   (8 (12 (24 (38   (638 (8 (643 (17

Other income (expense)

   (38 (14 (175 54     75   (269 (904 (137
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income before income taxes

   3,679   2,254   12,229   10,896     5,372   4,351   7,911   8,550  

Income tax provision

   1,141   788   3,149   2,327     1,500   739   2,415   2,008  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

  $2,538   $1,466   $9,080   $8,569    $3,872   $3,612   $5,496   $6,542  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings per share:

          

Basic

  $0.08   $0.04   $0.28   $0.27    $0.12   $0.11   $0.16   $0.20  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

  $0.08   $0.04   $0.27   $0.26    $0.11   $0.11   $0.16   $0.19  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted average shares outstanding:

          

Basic

   32,925,004   32,677,003   32,860,382   32,292,588     33,649,296   32,870,473   33,336,989   32,827,536  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

   33,689,560   33,327,377   33,617,999   33,099,599     34,175,127   33,670,696   33,862,311   33,581,682  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Other comprehensive income:

          

Unrealized gain on investments

   65   34   43   46  

Foreign currency translation loss

   (596 (3,157 (2,998 (4,763

Unrealized gain (loss) on investments

   —    (5 15   (22

Foreign currency translation gain (loss)

   (2,514 1,447   (633 (2,402
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income (loss)

  $2,007   $(1,657 $6,125   $3,852  

Comprehensive income

  $1,358   $5,054   $4,878   $4,118  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

REPLIGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)  Nine months ended September 30,   Six months ended June 30, 
  2015 2014   2016 2015 

Cash flows from operating activities:

      

Net income:

  $9,080   $8,569  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Net income

  $5,496   $6,542  

Adjustments to reconcile net income to net cash used in operating activities:

   

Depreciation and amortization

   3,449   2,965     2,465   2,295  

Non-cash interest expense

   382    —   

Stock-based compensation expense

   2,668   1,386     2,059   1,687  

Deferred tax expense

   218   261     218  173  

Loss on revaluation of contingent consideration

   2,114   126     2,642   1,881  

Gain on sale of fixed assets

   (15  —   

Loss on disposal of assets

   1   3     26   1  

Bad debt reserve

   11    —   

Changes in assets and liabilities:

      

Accounts receivable

   (2,767 (763   892   (6,820

Other receivables

   183   6,678     (318 (283

Inventories

   (4,051 (1,347   (5,093 (2,380

Prepaid expenses and other current assets

   699   88     793   981  

Accounts payable

   (749 921     511   586  

Accrued liabilities

   1,085   (1,984   (3,239 875  

Long-term liabilities

   (240 (255   (66) (425
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   11,701   16,648     6,753   5,113  
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Acquisition of Atoll GmbH, net of cash received

   (8,767  —   

Purchases of marketable securities

   (14,090 (24,236   (3,952 (8,119

Redemptions of marketable securities

   18,264   30,117     14,100   10,359  

Acquisition of assets of Refine Technology, LLC

   —    (21,236

Increase in restricted cash

   —    (250

Proceeds from sale of fixed assets

   45    —   

Purchases of property, plant and equipment

   (2,055 (2,964   (1,406 (1,737
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) investing activities

   2,119   (18,569

Net cash provided by investing activities

   20   503  
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Proceeds from issuance of convertible senior notes, net of costs

   111,323    —   

Exercise of stock options

   927   1,486     958   686  

Payment of contingent considerations

   (99 (604)   (498 (99
  

 

  

 

   

 

  

 

 

Net cash provided by financing activities

   828   882     111,783   587  
  

 

  

 

   

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents

   (1,927 (2,884   (26 (1,554
  

 

  

 

   

 

  

 

 

Net increase (decrease) in cash and cash equivalents

   12,721   (3,923

Net increase in cash and cash equivalents

   118,530   4,649  

Cash and cash equivalents, beginning of period

   35,363   39,830     54,092   35,363  
  

 

  

 

   

 

  

 

 

Cash and cash equivalents, end of period

  $48,084   $35,907    $172,622   $40,012  
  

 

  

 

   

 

  

 

 

Supplemental disclosure of non-cash investing activities:

   

Supplemental disclosure of non-cash activities:

   

Income taxes paid

  $2,671   $671    $1,981   $1,629  
  

 

  

 

   

 

  

 

 

Payment of contingent consideration in common stock

  $875   $—   
  

 

  

 

 

Stock tendered for acquisition of Atoll GmbH

  $14,135   $—   
  

 

  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

REPLIGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The consolidated financial statements included herein have been prepared by Repligen Corporation (the “Company,” “Repligen” or “we”) in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnote disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal, recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the entire year.2015.

The preparation of financial statements in conformity with U.S. 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 period. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Repligen Sweden AB, Atoll GmbH (as of April 1, 2016) and Repligen Singapore Pte. Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal, recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the entire year.

Recently Issued Accounting Pronouncements

In MayApril 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest – Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The ASU became effective for public entities for fiscal years beginning after December 15, 2015. The Company applied the amended presentation requirements in conjunction with its issuance of convertible senior notes in the second quarter of 2016.

In May 2014, the FASB issued ASU No. 2014-09, which amends the guidance for accounting for revenue“Revenue from contractsContracts with customers. This ASUCustomers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605,Revenue Recognition, and creates a new Topic 606,Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted in fiscal years beginning after December 15, 2016. 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 include updates as provided under ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”; ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The Company has not yet determined which adoption method it will utilize or the effect that the adoption of this guidance will have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying“Inventory (Topic 330): Simplifying the Measurement of Inventory,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.

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.

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 has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.

2. Acquisitions, Goodwill and Other Intangible Assets

Acquisition of Refine Technology, LLCAtoll GmbH

On June 2, 2014,April 1, 2016, the Company’s subsidiary Repligen Sweden AB (“Repligen Sweden”) acquired Atoll GmbH (“Atoll”) from UV-Cap GmbH & Co. KG (the “Seller”) pursuant to the terms of the Asseta Share Purchase Agreement (the “Share Purchase Agreement”), dated as of June 2, 2014 (the “Asset Purchase Agreement”March 31, 2016 (such acquisition, the “Atoll Acquisition”), by and among Repligen Sweden, the Seller, and the Company, Refine Technology, LLC (a limited liability company formedin its capacity as guarantor of the obligations of Repligen Sweden under the lawsShare Purchase Agreement. The Transaction was subject to certain closing conditions that did not occur until April 1, 2016. Payment for the Transaction was denominated in Euros but is reflected here in U.S. dollars for presentation purposes.

In connection with the Atoll Acquisition, the Company issued and contributed 538,700 shares of the StateCompany’s common stock, par value of New Jersey) (“Refine”$0.01 per share valued at $14.1 million (the “Stock Consideration”), to Repligen Sweden through a transfer by the membersCompany on behalf of Refine, Jerry Shevitz, Refine Technology Sales LLC (a limited liability company formedRepligen Sweden to fulfill Repligen Sweden’s obligation to deliver the Stock Consideration under the lawsShare Purchase Agreement. The issuance of the StateStock Consideration will not be registered under the Securities Act of New Jersey) and Refine Technology Sales Asia PTE. LTD. (a limited private company organized1933, as amended (the “Securities Act”), in reliance upon the Republic of Singapore), the Company acquired the business of Refine, including Refine’s Alternating Tangential Flow (“ATF”) System, a market-leading device used to significantly increase product yield during the fermentation stepexemption from registration provided by Section 4(2) of the biologic drug manufacturing process (the “Refine Business” andSecurities Act. The Stock Consideration was based on the acquisitionfair value of the Refine Business, the “Refine Acquisition”). Pursuant to the Asset Purchase Agreement, Repligen purchased all of the assets related to Refine’s ATF system and assumed certain specified liabilities related to Refine’s ATF system. 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. The transactionAtoll Acquisition was accounted for as a purchase of a business under Accounting Standards Codification (“ASC”)ASC 805, Business Combinations. The termstotal purchase price of the Atoll acquisition includedtotaled $25.3 million, consisting of an upfront cash payment of $21,236,000$10.2 million, less $66,000$74,000 as a result of the final determination of working capital, issuance of 215,285 shares of the Company’s $0.01 par value common stock valued at $4,000,000,Share Consideration, and future potential milestone payments totaling up to $10,900,000$1.1 million if specific revenue growth targets are met for the achievement of specific sales targets in the years 2014, 2015 and 2016, and future2016. The $1.1 million potential payments up to $7,500,000 out of any amounts that might be received in connection with the resolution, withdrawal or settlement of certain patent disputes with a third party. During the nine months ended September 30, 2015, the Company paid Refine a $1,000,000 milestone payment for achievement of the 2014 sales

target under the Asset Purchase Agreement. The $10,900,000 contingent consideration had an initial probability weighted fair value at acquisition of $1,370,000. The $7,500,000 contingent consideration had only a nominal probability weighted fair value at acquisition. In addition to the initial consideration, approximately $774,000 was paid to Refine following the acquisition under a Transition Services Agreement under which certain employees of Refine provided services to the Company for up to six months in supporttime of the Refine Business. As these payments were contingent upon future service, they were recognized ratably as operating expense whileclosing of the services were provided.Transaction of approximately $952,000.

Consideration Transferred

The Company accounted for the RefineAtoll Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of the Refine BusinessAtoll 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.$25.3 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,

  $21,170  

Cash consideration, less $74 of working capital adjustments reflected in other receivables as of June 30, 2016

  $10,176  

Value of common stock issued

   4,000     14,138  

Estimated fair value of contingent consideration

   1,370     952  
  

 

   

 

 

Total consideration transferred

  $26,540    $25,266  
  

 

   

 

 

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 Refine.the Seller. The Company paid to Refine $1,000,000 during the nine months ended September 30, 2015 for achievements of sales targets met in 2014, and could make payments of up to $9,900,000$1.1 million if specific salesrevenue growth targets are met for years 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, withdrawal 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 seeSee Note 8—Fair Value Measurement10 - 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$1,119,000 in transaction costs related to the RefineAtoll Acquisition. The transaction costs are included in 2014 selling, general and administrative expenses in the consolidated statements of comprehensive income.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 June 2, 2014.April 1, 2016. The components and allocation of the purchase price consists of the following amounts (in thousands):

 

Cash and cash equivalents

  $1,409  

Accounts receivable

  $1,647     697  

Inventory

   1,003     155  

Other current assets

   184     169  

Fixed assets

   85  

Fixed assets, net

   114  

Customer relationships

   6,400     5,318  

Developed technology

   2,000     2,175  

In process research and development (“IPR&D”)

   1,600  

Non-competition agreements

   57  

Trademark and trade name

   700     11  

Deferred tax assets

   903  

Accounts payable and other liabilities assumed

   (431   (599

Deferred tax liabilities

   (2,245

Goodwill

   13,352     17,102  
  

 

   

 

 

Net assets acquired

  $26,540    $25,266  
  

 

   

 

 

Of the consideration paid, $6,400,000$5.3 million represents the fair value of customer relationships that will be amortized over the determined useful life of 1016 years and $2,000,000$2.2 million represents the fair value of developed technology that will be amortized over a determined useful life of 1514 years. $700,000$57,000 represents the fair value of trademarknon-competition agreements, and trade name determined to have an indefinite useful life and is not subject to amortization.

$1,600,000 of the consideration paid$11,000 represents the fair value of acquired IPR&D projectstrademarks and trade names that are considered identifiablewill be amortized over a determined useful life of 2 years. The aforementioned intangible assets aswill be amortized on a straight-line basis.

The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. The Company is finalizing its valuation of the acquisition date. Those assets are considered indefinite lived until efforts associated 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 ATF system business. The IPR&D project assets are not currently amortized and are reviewed for impairment at least annually. There was no evidence of impairment to IPR&D as of September 30, 2015. 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 15 years from the date of acquisition.

Revenue, Net Income and Pro Forma Presentation

The Company recorded revenue from Refine of $466,000 from June 2, 2014 through June 30, 2014. For the three months ended September 30, 2015liabilities assumed, and 2014, the Company recorded revenue of approximately $3.8 million and $2.2 million, respectively. For the nine months ended September 30, 2015 and 2014, the Company recorded revenue of approximately $9.2 million and $2.6 million, respectively. The Company has included the operating results of Refine in its consolidated statements of operations since the June 2, 2014 acquisition date. The following table presents unaudited supplemental pro forma information for the three- and nine-month periods ended September 30, 2014, as if the Refine Acquisition had occurred as of January 1, 2013.

   (in thousands, except per share amounts) 
   Three months ended
September 30, 2014
   Nine months ended
September 30, 2014
 

Total revenue

  $15,278    $50,937  

Net income

   1,848     9,890  

Earnings per share:

    

Basic

  $0.04    $0.29  

Diluted

  $0.04    $0.28  

The unaudited pro forma information for the three- and nine-month periods ended September 30, 2015 and 2014 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments.

Other Intangible Assets

Intangible assets, except for the Refine Technology, LLC tradename and in-process research and development, 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 comprehensive income. The Refine Technology, LLC tradename and in-process research and development are not amortized. The Company reviews its indefinite-lived intangible assets notaccordingly, such amounts may be 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 Company’s 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 its products or changes in the size of the market for its 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 September 30, 2015.change.

Other intangible assets consisted of the following at September 30, 2015:

(In thousands)

  Gross Carrying
Amount
   Accumulated
Amortization
   Weighted
Average
Useful Life
(in years)
 

Technology – developed

  $3,295    $(953   12  

In process research and development

   1,600     —      —    

Patents

   240     (170   8  

Customer relationships

   11,804     (3,362   9  

Trademark/ tradename

   700     —       —    
  

 

 

   

 

 

   

 

 

 

Total other intangible assets

  $17,639    $(4,485   10  
  

 

 

   

 

 

   

Other intangible assets consisted of the following at December 31, 2014:

(In thousands)  Gross Carrying
Amount
   Accumulated
Amortization
   Weighted
Average
Useful Life
(in years)
 

Technology – developed

  $3,338    $(750   12  

In process research and development

   1,600     —       —    

Patents

   240     (148   8  

Customer relationships

   12,202     (2,546   9  

Trademark/ tradename

   700     —       —    
  

 

 

   

 

 

   

 

 

 

Total other intangible assets

  $18,080    $(3,444   10  
  

 

 

   

 

 

   

Amortization expense for amortized intangible assets was approximately $1,201,000 for the nine-month period ended September 30, 2015. In each of the next five years, the Company expects to record amortization expense (in thousands) of:

Years Ending

  Amortization Expense 

December 31, 2015 (three months remaining)

  $443  

December 31, 2016

   1,703  

December 31, 2017

   1,703  

December 31, 2018

   1,539  

December 31, 2019

   1,524  

December 31, 2020

   1,202  

3. Revenue Recognition

Product Sales

The Company’s 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 when required, 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 amongbetween 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. ForOn product sales to end customers, revenue is recognized, net of discounts, when both the title and risk of loss have transferred to the customer, as determined by the shipping terms provided there are no uncertainties regarding acceptance, and all obligations have been completed. Generally, the Company’sour 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 the 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 the Company’sour customers on a stand-alonestandalone 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.

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 returns,return, warranty or other issues is largely diminished. Furthermore, there is no customer right of return in the Company’sour sales agreements. Sales returns and warranty issues are infrequent and have not had nominala 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.

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:

 

The delivered item or items have value to the customer on a stand-alone basis.

 

If there is a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and within the Company’s control.

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:

 

It can only be achieved based in whole or in part on either the Company’s performance or the occurrence of a specific outcome resulting from the Company’s performance;

 

There is substantive uncertainty at the date an arrangement is entered into that the event will be achieved; and

 

It would result in additional payments being due to the entity.

The commercial milestone payments and royalty payments received under license agreements, if any, will be recognized as revenue when they are earned.

Sale of Intellectual Property to BioMarin

In January 2014, the Company entered into an asset purchase agreement (the “BioMarin Asset Purchase Agreement”) with BioMarin Pharmaceutical Inc. (“BioMarin”) to sell the Company’sRepligen’s histone deacetylase inhibitor (HDACi) portfolio. Pursuant to the terms of the BioMarin Asset Purchase Agreement, the Company received $2 million from BioMarin as an upfront payment on January 30, 2014 and a $125,675 payment of approximately $126,000 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, the CompanyRepligen 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 BioMarin Asset Purchase Agreement. The Company’sRepligen’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 nine-month period ended September 30, 2014, related to the transfer of the HDACi technology under the BioMarin Asset Purchase Agreement. The Company did not recognize any revenue in the three- and nine-month periods ended September 30, 2015. Any milestones earned upon specified clinical development or commercial sales events or future royalty payments, under the BioMarin 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 Asset Purchase Agreement:

 

The assignment by the CompanyRepligen to BioMarin of the Repligen Technology (“Repligen Know-How” and “Repligen Patents”) and the Scripps Agreement (the “Transferred Assets”);

 

The transfer of certain notebooks, data, documents, biological materials (if any) and other such documents in the Company’sour possession that might be useful to further development of the program (the “Technology Transfer”).

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 BioMarin 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 $126,000$125,675 payment to be received upon completion of the Technology Transfer. The Company excluded the potential milestone payments provided for in the BioMarin Asset Purchase Agreement from the arrangement consideration as they were not considered fixed or determinable at the time the BioMarin Asset Purchase Agreement was signed. Because the CompanyRepligen had not sold these items on a stand-alonestandalone basis previously, itRepligen had no vendor-specific objective evidence of selling price. Furthermore, the CompanyRepligen did not have detailed third-party evidence of selling price, and as a result the Companywe used itsour best estimate of selling price for each item. In determining these prices, the CompanyRepligen considered what itRepligen would be willing to sell the items for on a stand-alonestandalone 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 BioMarin 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 approximately $2,000,000, the amount of the up-front payment, as revenue in the first quarter of 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. The Company received the payment and recognized $126,000 of other revenues in September 2014 upon the 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:

 

Up to $60 million related to the achievement of specified clinical and regulatory milestone events; and

 

Up to $100 million related to the achievement of specified commercial sales events, specifically the first commercial sale in specific territories.

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 the Company’sour 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 BioMarin 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.

4. Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated other comprehensive income by component:component (in thousands):

 

(In thousands)

  Unrealized gain
(loss) on
investments
   Foreign currency
translation gain
(loss)
   Total 

Balance at December 31, 2014

  $(33  $(5,740  $(5,773

Other comprehensive income/(loss) before reclassifications

   43     (2,998   (2,955

Amounts reclassified from accumulated other comprehensive income

   —       —       —    
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income/(loss)

   43     (2,998   (2,955
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

  $10    $(8,738  $(8,728
  

 

 

   

 

 

   

 

 

 

(In thousands)

  Unrealized gain
(loss) on
investments
   Foreign currency
translation gain
(loss)
   Total 

Balance at December 31, 2015

  $(11  $(8,555  $(8,566

Other comprehensive income

   15     (633   (618
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

  $4    $(9,188  $(9,184
  

 

 

   

 

 

   

 

 

 

5. Earnings Per Share

The Company reports earnings per share in accordance with Accounting Standards Codification Topic 260,Earnings “Earnings Per Share,, which establishes standards for computing and presenting 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. Under the treasury stock method, unexercised “in-the-money” stock options and warrants 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 receive non-forfeitable dividends before vesting are considered participating securities and are considered in the calculation of basic and diluted earnings per share. There were no such participating securities outstanding during the three-month periods ended June 30, 2016 and 2015.

Basic and diluted weighted average shares outstanding were as follows:

 

  Three months ended
September 30,
   Nine months ended
September 30,
   Three months ended
June 30,
   Six months ended
June 30,
 
  2015   2014   2015   2014   2016   2015   2016   2015 

Weighted average common shares

   32,925,004     32,677,003     32,860,382     32,292,588     33,649,296     32,870,473     33,336,989     32,827,536  

Dilutive common stock options

   764,556     650,374     757,617     807,011     525,831     800,223     525,322     754,146  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Weighted average common shares, assuming dilution

   33,689,560     33,327,377     33,617,999     33,099,599     34,175,127     33,670,696     33,862,311     33,581,682  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

At SeptemberJune 30, 2015,2016, there were outstanding options to purchase 1,252,3561,315,739 shares of the Company’s common stock at a weighted average exercise price of $10.47$11.70 per share. For the three- and nine-monthsix-month periods ended SeptemberJune 30, 2016, 359,828 and 417,279 options to purchase shares of the Company’s common stock, respectively, 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. The Company has excluded the effects of its convertible senior notes issued in May 2016 on earnings per share, as it is the Company’s intent to settle these notes in cash.

At June 30, 2015, 163,459there were outstanding options to purchase 1,265,486 shares of the Company’s common stock at a weighted average exercise price of $9.68 per share. For the three- and 170,891six-month periods ended June 30, 2015, 126,541 and 150,041 options to purchase shares of the Company’s common stock, respectively, 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.

6. Cash, Cash Equivalents and Marketable Securities

At SeptemberJune 30, 2014,2016, the Company’s investments included money market funds and short-term marketable securities. At December 31, 2015, the Company’s investments included money market funds, short-term and long-term marketable securities. These marketable securities are classified as available-for-sale. 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. The average remaining contractual maturity of marketable securities at June 30, 2016 is approximately 3.53 months.

Management reviewed the Company’s investments as of June 30, 2016 and December 31, 2015 and concluded that there are no securities with other than temporary impairments in the investment portfolio. 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.

Investments in marketable securities consisted of the following at June 30, 2016 (in thousands):

   June 30, 2016 
   Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair Value 

Marketable securities:

        

U.S. Government and agency securities

  $3,927    $2    $—     $3,929  

Corporate and other debt securities

   5,250     2     —      5,252  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $9,177    $4    $—     $9,181  
  

 

 

   

 

 

   

 

 

   

 

 

 

There were outstanding optionsno long-term marketable securities as of June 30, 2016.

At June 30, 2016, the Company’s investments included three securities in unrealized loss positions with a total unrealized loss of less than $1,000 and a total fair market value of approximately $1,302,000. 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. There were no realized gains or losses on the investments for the six months ended June 30, 2016 or the six months ended June 30, 2015.

Investments in marketable securities consisted of the following at December 31, 2015 (in thousands):

   December 31, 2015 
   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  
  

 

 

   

 

 

   

 

 

   

 

 

 
   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  
  

 

 

   

 

 

   

 

 

   

 

 

 
   1,638     —      (5   1,633  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $19,326    $7    $(18  $19,315  
  

 

 

   

 

 

   

 

 

   

 

 

 

The contractual maturities of all money market funds and marketable securities are less than one year as of June 30, 2016.

7. Inventories

Inventories relate to purchase 1,259,317the Company’s bioprocessing business. The Company values inventory at cost or, if lower, market value, using the first-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 approximately $343,000 at June 30, 2016 and December 31, 2015.

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 consist of the following (in thousands):

   June 30,
2016
   December 31,
2015
 

Raw Materials

  $14,895    $10,671  

Work-in-process

   2,091     1,586  

Finished products

   6,211     5,741  
  

 

 

   

 

 

 

Total

  $23,197    $17,998  
  

 

 

   

 

 

 

8. Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):

   June 30, 2016   December 31, 2015 

Leasehold improvements

  $13,557    $13,306  

Equipment

   14,682     13,758  

Furniture and fixtures

   3,080     2,808  

Construction in progress

   621     425  
  

 

 

   

 

 

 

Total property, plant and equipment

   31,940     30,297  

Less: accumulated depreciation

   (18,233   (16,496
  

 

 

   

 

 

 

Property, plant and equipment, net

  $13,707    $13,801  
  

 

 

   

 

 

 

Depreciation expense totaled approximately $1,535,000 and $1,494,000 for the six-month periods ended June 30, 2016 and 2015, respectively.

9. Intangible Assets

Intangible assets, except for the Refine Technology, LLC tradename and in-process research and development, are amortized over their useful lives using the straight-line method, as applicable, and the amortization expense is recorded within selling, general and administrative expense in the Company’s statements of comprehensive income (loss). The Refine Technology, LLC tradename and in-process research and development are 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 June 30, 2016.

Intangible assets consisted of the following at June 30, 2016 (in thousands):

   Gross Carrying
Amount
   Accumulated
Amortization
   Weighted
Average
Useful Life
(in years)
 

Technology – developed

  $5,413    $(1,208   13  

In process research and development

   1,600     —      —   

Patents

   240     (192   8  

Customer relationships

   16,959     (4,385   11  

Trademark

   700     —      —   

Other intangibles

   67     (8   2  
  

 

 

   

 

 

   

 

 

 

Total intangible assets

  $24,979    $(5,793   12  
  

 

 

   

 

 

   

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    $(782   12  

In process research and development

   1,600     —      —   

Patents

   240     (177   8  

Customer relationships

   11,805     (3,926   9  

Trademark

   700     —      —   
  

 

 

   

 

 

   

 

 

 

Total intangible assets

  $17,640    $(4,885   10  
  

 

 

   

 

 

   

Amortization expense for amortized intangible assets was approximately $932,000 and $801,000 for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, the Company expects to record amortization expense as follows (in thousands):

Years Ending

  Amortization Expense 

December 31, 2016 (six months remaining)

  $1,120  

December 31, 2017

   2,241  

December 31, 2018

   2,052  

December 31, 2019

   2,028  

December 31, 2020

   1,683  

10. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

   June 30, 2016   December 31, 2015 

Employee compensation

  $3,800    $4,680  

Accrued interest payable

   251     —   

Accrued purchases

   718     604  

Taxes

   457     166  

Current portion of contingent consideration

   5,878     4,480  

Professional fees

   441     269  

Unearned revenue

   202     258  

Other accrued expenses

   1,915     1,600  
  

 

 

   

 

 

 

Total

  $13,662    $12,057  
  

 

 

   

 

 

 

11. Long Term Debt

The carrying value of the Company’s convertible senior notes is as follows (in thousands):

   June 30, 2016   December 31, 2015 

2.125% Convertible Senior Notes due 2021:

    

Principal amount

  $115,000    $—    

Unamortized debt discount

   (18,387   —    

Unamortized debt issuance costs

   (3,233   —    
  

 

 

   

 

 

 

Total convertible senior notes

  $93,380    $—    
  

 

 

   

 

 

 

On May 24, 2016, the Company issued $115 million aggregate principal amount of its 2.125% Convertible Senior Notes due 2021 (the “Notes”). The net proceeds from the sale of the Notes, after deducting the underwriting discounts and commissions and other related offering expenses, were approximately $111.3 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 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 receive shares of the Company’s common stock, cash or a combination thereof, at a weighted average exercise pricethe 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 $7.61 per share. For the three- and nine-month periods ended September 30, 2014, 263,475 and 289,475Company’s common stock.

The conversion rate for the Notes will initially be 31.1813 shares of the Company’s common stock respectively, were excluded fromper $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 calculation of diluted earnings per share because the exercise pricesterms of the stock options were greater than orNotes. 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 averageprincipal 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 shares,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 were therefore anti-dilutive.

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 June 30, 2016.

6.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 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 additional paid-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 equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Interest expense recognized on the Notes during the three month period ended June 30, 2016 includes $251,000, $324,000 and $57,000 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 June 30, 2016, the carrying value of the Notes was approximately $93.4 million and the fair value of the principal was approximately $124.3 million.

12. Stock-Based Compensation

For the three months ended SeptemberJune 30, 20152016 and 2014,2015, the Company recorded stock-based compensation expense of $981,000approximately $1,137,000 and $533,000,$985,000, respectively, for share-based awards granted under the Second Amended and Restated 2001 Repligen Corporation Stock Plan (the “2001 Plan”) and the Repligen Corporation Amended and Restated 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”). The Company recorded stock-based compensation expense of $2,668,000approximately $2,059,000 and $1,386,000$1,687,000 for the nine-monthsix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, respectively, for share-based awards granted under the Plans.

The following table presents stock-based compensation expense included in the Company’s consolidated statements of comprehensive income:income (in thousands):

 

(In thousands)

  Three months ended
September 30,
   Nine months ended
September 30,
 
  Three months ended
June 30,
   Six months ended
June 30,
 
  2015   2014   2015   2014   2016   2015   2016   2015 

Cost of product revenue

  $60    $46    $166    $136    $84    $63    $144    $106  

Research and development

   91     62     250     174     105     90     185     159  

Selling, general and administrative

   830     425     2,252     1,076     948     832     1,730     1,422  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $981    $533    $2,668    $1,386    $1,137    $985    $2,059    $1,687  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The 2012 Plan allows for the granting of incentive and nonqualified options to purchase shares of common stock, restricted stock restricted stock units and other equity awards. Incentive options and restricted stock units granted to employees under the Plans generally vest over a three to five-year period, with 20%-33% vesting on the first anniversary of the date of grant and the remainder vesting in equal yearly installments thereafter. Nonqualified options issued to non-employee directors under the Plans generally vest over one year. 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 SeptemberJune 30, 2015,2016, options to purchase 1,252,3561,315,739 shares were outstanding under the Plans. At SeptemberJune 30, 2015, 2,454,5732016, 1,976,534 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 restricted stock units. The Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award, and recognizes awards with service based vesting 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 performance-based or subject to performance or market conditions as of September 30, 2015.conditions. 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.

Information regarding option activity for the ninesix months ended SeptemberJune 30, 20152016 under the Plans is summarized below:

 

   Options
Outstanding
   Weighted-
Average
Exercise
Price Per
Share
   Weighted-
Average
Remaining
Contractual
Term
(in years)
   Aggregate
Intrinsic
Value

(in thousands)
 

Options outstanding at January 1, 2015

   1,225,117    $8.31      

Granted

   270,532     16.57      

Exercised

   (171,893   5.24      

Forfeited/Cancelled

   (71,400   9.12      
  

 

 

       

Options outstanding at September 30, 2015

   1,252,356    $10.47     7.08    $22,287  
  

 

 

       

Options exercisable at September 30, 2015

   504,326    $6.33     4.87    $10,853  
  

 

 

       

Vested and expected to vest at September 30, 2015 (1)

   1,186,665    $10.47     7.04    $21,146  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Options
Outstanding
   Weighted-
Average
Exercise
Price Per
Share
   Weighted-
Average
Remaining
Contractual
Term
(in years)
   (in thousands)
Aggregate
Intrinsic
Value
 

Options outstanding at January 1, 2016

   1,240,935    $10.44      

Granted

   331,203     12.40      

Exercised

   (170,919   5.89      

Forfeited/Cancelled

   (85,480   7.69      
  

 

 

       

Options outstanding at June 30, 2016

   1,315,739    $11.70     7.33    $21,147  
  

 

 

       

Options exercisable at June 30, 2016

   514,898    $9.49     5.17    $9,402  
  

 

 

       

Vested and expected to vest at June 30, 2016(1)

   1,223,223    $11.88     7.26    $19,473  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) RepresentsThis represents the number of vested options as of SeptemberJune 30, 20152016 plus the number of unvested options expected to vest as of SeptemberJune 30, 20152016 based on the unvested outstanding options at SeptemberJune 30, 20152016 adjusted for estimated forfeiture rates of 8% for awards granted to non-executive level employees and 3% for awards granted to executive level employees.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of the common stock on SeptemberJune 30, 20152016 of $27.85$27.36 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their options on SeptemberJune 30, 2015.2016.

The weighted average grant date fair value of options granted during the ninesix months ended SeptemberJune 30, 2016 and 2015 was $20.11 and 2014 was $22.41 and $11.12,$21.83, respectively. The total fair value of stock options that vested during the ninesix months ended SeptemberJune 30, 20152016 and 20142015 was approximately $1,862,000$2,396,000 and $1,023,000,$1,522,000, respectively.

As of SeptemberJune 30, 2015,2016, there was $7,455,000approximately $9,613,000 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 2.972.91 years. The Company expects 682,339708,325 unvested options to vest over the next five years.

7. Cash, Cash Equivalents13. Income Taxes

The Company’s effective tax rate for the three and Marketable Securities

At Septembersix months ended June 30, 2016 was 27.9% and 30.5%, respectively, compared to 17.0% and 23.5%, respectively, for the corresponding periods in the prior year. For the current three and six month periods, the effective tax rate was lower than the U.S. statutory tax rate of 34% primarily due to increased foreign profits at lower tax rates, offset by unbenefited domestic losses. For the three and six months ended June 30, 2015, the effective tax rate differed from the U.S. statutory rate of 34% primarily due to the lower statutory tax rate in Sweden and a reserve reversal attributable to a correction of an income tax audit accrual.

As of December 31, 2014,2015, the Company’s investments included money market funds as well as short-termCompany has U.S. net operating loss carryforwards of approximately $46,984,000 and long-term marketable securities. These marketable securitiesU.S. business tax credit carryforwards of approximately $1,920,000 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 2035. Net operating loss carryforwards and available tax credits are classified as available-for-sale. Marketable securities are investments with original maturitiessubject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of greater than 90 days. Long-term marketable securities are securities with maturitiescertain changes in the ownership interest of greater than one year. The average remaining contractual maturitysignificant stockholders.

As of marketable securities at September 30, 2015 is approximately 5.5 months.

Management reviewed the Company’s investments as of September 30, 2015 and December 31, 2014 and2015, the Company concluded that there are no securities with other than temporary impairmentsrealization of deferred tax assets in its investment portfolio. The Company does not intend to sell any investments in an unrealized loss position, and itthe United States beyond December 31, 2015 is not more likely than not, thatand as such, the Company will be required to sellmaintained a valuation allowance against the investments before recoverymajority of their amortized cost bases.

its remaining deferred tax assets. As of June 30, 2016, the Company concluded that realization of deferred tax assets beyond June 30, 2016 is not more likely than not, and as such, the Company maintained a valuation allowance against the majority of its remaining U.S. deferred tax assets.

Investments in marketable securities consistedAs a result of the following at September 30, 2015 (in thousands):

   September 30, 2015 
   Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair Value 

Marketable securities:

        

U.S. Government and agency securities

  $11,053    $4    $—     $11,057  

Corporate and other debt securities

   9,729     5     (1   9,733  
  

 

 

   

 

 

   

 

 

   

 

 

 
   20,782     9     (1   20,790  

Long-term marketable securities:

        

U.S. Government and agency securities

   1,649     2     —       1,651  

Corporate and other debt securities

   —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 
   1,649     2     —       1,651  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $22,431    $11    $(1  $22,441  
  

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2015,Company’s acquisition of Atoll GmbH on April 1, 2016, the Company’s investments included fourteen securities in unrealized loss positions with a total unrealized lossCompany acquired intangible assets of approximately $1,000 and a total fair market value€6,640,000. Because the amortization of these intangible assets is not deductible under German tax law, the Company recorded deferred tax liabilities of approximately $4,920,000. All investments with gross unrealized€1,972,000 (approximately $2,190,000) as of June 30, 2016. Additionally, the Company was able to retain net operating losses have been in unrealized loss positions for less than 12 months. of approximately €2,669,000. Accordingly, the Company recorded deferred tax assets of approximately €793,000 (approximately $880,000) as of June 30, 2016.

The unrealized losses were caused primarily by current economic and market conditions. There was no change in the credit risk of the securities. There were no realized gains or losses on the investments for the nine monthsfiscal years ended September 30, 2015 or the nine months ended September 30, 2014.

Investments in marketable securities consisted of the following at December 31, 2012, 2013, 2014 (in thousands):and 2015 are subject to examination by U.S. federal, state and Sweden taxing authorities.

   December 31, 2014 
   Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair Value 

Marketable securities:

        

U.S. Government and agency securities

  $12,716    $2    $(2  $12,716  

Corporate and other debt securities

   10,373     4     (3   10,374  
  

 

 

   

 

 

   

 

 

   

 

 

 
   23,089     6     (5   23,090  

Long-term marketable securities:

        

U.S. Government and agency securities

   1,228     —       —       1,228  

Corporate and other debt securities

   2,326     —       (4   2,322  
  

 

 

   

 

 

   

 

 

   

 

 

 
   3,554     —       (4   3,550  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $26,643    $6    $(9  $26,640  
  

 

 

   

 

 

   

 

 

   

 

 

 

The contractual maturities of marketable securities at September 30, 2015 were as follows (in thousands):

   Amortized
Cost
   Fair Value 

Due in 1 year or less

  $20,782    $20,790  

Due in 1 to 2 years

   1,649     1,651  
  

 

 

   

 

 

 
  $22,431    $22,441  
  

 

 

   

 

 

 

8.14. 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 and corporate marketable 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. At least annually, 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. The Company did not adjust or override any fair value measurements provided by the pricing services as of SeptemberJune 30, 2015.2016.

The following fair value hierarchy table presents information about each major category of the Company’s assets measured at fair value on a recurring basis as of SeptemberJune 30, 20152016 (in thousands):

 

  Fair value measurement at reporting date using:   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   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

  $9,543    $—      $—      $9,543    $131,939    $—     $—     $131,939  

U.S. Government and agency securities

   8,496     4,012     —       12,508     3,629     300     —      3,929  

Corporate and other debt securities

   —       9,933     —       9,933     —      5,252     —      5,252  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $18,039    $13,945    $—      $31,984    $135,568    $5,552    $—     $141,120  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

                

Contingent consideration – short-term

   —       —       4,454    4,454    $—      $—     $5,878    $5,878  

Contingent consideration – long-term

   —       —       365    365  

Convertible senior notes

   —      124,295     —      124,295  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $—      $—      $4,819   $4,819    $—     $124,295    $5,878    $130,173  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Company has no other assets or liabilities for which fair value measurement is either required or has been elected to be applied, other than theapplied. The liabilities for contingent consideration are recorded in connection with the BioFlash Partners, LLC (“BioFlash”), Refine Technology, LLC (“Refine”) and RefineAtoll business combinations. 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 and a 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 Refine. The contingent consideration related to Atoll is valued using management’s estimates of expected future milestone payments based on forecasted sales. These valuations are Level 3 valuations, as the primary inputs are unobservable.

Changes in the fair value of contingent consideration in the nine-monthsix-month period ended SeptemberJune 30, 20152016 are primarily attributable to an increase to the expected 2016 Refine milestone payment of $2,088,000 related to 2015 sales,$2,629,000, a $1,000,000$4,350,000 milestone payment to Refine related to 2014 sales,and a $110,000$130,000 minimum royalty payment made to BioFlash, and a final milestone payment to Novozymes Biopharma DK A/S of 25,000 Euros (approximately $29,000). All milestone payments made in 2015which were previously accrued. Additionally, the Company recorded contingent consideration of €836,000 (approximately $928,000) related to the Atoll acquisition.

The following table provides a rollforward of the fair value of the contingent consideration (in thousands):

 

Balance at December 31, 2014

  $3,844  

Balance at December 31, 2015

  $6,788  

Additions

   928  

Payments

   (1,139   (4,480

Changes in fair value

   2,114     2,642  
  

 

   

 

 

Balance at September 30, 2015

  $4,819  

Balance at June 30, 2016

  $5,878  
  

 

   

 

 

The following tables provide quantitative information associated with the fair value measurement of the Company’s contingent consideration related to Refine using Level 3 inputs (in thousands):

 

   Contingent Consideration
   Refine

Fair value as of SeptemberJune 30, 20152016

  $4,409,0004,648

Valuation technique

  Probability-adjusted

discounted cash flow

Remaining periodsperiod in which milestones can be achieved

  2015 – 2016

 

   Fixed
Earn-out
   Maximum
Variable
Earn-out
   Accrued
Balance
 

2015

   3,500     850     4,324  

2016

   4,250     1,250     85  
   Fixed
Earn-out
   Maximum
Variable
Earn-out
   Accrued
Balance
 

2016

   4,250     1,300     4,648  

The significant unobservable inputs used in the fair value measurement of Refine’s contingent consideration are (i) the probabilities of a successful achievement of 2015 and 2016 sales milestones; (ii) the period in which these milestones are expected to be achieved; and (iii) a discount rate.milestones. During the first ninesix months of 2015,2016, the estimated fair value of the 20152016 contingent payment was increased by $2,088,000$2,629,000 to $4,409,000$4,648,000 based uponon revised sales forecasts for 2015 and 2016.forecasts. Increases or decreases in the Company’s projected sales during these periods2016 may result in a significantly higher or lower fair value measurement, respectively, and could result in a reversal of the current accrual.

The following tables provide quantitative information associated with the fair value measurement of the Company’s contingent consideration related to Atoll using Level 3 inputs (in thousands):

Contingent Consideration
Atoll

Fair value as of June 30, 2016

$928

Valuation technique

Probability-weighted
expected return method.

Remaining period in which milestones can be achieved

2016

The significant unobservable inputs used in the fair value measurement of Atoll’s contingent consideration are the probabilities of successful achievement of 2016 sales milestones. The initial valuation of contingent consideration upon the acquisition of Atoll in April 2016 resulted in a fair value of €836,000 (approximately $928,000). Increases or decreases in the Company’s projected sales during 2016 may result in a significantly higher or lower fair value measurement, respectively, and could result in a reversal of the current accrual.

In May 2016, the Company issued $115 million aggregate principal amount of 2.125% convertible senior notes due June 1, 2021 (the “Notes”). Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016. As of June 30, 2016, the carrying value of the Notes was $93.3 million, net of unamortized discount, and the fair value of the Notes was approximately $124.3 million. The Notes are discussed in more detail in Note 11, “Long Term Debt.

There were no remeasurements to fair value during the ninethree months ended SeptemberJune 30, 20152016 of financial assets and liabilities that are not measured at fair value on a recurring basis.

9. Inventories

Inventories relate to the Company’s bioprocessing business. The Company values inventory at cost or, if lower, market value, using the first-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 approximately $328,000 at September 30, 2015 and $78,000 at December 31, 2014.

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 consist of the following (in thousands):

   September 30,
2015
   December 31,
2014
 

Raw materials

  $8,795    $5,374  

Work-in-process

   2,985     2,256  

Finished products

   4,119     4,754  
  

 

 

   

 

 

 

Total

  $15,899    $12,384  
  

 

 

   

 

 

 

10. 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 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.

Accrued liabilities consist of the following (in thousands):

   September 30, 2015   December 31, 2014 

Employee compensation

  $3,767    $3,759  

Taxes

   1,589     571  

Royalty and license fees

   948     —   

Current portion of contingent consideration

   4,454     1,135  

Professional fees

   394     511  

Unearned revenue

   524     130  

Other accrued expenses

   1,082     713  
  

 

 

   

 

 

 

Total

  $12,758    $6,819  
  

 

 

   

 

 

 

11.15. Commitments and Contingencies

In March 2014, the Company entered into an amendment of its existing lease to expand the rented space from 55,694 to 75,594 square feet at 41 Seyon Street, Waltham, Massachusetts. Pursuant to the terms of the amended lease, commencing on August 1, 2014 the Company began leasing an additional 19,900 square feet (the “Expansion Space”) for a period of eight years and one month. The Expansion Space is a part of the Company’s corporate headquarters.

The amended lease provides for additional rent expense of approximately $361,000 on an annualized basis. Future minimum rental commitments under the amended leaseCompany’s leases as of SeptemberJune 30, 20152016 are as follows (in thousands):

 

   Minimum Rental
Commitments
 

2015

  $586  

2016

   2,343  

2017

   1,888  

2018

   1,482  

2019

   1,371  

Thereafter

   3,386  

   Minimum Rental
Commitments
 

2016

  $2,031  

2017

   1,434  

2018

   1,434  

2019

   1,387  

2020

   1,371  

Thereafter

   2,700  

12. Income Taxes

For the three- and nine-month periods ended September 30, 2015, the Company had income before taxes of $3,679,000 and $12,229,000, respectively. The Company recorded income tax provisions of $1,141,000 and $3,149,000, respectively, for the three- and nine-month periods ended September 30, 2015. This resulted in effective tax rates of 31.0% and 25.8% for the three- and nine-month periods ended September 30, 2015. The Company expects its effective tax rate for all of 2015 will be 24.3% based on currently forecasted rates of profitability in the countries in which the Company conducts business. The difference between the effective tax rate at Q3 of 24.3% and the estimated annual effective tax rate for 2015 of 22.01% is due primarily to a discrete tax charge related to historic tax uncertainties recorded in 2015 as well as the jurisdictional mix of earnings. The effective tax rate differs from the U.S. statutory tax rate primarily due to the lower statutory tax rate in Sweden.

For the three and nine-month periods ended September 30, 2014, the Company had income before taxes of $2,254,000 and $10,896,000, respectively. The Company recorded income tax provisions of $788,000 and $2,327,000, respectively, for the three and nine-month periods ended September 30, 2014. This is based on a year to date effective tax rate of 21.4% for the nine-month period ended September 30, 2014 and an effective tax rate of 22.1% for the year ending December 31, 2014. The anticipated movement in the effective tax rate between the interim period and year end is a result of the expected change in the income position in the US. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the U.S. statutory tax rate primarily due to the lower statutory tax rate in Sweden, as well as year-to-date income for the U.S. entity as compared to a projected loss in the U.S. for the full year.

The Company has net operating loss carryforwards of approximately $43,387,000 and business tax credits carryforwards of approximately $1,782,000 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 2032. Net operating loss carryforwards and available tax credits 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.

As of December 31, 2014, the Company concluded that realization of deferred tax assets beyond December 31, 2014 is not more likely than not, and as such, as of December 31, 2014 it maintained a valuation allowance against the majority of its remaining deferred tax assets. As of September 30, 2015, the Company concluded that realization of deferred tax assets beyond September 30, 2015 is not more likely than not, and as such, as of September 30, 2015 it maintained a valuation allowance against the majority of its remaining deferred tax assets.

The fiscal years ended March 31, 2007 through March 31, 2011 as well as the nine-month fiscal year ended December 31, 2011 and the years ended December 31, 2012, 2013 and 2014 are subject to examination by the Commonwealth of Massachusetts (“the Commonwealth”) taxing authorities. Fiscal years ended December 31, 2012, 2013 and 2014 are subject to examination by other states, U.S. federal and Sweden taxing authorities.

The Company is currently subject to an examination by the Commonwealth for the years 2008 and 2009. The examiner completed the exam in 2013 and issued a notice of intent to assess tax, which the Company has appealed. The two primary issues raised in the exam are the treatment of R&D credits and the sourcing of certain income streams. During the appeal stage, the Company and the state each have made settlement proposals. As of September 30, 2015 there has been no firm agreement regarding the settlement; however, based on the direction of the negotiation, the Company has increased its uncertain tax positions by $201,000 during the three-month period ended September 30, 2015.

For the years ended March 31, 2010 and 2011, as well as the nine months ended December 31, 2011, the Commonwealth indicated that it was seeking to disallow certain Research and Development Credits that were generated between 2010 and 2011. The Company performed an evaluation of the available documentation, the likelihood of similar matters in other open audit periods, the impact of interest and penalties and other relevant factors and paid approximately $141,000 to the Commonwealth in July 2015. The amount paid was previously accrued by the Company.

The following is a tabular reconciliation of unrecognized tax benefits (in thousands):

Unrecognized tax benefits at December 31, 2014

  $2,081  

Gross increases – tax positions in current period

   229  

Gross decreases – tax positions in prior period

   (125

Settlements

   (141
  

 

 

 

Unrecognized tax benefits at September 30, 2015

  $2,044  
  

 

 

 

13.16. Segment Reporting

The Company views its operations, makes decisions regarding how to allocate resources and manages its business as one operating segment. As a result, the financial information disclosed herein represents all of the material financial information related to the Company’s principal operating segment.

The following table represents the Company’s total revenue by geographic area (based on the location of the customer):

 

  Three months ended
September 30,
 Nine months ended
September 30,
   Three months ended
June 30,
 Six months ended
June 30,
 
  2015 2014 2015 2014   2016 2015 2016 2015 

United States

   45 21 37 25

Sweden

   27 30 39 40   29 51 31 44

United States

   38 38 29 34

United Kingdom

   18 23 18 22   6 17 10 18

Other

   17 9 14 4   20 11 22 13
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total

   100 100 100 100   100 100 100 100
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Revenue from significant customers as a percentage of the Company’s total revenue is as follows:

 

   Three months ended
September 30,
  Nine months ended
September 30,
 
   2015  2014  2015  2014 

GE Healthcare

   26  30  38  39

Bioprocessing Customer B

   19  23  18  22

Bioprocessing Customer C

   19  20  14  16
   Three months ended
June 30,
  Six months ended
June 30,
 
   2016  2015  2016  2015 

GE Healthcare

   28  51  31  44

MilliporeSigma

   30  25  30  31

Significant accounts receivable balances as a percentage of the Company’s total trade accounts receivable and other receivables balances are as follows:

 

   September 30,
2015
  December 31,
2014
 

GE Healthcare

   23  29

Bioprocessing Customer B

   15  *  

Bioprocessing Customer C

   12  *  

*Denotes less than 10% of accounts receivable.
   June 30,
2016
  December 31,
2015
 

GE Healthcare

   49  13

MilliporeSigma

   13  32

Bioprocessing Customer C

   3  21

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We areRepligen is a bioprocessing company that develops, manufactures and markets innovative products and solutions used to manufacture biologic drugs. Biologics, or principally monoclonal antibodies, recombinant proteins, and vaccines, are producedmanufactured through a complex process involving the use of live cells to produce the drug, followed by multiple separation and purification processes, where theyprocesses. Our products are used in this process to enhance productionend product yields for the manufacturer while lowering costs and reducing risks through increased process efficiencies.

For over twentytwenty-five years, we have been a global market leader in native and recombinant forms of Protein A, a critical reagent used in the downstream purification of therapeutic monoclonal antibodies, or mAbs, one of the largest and fastest-growing class of biologic drugs on the market. Our Protein A reagentsligands are a critical component of Protein A resins currently used in the commercial production of over 4550 mAbs, and in clinical stage production of over 300 investigational mAbs. We alsoIn upstream bioprocessing, where a biologic drug product is grown in bioreactors, we supply several growth factor products used to supplement cell culture media and enhance cell productivity. Our XCell™ ATF filtration productssystems are also used upstream to increase cell cultureretention and accelerate cell productivity, duringresulting in significantly higher product yield from a bioreactor. In downstream bioprocessing, where the bioproduction process. In the expanding area of flexible biomanufacturing technologies,biologic drug product is separated and purified, we have developed and currently market a series ofour innovative OPUS® line of chromatography columns for use in clinical-scale manufacturing. Thesebench-scale through clinical production-scale purification. We deliver OPUS pre-packed “plug-and-play” columns are uniquely customizable towith chromatography resins of our customers’ mediachoice, and customized to their size requirements. In the industry, OPUS is one of the leading “single-use” technologies that are being adopted for their convenience, flexibility and reliability as biomanufacturers seek ways to increase productivity while reducing facility size and cost.

We generally manufacture and sell Protein A ligands through long-term supply agreements, and we sell our XCell ATF and OPUS lines direct to end users (biopharmaceutical developers and contract manufacturing organizations) worldwide. Our growth factor products are sold through a distribution agreement with MilliporeSigma under which we co-promote LONG®R3 IGF-1 and other growth factors in our portfolio. We refer to these activities as our bioprocessing business. Our manufacturing facilities are located in the United States, Sweden and Germany.

Through strategic acquisitions and internal product development, we have expanded our portfolio of products that we sell direct to end users (biopharmaceutical companies and contract manufacturing organizations).users. This expansion includes our acquisition of the Alternating Tangential Flow (“ATF”) System (now XCell™ ATF) which we acquired fromunder an asset purchase agreement with Refine Technology LLC, or Refine. The ATF System is a best-in-class device for generating extremely high cell concentrations to allow for improved drug yield and more robust, large scale manufacturing. OnRefine, on June 2, 2014, we purchased all of the assets and assumed certain specified liabilities related to Refine’s ATF System.2014. This acquisition strengthened our bioprocessing business by adding a complementaryupstream product portfolio and complements our growth factor portfolio. Additionally, on April 1, 2016, we acquired Atoll GmbH (“Atoll”), an innovator and manufacturer of pre-packed chromatography columns used in process development and clinical manufacturing of biologic drugs, from UV-Cap GmbH & Co. KG. This acquisition strengthens and complements our growing OPUS product line, while expanding its sales presence worldwide.

We generally manufacture and sell Protein A and growth factors to life sciences companies under supply agreements and sell our chromatography columns, as well as media and quality test kits, and our ATF products directly to biopharmaceutical companies or contract manufacturing organizations or through distributors. We refer to these activities as our bioprocessing business. Our manufacturing facilities are locatedprovides an important customer-facing center in the United States and Sweden.Central Europe.

Historically, Repligen also conducted activities aimed at developing proprietary therapeutic drug candidates, often with a potential of entering into a collaboration with a larger commercial stage pharmaceutical or biotechnology company in respect of these programs. As part of our strategic decision in 2012 to focus our efforts on our core bioprocessing business, we reduced our efforts ondiscontinued our clinical development programs, and increased our effortsoutlicensed those programs to find collaboration partnersbiopharmaceutical companies including Pfizer, Inc. and BioMarin, under agreements that allow us to pursueshare in the development and, if successful, thepotential commercialization of these drug programs.the subject compounds.

Critical Accounting Policies and Estimates

A “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For additional information, please see the discussion of our critical accounting policies in Management’s Discussion and Analysis and our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.

Results of Operations

Three months ended SeptemberJune 30, 20152016 vs. SeptemberJune 30, 20142015

Revenues

Total revenues for the three-month periods ended September 30, 2015 and 2014 were comprised of the following:

   Three months ended
September 30,
   % Change 
   2015   2014   2015 vs. 2014 
   (in thousands, except percentages) 

Product revenue

  $19,814    $15,152     31

Royalty and other revenue

   —      126     (100%) 
  

 

 

   

 

 

   

 

 

 

Total revenue

  $19,814    $15,278     30
  

 

 

   

 

 

   

 

 

 

Sales of bioprocessing products for the three-monthsthree months ended SeptemberJune 30, 2016 and 2015 were $29,170,000 and 2014 were $19,814,000 and $15,152,000,$21,457,000, respectively, representing an increase of $4,662,000,$7,713,000, or 31%36%. This increase was primarily due to increases in orders for our chromatography columns and ATF products from our key bioprocessing customers, partially offset by the foreign currency exchange impact of the strengthening U.S. dollar against the Swedish krona, British pound and the Euro.customers. Sales of our bioprocessing products canare impacted by the timing of

orders, development efforts at our customers or end-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.

Costs and operating expenses

Total costs and operating expenses for the three-month periods ended June 30, 2016 and 2015 were comprised of the following:

   Three months ended
June 30,
   % Change 
   2016   2015   2016 vs. 2015 
   (in thousands, except percentages) 

Cost of product revenue

  $12,644    $8,586     47

Research and development

   1,890     1,252     51

Selling, general and administrative

   8,140     6,242     30

Contingent consideration – fair value adjustments

   637     768     (17%) 
  

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

  $23,311    $16,848     38
  

 

 

   

 

 

   

 

 

 

Cost of product revenue was approximately $12,644,000 and $8,586,000 for the three-month periods ended June 30, 2016 and 2015, respectively, an increase of $4,058,000 or 47%. This increase is primarily due to the increased product revenue noted above. Gross margins may fluctuate over the remainder of 2016 based on expected production volume and shipments, and product mix.

Research and development expenses were approximately $1,890,000 and $1,252,000 for the three-month periods ended June 30, 2016 and 2015, respectively, an increase of $638,000 or 51%. This increase is primarily related to the timing and scale of our bioprocessing product development projects. Expenses generally include personnel costs, external development costs, supplies and other expenses related to our new products in development.

Selling, general and administrative expenses were approximately $8,140,000 and $6,242,000 for the three-month periods ended June 30, 2016 and 2015, respectively, an increase of $1,898,000 or 30%. This increase is primarily due to the continued buildout of our administrative infrastructure to support future growth, the expansion of our customer-facing activities to drive sales of our bioprocessing products and costs incurred related to the acquisition of Atoll on April 1, 2016.

Contingent consideration fair value adjustments were approximately $637,000 and $768,000 for the three-month periods ended June 30, 2016 and 2015, respectively, a decrease of $131,000 or 17%. Fair value adjustments for contingent consideration are based on changes in the probabilities of achieving milestones and the related payments.

Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $76,000 and $19,000 for the three-month periods ended June 30, 2016 and 2015, respectively. This increase of $57,000, or 300%, is primarily attributable to higher average invested cash balances related to the receipt of proceeds from our issuance of convertible senior notes in May 2016.

Interest expense

Interest expense was approximately $638,000 and $8,000 for the three-month periods ended June 30, 2016 and 2015, respectively. This increase of $630,000 is attributable to interest expense related to the issuance of convertible senior notes in May 2016.

Other income (expense)

Other income was approximately $75,000 and other expense was approximately ($269,000) for the three-month periods ended June 30, 2016 and 2015, respectively, and was primarily attributable to foreign currency gains and losses.

Provision for income taxes

For the three months ended June 30, 2016, we had income before taxes of approximately $5,372,000 and recorded a tax provision of approximately $1,500,000 for an effective tax rate of approximately 28%. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the U.S. statutory tax rate primarily due to lower statutory tax rates in foreign jurisdictions.

Six months ended June 30, 2016 vs. June 30, 2015

Revenues

Sales of bioprocessing products for the six-month periods ended June 30, 2016 and 2015 were $54,265,000 and $42,274,000, respectively, an increase of $11,991,000 or 28%. This increase was primarily due to increases in orders for our chromatography columns and ATF products from our key bioprocessing customers. Sales of our bioprocessing products are impacted by the timing of orders, development efforts at our customers or end-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.

Costs and operating expenses

Total costs and operating expenses for the three-monthsix-month periods ended SeptemberJune 30, 20152016 and 20142015 were comprised of the following:

 

  Three months ended
September 30,
   % Change   Six months ended
June 30,
   % Change 
  2015   2014   2015 vs. 2014   2016   2015   2016 vs. 2015 
  (in thousands, except percentages)   (in thousands, except percentages) 

Cost of product revenue

  $8,444    $6,931     22  $23,713    $16,659     42

Research and development

   1,490     1,650     (10%)    3,430     2,819     22

Selling, general and administrative

   5,959     4,471     33   15,159     12,267     24

Contingent consideration – fair value adjustments

   233     10     2,230   2,642     1,881     40
  

 

   

 

   

 

   

 

   

 

   

 

 

Total costs and operating expenses

  $16,126    $13,062     23  $44,944    $33,626     34
  

 

   

 

   

 

   

 

   

 

   

 

 

Cost of product revenue was approximately $8,444,000$23,713,000 and $6,931,000$16,659,000 for the three-monthsix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, respectively, an increase of $1,513,000$7,054,000 or 22%42%. This increase is primarily due to the increased product revenuesrevenue noted above. Gross margins may declinefluctuate over the remainder of 20152016 based on expected production volume and shipments, and product mix.

Research and development expenses were approximately $1,490,000$3,430,000 and $1,650,000$2,819,000 for the three-monthsix-month periods ended SeptemberJune 30, 2016 and 2015, and 2014, respectively, a decreasean increase of $160,000$611,000 or 10%22%. This decreaseincrease is primarily related to the timing and scale of our bioprocessing product development projects. These expenses includedExpenses generally include personnel costs, external development costs, supplies and other expenses related to our new products in development.

Selling, general and administrative expenses were approximately $5,959,000$15,159,000 and $4,471,000$12,267,000 for the three-monthsix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, respectively, an increase of $1,488,000$2,892,000 or 33%24%. This increase is primarily due to the continued buildout of our administrative infrastructure to support future growth, and the expansion of our customer-facing activities to drive sales of our bioprocessing products partially offset byand costs incurred related to our Refinethe acquisition in 2014 that did not repeat in 2015.

Contingent Considerationof Atoll on April 1, 2016.

Contingent consideration fair value adjustments were approximately $233,000$2,642,000 and $10,000$1,881,000 for the three-monthsix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, respectively, an increase of $223,000. The increase$761,000 or 40%. Fair value adjustments for contingent consideration are based on changes in the fair value adjustment during the third quarter of 2015 relates to the increased probabilityprobabilities of achieving sales milestones and the related to the Refine acquisition.payments.

Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $37,000$137,000 and $64,000$56,000 for the three-monthsix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, respectively. This decreaseincrease of $27,000,$81,000, or 42%145%, is primarily attributable to lowerhigher average invested cash balances.balances related to the receipt of proceeds from our issuance of convertible senior notes in May 2016.

Interest expense

Interest expense was approximately $643,000 and $17,000 for the six-month periods ended June 30, 2016 and 2015, respectively. This increase of $626,000 is attributable to interest expense related to the issuance of convertible senior notes in May 2016.

Other income (expense)

Other income (expense)expense was approximately ($38,000)904,000) and ($14,000)137,000) for the three-monthsix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and was primarily attributable to foreign currency gains and losses related to amounts due from non-Swedish kronor-based customers and cash balances denominated in U.S. dollars and British pounds held by our Sweden operations.

Provision for income taxes

For the threesix months ended SeptemberJune 30, 2015,2016, we had income before taxes of approximately $3,679,000$7,911,000 and recorded a tax provision of approximately $1,141,000$2,415,000 for an effective tax rate of approximately 31.0%31%. The effective income tax rate is based upon the estimated income for the year and the composition of the income in different jurisdictions. The effective tax rate differs from the U.S. statutory tax rate primarily due to the lower statutory tax raterates in Sweden.

foreign jurisdictions and the tax treatment of contingent consideration expense recorded in the first half of 2016.

Nine months ended September 30, 2015 vs. September 30, 2014Non-GAAP Financial Measures

RevenuesWe provide non-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 each non-GAAP financial measures to its most comparable GAAP financial measures are described below.

Total revenuesWe 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 nine-monthperiod in which such charges are incurred.

Non-GAAP Adjusted Income from Operations

Non-GAAP adjusted income from operations is measured by taking income from operations as reported in accordance with GAAP and excluding acquisition costs 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 to non-GAAP adjusted income from operations for the three- and six-month periods ended SeptemberJune 30, 2016 and 2015 and 2014 were comprised of the following:(in thousands):

 

   Nine months ended
September 30,
   % Change 
   2015   2014   2015 vs. 2014 
   (in thousands, except percentages) 

Product revenue

  $62,088    $45,038     38

Royalty and other revenue

   —       2,117     (100%) 
  

 

 

   

 

 

   

 

 

 

Total revenue

  $62,088    $47,155     32
  

 

 

   

 

 

   

 

 

 
   Three months ended June 30,   Six months ended June 30, 
   2016   2015   2016   2015 

GAAP income from operations

  $5,859    $4,609    $9,321    $8,648  

Non-GAAP adjustments to net income:

        

Acquisition costs

   725     —       1,118     —    

Contingent consideration – fair value adjustments

   637     769     2,642     1,881  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted income from operations

  $7,221    $5,378    $13,081    $10,529  
  

 

 

   

 

 

   

 

 

   

 

 

 

SalesNon-GAAP Adjusted Net Income

Non-GAAP adjusted net income is measured by taking net income as reported in accordance with GAAP and excluding acquisition costs, contingent consideration expenses and non-cash interest expense booked through our consolidated statements of bioprocessing productscomprehensive income. The following is a reconciliation of net income in accordance with GAAP to non-GAAP adjusted net income for the nine-monththree-month periods ended SeptemberJune 30, 20152016 and 2014 were $62,088,0002015:

   Three Months Ended June 30, 
   2016   2015 
   (in thousands)
Amount
   Fully Diluted
Earnings per
Share
   (in thousands)
Amount
   Fully Diluted
Earnings per
Share
 

GAAP net income

  $3,872    $0.11    $3,612    $0.11  

Non-GAAP adjustments to net income:

        

Acquisition costs

   725     0.02     —       —    

Contingent consideration – fair value adjustments

   637     0.02     769     0.02  

Non-cash interest expense

   382     0.01     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted net income

  $5,616    $0.16    $4,381    $0.13  
  

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation of net income in accordance with GAAP to non-GAAP adjusted net income for thesix-month periods ended June 30, 2016 and $45,038,000, respectively, an increase of $17,050,000, or 38%. This increase was due2015:

   Six Months Ended June 30, 
   2016   2015 
   (in thousands)
Amount
   Fully Diluted
Earnings per
Share
   (in thousands)
Amount
   Fully Diluted
Earnings per
Share
 

GAAP net income

  $5,496    $0.16    $6,542    $0.19  

Non-GAAP adjustments to net income:

        

Acquisition costs

   1,118     0.03     —       —    

Contingent consideration – fair value adjustments

   2,642     0.08     1,881     0.06  

Non-cash interest expense

   382     0.01     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted net income

  $9,638    $0.28    $8,423    $0.25  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

Adjusted EBITDA is measured by taking net income as reported in part to increases in orders from our key bioprocessing customers, partially offset by the foreign currency exchange impact of the strengthening U.S. dollar against the Swedish krona, British poundaccordance with GAAP, excluding investment income, interest expense, taxes, depreciation and the Euro. Additionally, approximately $6,600,000 of this increase is attributable to the addition of the ATF System to our suite of products. Sales of our bioprocessing products are impacted by the timing of orders, development efforts at our customers or end-usersamortization, 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.

During the nine months ended September 30, 2014, we also recognized $2,117,000 of revenue under the Asset Purchase Agreement with BioMarin Pharmaceutical Inc. (“BioMarin”) to advance Repligen’s histone deacetylase inhibitor (HDACi) portfolio.

Costs and operating expenses

Totalexcluding acquisition costs and operatingcontingent 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 the nine-monththree- and six-month periods ended SeptemberJune 30, 2016 and 2015 and 2014 were comprised of the following:(in thousands):

 

   Nine months ended
September 30,
   % Change 
   2015   2014   2015 vs. 2014 
   (in thousands, except percentages) 

Cost of product revenue

  $25,103    $19,938     26

Research and development

   4,309     4,281     1

Selling, general and administrative

   18,226     12,180     50

Contingent consideration – fair value adjustments

   2,114     126     1,578
  

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

  $49,752    $36,525     36
  

 

 

   

 

 

   

 

 

 

Cost of product revenue was approximately $25,103,000 and $19,938,000 for the nine-month periods ended September 30, 2015 and 2014, respectively, an increase of $5,165,000 or 26%. This increase is primarily due to the increased product revenue noted above and the addition of the ATF System to our suite of products. Gross margins may decline over the remainder of 2015 based on expected production volume and shipments and product mix.

Research and development expenses were approximately $4,309,000 and $4,281,000 for the nine-month periods ended September 30, 2015 and 2014, respectively, an increase of $28,000 or 1%. This increase is primarily related to the timing of expenditures, including personnel, supplies and other development expenses related to our new products in development.

Selling, general and administrative expenses were approximately $18,126,000 and $12,180,000 for the nine-month periods ended September 30, 2015 and 2014, respectively, an increase of $6,046,000 or 50%. This increase is primarily due to higher administrative expenses related to the planned implementation and training 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.

Contingent Consideration

Contingent consideration fair value adjustments were approximately $2,114,000 and $126,000 for the nine-month periods ended September 30, 2015 and 2014, respectively, an increase of $1,988,000. The increase in the fair value adjustment during 2015 relates to the increased probability of achieving sales milestones related to the Refine acquisition.

Investment income

Investment income includes income earned on invested cash balances. Investment income was approximately $92,000 and $250,000 for the nine-month periods ended September 30, 2015 and 2014, respectively. This decrease of $158,000, or 63%, is primarily attributable to lower average invested cash balances.

Other income (expense)

Other income (expense) was approximately ($175,000) and $54,000 for the nine-month periods ended September 30, 2015 and 2014, respectively, and was primarily attributable to foreign currency (losses) and gains related to our Sweden operations.

Provision for income taxes

For the nine months ended September 30, 2015, we had income before taxes of approximately $12,229,000 and recorded a tax provision of approximately $3,149,000 for an effective tax rate of approximately 25.8%. The effective tax rate differs from the U.S. statutory tax rate primarily due to the lower statutory tax rate in Sweden.

   Three months ended June 30,   Six months ended June 30, 
   2016   2015   2016   2015 

GAAP net income

  $3,872    $3,612    $5,496    $6,542  

Non-GAAP EBITDA adjustments to net income:

        

Investment income

   (76   (19   (137   (56

Interest expense

   638     8     643     17  

Tax provision

   1,500     739     2,415     2,008  

Depreciation

   785     745     1,536     1,494  

Amortization

   533     400     932     801  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   7,252     5,485     10,885     10,806  

Other non-GAAP adjustments:

        

Acquisition costs

   725     —       1,118     —    

Contingent consideration – fair value adjustments

   637     769     2,642     1,881  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $8,614    $6,254    $14,645    $12,687  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and capital resources

We have financed our operations primarily through revenues derived from product sales, and research grants, as well as proceeds and royalties from license arrangements, and a litigation settlement, and sales of equity securities.securities and issuance of debt. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue.

At SeptemberJune 30, 2015,2016, we had cash and marketable securities of $70,525,000$181,803,000 compared to $62,003,000$73,407,000 at December 31, 2014.2015. A deposit for leased office space of $450,000 is classified as restricted cash and is not included in cash and marketable securities totals as of SeptemberJune 30, 2015 or2016 and December 31, 2014.2015.

On April 1, 2016, pursuant to the terms 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 consideration for all of the equity interests in Atoll a purchase price of €7.8 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 $111.3 million 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 receive shares of the Company’s common stock, cash or a combination thereof, at the Company’s election.

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.

Operating activities

For the nine-monthsix-month period ended SeptemberJune 30, 2016, our operating activities provided cash of $6,753,000 reflecting net income of $5,496,000 and non-cash charges totaling $7,766,000 including depreciation, amortization, non-cash interest expense, stock-based compensation charges, deferred tax expenses and the revaluation of contingent consideration. A decrease in accounts receivable provided $892,000 of cash, and was primarily due to the timing of cash receipts from customers. An increase in inventories consumed $5,093,000 of cash to support future revenues. Payments of accrued liabilities consumed $3,239,000 of cash, and was mainly due to the payment of contingent consideration to Refine related to 2015 sales milestones.

For the six-month period ended June 30, 2015, our operating activities provided cash of $11,701,000,$5,113,000, reflecting net income of $9,080,000$6,542,000 and non-cash charges totaling $8,461,000$6,070,000 mainly attributable to depreciation and amortization, stock-based compensation charges and the revaluation of contingent consideration. An increase in accounts receivable consumed $2,767,000$6,820,000 of cash, and was primarily due to a 38%41% increase in product revenues as well as timing of sales and payments from customers. Additionally, an increase in inventory consumed $4,051,000 of cash, and was due to increasing inventory levels to meet future production requirements. The remaining cash flow used in operations resulted from net favorableunfavorable changes in various other working capital accounts.

For the nine-month period ended September 30, 2014, our operating activities provided cash of $16,648,000 reflecting net income of $8,569,000 and non-cash charges totaling $4,741,000 including depreciation, amortization, stock-based compensation charges and deferred tax expense. The remaining cash flow provided by operations resulted from favorable changes in various working capital accounts, in particular the collection of the final Orencia royalty from Bristol Myers of $4.9 million and the tenant improvement allowance of $1,800,000 from our landlord.

Investing activities

We place our marketable security investments in high quality credit instruments as specified in our investment policy guidelines. Our investing activities provided $2,119,000 of cash$20,000 for the nine-monthsix-month period ended SeptemberJune 30, 2016. On April 1, 2016 we paid approximately $8.8 million as cash consideration for the acquisition of Atoll GmbH. Net redemptions of marketable securities were $10,148,000 in thesix-month period ended June 30, 2016, offset by fixed asset additions of $1,406,000. Our investing activities provided $503,000 for thesix-month period ended June 30, 2015, primarily due to net redemptions of marketable securities of $4,174,000$2,240,000 offset by $2,055,000$1,737,000 used for fixed asset additions. Our investing activities consumed $18,569,000 of cash for the nine-month period ended September 30, 2014, primarily due to the Refine acquisition, fixed asset additions and an increase in restricted cash, partially offset by net redemptions of marketable debt securities.

Financing activities

For the nine-month periodssix-month period ended SeptemberJune 30, 20152016 and 2014,2015, our financing activities provided cash of $828,000$111,783,000 and $882,000,$587,000, respectively. In May 2016, we received net proceeds of $111.3 million from the issuance of our 2.125% Convertible Senior Notes due 2021. For the nine-monthsix-month period ended SeptemberJune 30, 2016, proceeds from exercises of $958,000 were partially offset by contingent consideration payments of $498,000 which stemmed from the initial valuation of the likelihood that the 2015 ATF sales milestone would be achieved. For the six-month period ended June 30, 2015, proceeds from exercises of stock options of $927,000$686,000 were partially offset by contingent consideration payments of $99,000 which stemmed from the initial valuation of the likelihood that the 2014 ATF sales milestone would be achieved. For the nine-month period ended September 30, 2014, cash proceeds from exercises of stock options were $1,486,000, partially offset by contingent consideration payments of $604,000.

We do not currently use derivative financial instruments.

Working capital increased by $10,307,000approximately $112,120,000 to $80,570,000$196,591,000 at SeptemberJune 30, 20152016 from $70,263,000$84,471,000 at December 31, 20142015 due to the issuance of debt and the various changes noted above.

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;

market acceptance of our new products;

 

our ability to acquire additional bioprocessing products;

 

the resources required to successfully integrate the acquisitions of Refine acquisitionand Atoll and recognize expected synergies;

our ability to realize value from our outlicensed early stage programs, CNS and RG1068;

 

the scope of and progress made in our research and development activities;

 

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.foreseeable future. We expect operating expenses in the year ending December 31, 20152016 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 monetizing existing assets and licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio of development programs. 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. This may require the issuance or sale of additional equity or debt securities. The sale of additional equity may result in additional dilution to our stockholders. Should we need to secure additional financing to acquire a product, fund future investment in research and development, or meet our future liquidity requirements, 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.

Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements as of SeptemberJune 30, 2015.2016.

Contractual obligationsObligations

As of SeptemberJune 30, 2015,2016, we had the following fixed obligations and commitments:

 

  Payments Due by Period   Payments Due by Period 

(In thousands)

  Total   Less than 1
Year
   1 - 3
Years
   3 - 5
Years
   More than 5
Years
   Total   Less than 1
Year
   1 - 3
Years
   3 - 5
Years
   More than 5
Years
 

Operating lease obligations

  $12,084    $2,343    $3,550    $2,805    $3,386    $10,662    $2,337    $2,868    $2,758    $2,700  

Purchase obligations(1)

   7,071     7,071     —      —      —      6,432     6,432     —      —      —   

Contingent consideration(2)

   4,819     4,454     365     —       —      5,878     5,878     —      —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $23,974    $13,868    $3,915    $2,805    $3,386    $22,972    $14,647    $2,868    $2,758    $2,700  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Primarily represents purchase orders for the procurement of raw material for manufacturing.
(2)Represents the current estimated fair value of contingent consideration amounts relating to the Bioflash, Refine and Atoll acquisitions. These amounts are recorded in accrued expenses and long term liabilities on our consolidated balance sheets.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position, potential impairment of future earnings, management’s strategy, plans and objectives for future operations or acquisitions, product development and sales, litigation strategy, product candidate research, development and regulatory approval, selling, general and administrative expenditures, intellectual property, development and manufacturing plans, availability of materials and product and adequacy of capital resources and financing plans constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated,

including, without limitation, risks associated with: the success of current and future collaborative or supply relationships, including our agreementagreements with BioMarin, our ability to successfully negotiateGeneral Electric and consummate development and commercialization partnerships for our portfolio of therapeutic and diagnostic assets on acceptable terms, if at all,MilliporeSigma, our ability to successfully grow our bioprocessing business, including as a result of acquisition, commercialization or partnership opportunities, and our ability to develop and commercialize products, our ability to obtain required regulatory approvals, our compliance with all Food and Drug Administration regulations, our ability to obtain, maintain and protect intellectual property rights for our products, the risk of litigation regarding our patent and other intellectual property rights, the risk of litigation with collaborative partners, our limited sales and marketing experience and capabilities, our limited manufacturing capabilities and our dependence on third-party manufacturers and value-added resellers, our ability to hire and retain skilled personnel, the market acceptance of our products, reduced demand for our products that adversely impacts our future revenues, cash flows, results of operations and financial condition, our ability to compete with larger, better financed life science, pharmaceutical and biotechnologysciences companies, that may develop new approaches to the treatment of our targeted diseases, our history of losses and expectation of incurring losses, our ability to generate future revenues, our ability to successfully integrate Refine and Atoll, our ability to raise additional capital to continue our drug development programs or fund potential acquisitions, our volatile stock price, and the effects of our anti-takeover provisions, the impact of the expiration on December 31, 2013 of Bristol-Myers Squibb royalty payments based on its U.S. sales of Orencia®, and the impact of the expiration on April 26, 2015 of our licensing agreement with Pfizer.provisions. Further information on potential risk factors that could affect our financial results are included in the filings made by us from time to time with the Securities and Exchange Commission including under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.2015 and in this Quarterly Report onForm 10-Q.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

We have investments in commercial paper, U.S. Government and agency securities as well as corporate bonds and other debt securities. As a result, we are 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 generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. A hypothetical 100 basis point decreaseincrease in interest rates would result in an approximate $103,000$27,000 decrease in the fair value of our investments as of SeptemberJune 30, 2015.2016. 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 risk

The reporting currency of the Company is U.S. dollars. Transactions by our subsidiary, Repligen Sweden, a wholly-owned subsidiary, may be denominated in Swedish kronor, British pound sterling, U.S. dollars, or in Euros while the entity’s functional currency is the Swedish krona. Transactions by Atoll GmbH, a wholly-owned subsidiary acquired by the Company on April 1, 2016, may be denominated in U.S. dollars or Euros while the entity’s functional currency is the Euro. Certain sales transactions made by the U.S. entity related to ATF system products are denominated in foreign currencies. Exchange gains or losses resulting from the translation between the transactional currency and the functional currency of Repligen Sweden and ATF system product sales are included in our consolidated statements of comprehensive income. The functional currency of the Company is U.S. dollars.net income (loss). 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.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the principal executive officer and the principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the 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 in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, on a timely basis, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and the Company’s principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control

ThereWe acquired Atoll in the second quarter of 2016. The financial results of Atoll are included in our unaudited condensed consolidated financial statements as of June 30, 2016 and for the quarter then ended. As this acquisition occurred in the second quarter of 2016, the scope of our assessment of our internal control over financial reporting does not include Atoll. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.

Other than the change noted above, there was no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1.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 1A.RISK FACTORS

The matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances, over many of which Repligen has little or no control. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 20142015 and subsequent filings as well as risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, could cause our actual results to differ materially from those in the forward-looking statements. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in our Quarterly Report on Form 10-Q for the three-month period ended March 31, 2016, other than as set forth below to update for the issuance of convertible debt instruments on May 24, 2016.

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 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.

In addition, holders of the Notes would have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. 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.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In June 2008,April 2016, in connection with the Boardacquisition of Directors authorized a program to repurchase up to 1.25 millionthe Atoll business, 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 repurchased atexempt from the discretionregistration requirements pursuant to Section 4(2) of management from time to time in the open market or through privately negotiated transactions. The repurchase program has no set expiration dateSecurities Act of 1933 and may be suspended or discontinued at any time. We did not repurchase any shares of common stock during the three- and nine-month periods ended September 30, 2015. As of September 30, 2015, there are 657,173 shares remainingRule 506(b) promulgated under this authorization.Regulation D.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

(a) Exhibits

 

Exhibit

Number

  

Document Description

  3.1  Restated Certificate of Incorporation, dated June 30, 1992 and amended September 17, 1999 (filed as Exhibit 3.1 to Repligen Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). (File No. 000-14656)
  3.2  Amended and Restated By-Laws (filed as Exhibit 3.2 to Repligen Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference). (File No. 000-14656)
  3.3  Amendment No. 1 to the Amended and Restated By-Laws (filed as Exhibit 3.1 to Repligen Corporation’s Current Report on Form 8-K filed on December 20, 2011 and incorporated herein by reference).
  3.4  Amendment No. 2 to the Amended and Restated By-Laws (filed as Exhibit 3.1 to Repligen Corporation’s Current Report on Form 8-K filed on May 25, 2012 and incorporated herein by reference).
  3.5  Certificate of Amendment to the Certificate of Incorporation of Repligen Corporation, effective as of May 16, 2014 (filed as Exhibit 3.1 to Repligen Corporation’s Current Report on Form 8-K filed on May 19, 2014 and incorporated herein by reference).
  4.1Base Indenture, dated as of May 24, 2016, by and between Repligen Corporation and Wilmington Trust, National Association (filed as Exhibit 4.1 to Repligen Corporations Current Report on Form 8-K filed on May 24, 2016).
  4.2First Supplemental Indenture, dated as of May 24, 2016, by and between Repligen Corporation and Wilmington Trust, National Association (filed as Exhibit 4.2 to Repligen Corporations Current Report on Form 8-K filed on May 24, 2016).
  4.3Form of 2.125% Convertible Senior Note due 2021 (included in Exhibit 4.2).
10.1Form of Indemnification Agreement (filed as Exhibit 10.1 to Repligen Corporations Current Report on Form 8-K filed on May 12, 2016).
31.1 +  Rule 13a-14(a)/15d-14(a) Certification.
31.2 +  Rule 13a-14(a)/15d-14(a) Certification.

Exhibit

Number

Document Description

32.1 *32.1*  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101+  The following materials from Repligen Corporation on Form 10-Q for the quarterly period ended SeptemberJune 30, 2015,2016, formatted in Extensible Business Reporting Language (xBRL): (i) Condensed Consolidated Statements of Comprehensive Income (Loss), (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

+Filed herewith.
*Furnished herewith.

SIGNATURES

Pursuant to the requirements 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: November 5, 2015August 4, 2016  By: 

/S/ TONY J. HUNT

   Tony J. Hunt
   President and Chief Executive Officer
   (Principal executive officer)
   Repligen Corporation
Date: November 5, 2015August 4, 2016  By: 

/S/ JON SNODGRES

   Jon Snodgres
   Chief Financial Officer
   (Principal financial officer)
   Repligen Corporation

 

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