UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

 

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

For the quarterly period ended June 30, 2016March 31, 2017

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 Number000-14656

 

 

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 RegulationS-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, anon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” in Rule12b-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

 

¨

Emerging growth company

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act.):    Yes  ☐    No  ☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule¨12b-2 No  xof the Securities Exchange Act of 1934.    Emerging growth company     ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 29, 2016.April 28, 2017.

 

Class

  

Number of Shares

Common Stock, par value $.01 per share

  33,786,51734,080,664

 

 

 


Table of Contents

 

      PAGE 

PART I

  

FINANCIAL INFORMATION

  

Item 1.

  Unaudited Condensed Consolidated Financial Statements  

Condensed Consolidated Balance Sheets as of June 30, 2016March 31, 2017 and December 31, 20152016

   3 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Six-MonthThree-Month Periods Ended June 30,March 31, 2017 and 2016 and 2015

   4 

Condensed Consolidated Statements of Cash Flows for the Six-MonthThree-Month Periods Ended June 30,March 31, 2017 and 2016 and 2015

   5 

Notes to Unaudited Condensed Consolidated Financial Statements

   6 

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   2123 

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk   2829 

Item 4.

  Controls and Procedures   2830 

PART II

  OTHER INFORMATION   3031 

Item 1.

  Legal Proceedings   3031 

Item 1A.

  Risk Factors   3031 

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds   31 

Item 3.

  Defaults Upon Senior Securities   31 

Item 4.

  Mine Safety Disclosures   31 

Item 5.

  Other Information   31 

Item 6.

  Exhibits   31 

Signatures

   33 

REPLIGEN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(in thousands, except share data)  June 30,
2016
 December 31,
2015
   March 31, 2017 December 31,
2016
 

Assets

      

Current assets:

      

Cash and cash equivalents

  $172,622   $54,092    $129,663  $122,233 

Marketable securities

   9,181   17,682     12,180  19,547 

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

   11,073   11,300  

Accounts receivable, less reserve for doubtful accounts of $32 at March 31, 2017 and $23 at December 31, 2016

   17,710  15,194 

Other receivables

   564   82     669  839 

Inventories

   23,197   17,998     23,957  24,696 

Prepaid expenses and other current assets

   1,304   2,098     1,620  1,644 
  

 

  

 

   

 

  

 

 

Total current assets

   217,941   103,252     185,799  184,153 
  

 

  

 

   

 

  

 

 

Property, plant and equipment, net

   13,707   13,801     15,373  14,956 

Long-term marketable securities

   —    1,633  

Intangible assets, net

   19,186   12,755     29,222  29,806 

Goodwill

   31,026   14,346     59,784  59,548 

Restricted cash

   450   450     450  450 
  

 

  

 

   

 

  

 

 

Total assets

  $282,310   $146,237    $290,628  $288,913 
  

 

  

 

   

 

  

 

 

Liabilities and stockholders’ equity

      

Current liabilities:

      

Accounts payable

  $7,688   $6,724    $4,635  $5,061 

Accrued liabilities

   13,662   12,057     9,116  16,014 
  

 

  

 

   

 

  

 

 

Total current liabilities

   21,350   18,781     13,751  21,075 

Convertible senior notes

   93,380    —      96,242  95,272 

Deferred tax liabilities

   1,978   451     2,188  2,103 

Other long-term liabilities

   1,878   4,257     1,656  1,699 

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, 33,691,278 shares at June 30, 2016 and 32,949,353 shares at December 31, 2015 issued and outstanding

   337   329  

Common stock, $.01 par value, 80,000,000 shares authorized, 34,076,544 shares at March 31, 2017 and 33,844,074 shares at December 31, 2016 issued and outstanding

   341  338 

Additional paid-in capital

   238,617   202,527     245,961  242,036 

Accumulated other comprehensive loss

   (9,184 (8,566   (12,718 (13,749

Accumulated deficit

   (66,046 (71,542   (56,793 (59,861
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   163,724   122,748     176,791  168,764 
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $282,310   $146,237    $290,628  $288,913 
  

 

  

 

   

 

  

 

 

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 data)  Three months ended June 30, Six months ended June 30,   Three months ended March 31, 
  2016 2015 2016 2015   2017 2016 

Revenue:

   

Product revenue

  $29,170   $21,457   $54,265   $42,274    $30,569  $25,094 

Royalty and other revenue

   21   —   
  

 

  

 

 

Total revenue

   30,590  25,094 

Operating expenses:

        

Cost of product revenue

   12,644   8,586   23,713   16,659     13,990  11,069 

Research and development

   1,890   1,252   3,430   2,819     1,742  1,539 

Selling, general and administrative

   8,140   6,242   15,159   12,267     9,182  7,018 

Contingent consideration – fair value adjustments

   637   768   2,642   1,881     —    2,005 
  

 

  

 

  

 

  

 

   

 

  

 

 

Total operating expenses

   23,311   16,848   44,944   33,626     24,914  21,631 
  

 

  

 

  

 

  

 

   

 

  

 

 

Income from operations

   5,859   4,609   9,321   8,648     5,676  3,463 

Investment income

   76   19   137   56     96  61 

Interest expense

   (638 (8 (643 (17   (1,585 (5

Other income (expense)

   75   (269 (904 (137

Other expense

   (120 (979
  

 

  

 

  

 

  

 

   

 

  

 

 

Income before income taxes

   5,372   4,351   7,911   8,550     4,067  2,540 

Income tax provision

   1,500   739   2,415   2,008     999  915 
  

 

  

 

  

 

  

 

   

 

  

 

 

Net income

  $3,872   $3,612   $5,496   $6,542    $3,068  $1,625 
  

 

  

 

  

 

  

 

   

 

  

 

 

Earnings per share:

        

Basic

  $0.12   $0.11   $0.16   $0.20    $0.09  $0.05 
  

 

  

 

  

 

  

 

   

 

  

 

 

Diluted

  $0.11   $0.11   $0.16   $0.19    $0.09  $0.05 
  

 

  

 

  

 

  

 

   

 

  

 

 

Weighted average shares outstanding:

        

Basic

   33,649,296   32,870,473   33,336,989   32,827,536     33,891,702  33,024,681 
  

 

  

 

  

 

  

 

   

 

  

 

 

Diluted

   34,175,127   33,670,696   33,862,311   33,581,682     34,382,322  33,493,575 
  

 

  

 

  

 

  

 

   

 

  

 

 

Other comprehensive income:

        

Unrealized gain (loss) on investments

   —    (5 15   (22

Foreign currency translation gain (loss)

   (2,514 1,447   (633 (2,402

Unrealized gain on investments

   4  15 

Foreign currency translation gain

   1,027  1,881 
  

 

  

 

  

 

  

 

   

 

  

 

 

Comprehensive income

  $1,358   $5,054   $4,878   $4,118  

Comprehensive income (loss)

  $4,099  $3,521 
  

 

  

 

  

 

  

 

   

 

  

 

 

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

REPLIGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)  Six months ended June 30,   Three months ended March 31, 
  2016 2015   2017 2016 

Cash flows from operating activities:

      

Net income

  $5,496   $6,542    $3,068  $1,625 

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

      

Depreciation and amortization

   2,465   2,295     1,582  1,150 

Non-cash interest expense

   382    —      970   —   

Stock-based compensation expense

   2,059   1,687     1,531  922 

Deferred tax expense

   218  173     10   —   

Loss on revaluation of contingent consideration

   2,642   1,881     —    2,005 

Gain on sale of fixed assets

   (15  —   

Loss on disposal of assets

   26   1     59  3 

Changes in assets and liabilities:

      

Accounts receivable

   892   (6,820   (2,415 (1,149

Other receivables

   (318 (283   172  (249

Inventories

   (5,093 (2,380   851  (3,092

Prepaid expenses and other current assets

   793   981     34  781 

Accounts payable

   511   586     (452 (1,600

Accrued liabilities

   (3,239 875     (4,220 (4,277

Long-term liabilities

   (66) (425   (43 70 
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   6,753   5,113  

Net cash provided by (used in) operating activities

   1,147  (3,811
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Acquisition of Atoll GmbH, net of cash received

   (8,767  —   

Purchases of marketable securities

   (3,952 (8,119   (28 (3,969

Redemptions of marketable securities

   14,100   10,359     7,400  5,600 

Proceeds from sale of fixed assets

   45    —   

Purchases of property, plant and equipment

   (1,406 (1,737   (1,295 (431
  

 

  

 

   

 

  

 

 

Net cash provided by investing activities

   20   503     6,077  1,200 
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Proceeds from issuance of convertible senior notes, net of costs

   111,323    —   

Exercise of stock options

   958   686     1,333  821 

Payment of contingent considerations

   (498 (99   (1,663 (498
  

 

  

 

   

 

  

 

 

Net cash provided by financing activities

   111,783   587  

Net cash (used in) provided by financing activities

   (330 323 
  

 

  

 

   

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents

   (26 (1,554   536  1,409 
  

 

  

 

   

 

  

 

 

Net increase in cash and cash equivalents

   118,530   4,649  

Net increase (decrease) in cash and cash equivalents

   7,430  (879

Cash and cash equivalents, beginning of period

   54,092   35,363     122,233  54,092 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents, end of period

  $172,622   $40,012    $129,663  $53,213 
  

 

  

 

   

 

  

 

 

Supplemental disclosure of non-cash activities:

      

Income taxes paid

  $1,981   $1,629    $1,181  $1,039 
  

 

  

 

   

 

  

 

 

Payment of contingent consideration in common stock

  $875   $—     $1,062  $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 condensed 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 Form10-Q and Article 10 of RegulationS-X and do not include all of the information and footnote disclosures required by U.S. GAAP. These condensed 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 Form10-K for the fiscal year ended December 31, 2015.2016.

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 condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Repligen Sweden AB (“Repligen Sweden”), Repligen GmbH (acquired as Atoll GmbH (asas of April 1, 2016 and renamed on September 20, 2016), TangenX Technology Corporation (acquired as of December 14, 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 condensed 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 April 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 ASUNo. 2014-09, “Revenue from Contracts with Customers (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. 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 ASU2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”; ASU2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; and ASU2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The Company intends to adopt the provisions of Topic 606 using the modified retrospective method effective January 1, 2018. The Company has commenced work to assess the impact of the new revenue standard on its principal revenue streams. The Company has not yet determined which adoption method it will utilize ormade a determination on the effect that the adoption of this guidance will have onimpact to its consolidated financial statements.

In July 2015, the FASB issued ASUNo. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.”Inventory” (“ASU2015-11”). ASU2015-11 requires inventory be measured at the lower of cost and net realizable value, and options that currently exist for market value be eliminated. ASU2015-11 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 expectadopted the adoptionprovisions of ASU2015-11 to as of January 1, 2017, and this standard did not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No.2016-02, “Leases (Topic 842).” (“ASU2016-02”). ASU2016-02 requires lessees to recognize aright-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. TheThis 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. TheThis ASU is effective for public entities for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company has not yet completedadopted the provisions of this ASU as of January 1, 2017. As a result of this standard, the Company increased its assessmentU.S. federal and state net operating loss carryovers by approximately $5.3 million for previously unrecognized excess tax benefits outstanding as of January 1, 2017. Since the Company maintains a full valuation allowance on its net U.S. deferred tax assets, the Company recorded a corresponding increase to the valuation allowance and the impact of adopting ASU2016-09 on retained earnings is zero.

In August 2016, the new standardFASB issued ASUNo. 2016-15, “Statement of Cash Flows (Topic 203): Classification of Certain Cash Receipts and Cash Payments”. ASUNo. 2016-15 addresses eight specific cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. This ASU is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively with early adoption permitted. The Company currently classifies payments up to the amount of its contingent consideration liability recognized at the date of its acquisition as financing activities, with additional payments classified as operating activities. As a result, the Company does not expect the adoption of ASU2016-15 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issuedASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public entities for fiscal years beginning after December 15, 2017, with early adoption permitted.

2. Acquisition of Acquisitions

Atoll GmbH

On April 1, 2016, the Company’s subsidiary, Repligen Sweden, AB (“Repligen Sweden”) acquired Atoll GmbH (“Atoll”) fromUV-Cap GmbH & Co. KG (the “Seller”) pursuant to a Share Purchase Agreement (the “Share“Atoll Share Purchase Agreement”), dated as of March 31, 2016 (such acquisition, the “Atoll Acquisition”), by and among Repligen Sweden, the Seller, and the Company, in its capacity as guarantor of the obligations of Repligen Sweden under the Atoll Share Purchase Agreement. The TransactionAtoll Acquisition was subject to certain closing conditions that did not occur until April 1, 2016. Payment for the TransactionAtoll Acquisition 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 Company’s common stock, par value of $0.01 per share valued at $14.1 million (the “Stock Consideration”) to Repligen Sweden through a transfer by the Company on behalf of Repligen Sweden to fulfill Repligen Sweden’s obligation to deliver the Stock Consideration under the Atoll Share Purchase Agreement. The issuance of the Stock Consideration willwas not be registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. The Stock Consideration was based on the fair value of Repligenthe Company’s common stock on April 1, 2016.

This acquisition strengthened Repligen’s bioprocessing business by adding a complementary extension to an existing product line while expanding its direct sales presence worldwide. On September 20, 2016, Atoll changed its name to Repligen GmbH.

The Atoll Acquisition was accounted for as a purchase of a business under ASC 805, Business“Business Combinations. The total purchase price of the Atoll acquisition totaledAcquisition was $25.3 million, consisting of an upfront cash payment of $10.2 million, less $74,000 as a result of the final determination of working capital, issuance of the ShareStock Consideration, and a future potential milestone payments totaling up topayment of $1.1 million if specific revenue growth targets are met for 2016. The $1.1 million potential contingent consideration had an initial probability weighted fair value at the time of the closing of the TransactionAtoll Acquisition of approximately $952,000.

Consideration Transferred

The Company accounted for the Atoll Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of Atoll 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 $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, less $74 of working capital adjustments reflected in other receivables as of June 30, 2016

  $10,176  

Cash consideration, less $74 of working capital adjustments

  $10,176 

Value of common stock issued

   14,138     14,138 

Estimated fair value of contingent consideration

   952     952 
  

 

   

 

 

Total consideration transferred

  $25,266    $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 the Seller. ThePursuant to the terms of the Atoll Share Purchase Agreement, the Company couldwould make paymentsa contingent consideration payment of up to $1.1 million if specific revenue growth targets arewere met for 2016. The liabilityBecause the specified revenue growth targets were met for 2016, the Company made the contingent consideration payment in March 2017. No further measurement of this liability is included in current liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. See Note 10 - Accrued Liabilities for further details.required as of March 31, 2017.

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 $1,119,000$1,262,000 in transaction costs related to the Atoll Acquisition. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

Fair Value of Net Assets Acquired

The allocation of purchase price was based on the fair value of assets acquired and liabilities assumed as of April 1, 2016. The components and allocation of the purchase price consists of the following amounts (in thousands):

 

Cash and cash equivalents

  $1,409    $1,409 

Accounts receivable

   697     697 

Inventory

   155     155 

Other current assets

   169     169 

Fixed assets, net

   114     114 

Customer relationships

   5,318     5,318 

Developed technology

   2,175     2,175 

Non-competition agreements

   57     57 

Trademark and trade name

   11     11 

Deferred tax assets

   903     885 

Accounts payable and other liabilities assumed

   (599   (599

Deferred tax liabilities

   (2,245   (2,202

Goodwill

   17,102     17,077 
  

 

   

 

 

Net assets acquired

  $25,266    $25,266 
  

 

   

 

 

Of the consideration paid, $5.3 million represents the fair value of customer relationships that will be amortized over the determined useful life of 1613 years and $2.2 million represents the fair value of developed technology that will be amortized over a determined useful life of 14 years. $57,000 represents the fair value ofnon-competition agreements and $11,000 represents the fair value of trademarks and trade names that will be amortized over a determined useful life of 2 years. The aforementioned intangible assets will be amortized on a straight-line basis.

The assessmentgoodwill of $17.1 million represents future economic benefits expected to arise from synergies from combining operations, utilizing the Company’s existing sales infrastructure to increase market presence and the extension of existing customer relationships.

TangenX Technology Corporation

On December 14, 2016, the Company acquired TangenX Technology Corporation (“TangenX”), pursuant to the terms of the Share Purchase Agreement, dated as of December 14, 2016 (the “TangenX Share Purchase Agreement”), by and among the Company, John Connors and Novasep Process SAS (such acquisition, the “TangenX Acquisition”). Through the TangenX Acquisition, the Company acquired all outstanding shares and the business of TangenX, including TangenX’s innovativesingle-use Sius line of tangential flow filtration (“TFF”) cassettes and hardware used in downstream biopharmaceutical manufacturing processes.

TangenX™ TFF products are used in the filtration of biological drugs, thereby expanding Repligen’s filtration portfolio and complementing the OPUS® pre-packed column product line in downstream purification.

The TangenX Acquisition was accounted for as a purchase of a business under ASC 805, “Business Combinations.” The total purchase price of the TangenX Acquisition was $37.1 million in cash.

Consideration Transferred

The Company accounted for the TangenX Acquisition as a purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of TangenX were recorded as of the acquisition date, at their respective fair values, and consolidated with those of Repligen. The fair value is preliminaryof the net assets acquired was approximately $37.1 million.

The preparation of the valuation required the use of significant assumptions and isestimates. 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 informationassumptions that was availablethe Company believes to management atbe reasonable. However, actual results may differ from these estimates.

The total consideration transferred follows (in thousands):

Cash consideration

  $37,532 

Less: working capital adjustment

   (467
  

 

 

 

Net assets acquired

  $37,065 
  

 

 

 

Acquisition related costs are not included as a component of consideration transferred, but are expensed in the timeperiods in which the condensed consolidated financial statements were prepared.costs are incurred. The Company is finalizing its valuationincurred $1,337,000 in transaction costs related to the TangenX Acquisition. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

Fair Value of Net Assets Acquired

The allocation of purchase price was based on the fair value of assets acquired and liabilities assumed as of December 14, 2016. The components and accordingly,allocation of the purchase price consists of the following amounts (in thousands):

Cash and cash equivalents

  $1,218 

Accounts receivable

   459 

Other receivables

   111 

Inventory

   936 

Other current assets

   50 

Fixed assets, net

   215 

Customer relationships

   6,192 

Developed technology

   6,044 

Non-competition agreements

   21 

Trademark and trade name

   11 

Accounts payable and other liabilities assumed

   (3,083

Deferred tax liabilities

   (4,525

Goodwill

   29,416 
  

 

 

 

Net assets acquired

  $37,065 
  

 

 

 

Of the consideration paid, $6.2 million represents the fair value of customer relationships that will be amortized over the determined useful life of 13 years and $6.0 million represents the fair value of developed technology that will be amortized over a determined useful life of 20 years. $21,000 represents the fair value ofnon-competition agreements that will be amortized over a determined life of 5 years. $11,000 represents the fair value of trademarks and trade names that will be amortized over a determined useful life of 2 years. The aforementioned intangible assets will be amortized on a straight-line basis.

The goodwill of $29.4 million represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships.

Revenue, Net Income and Pro Forma Presentation

The Company recorded revenue from TangenX of $119,000 from December 15, 2016 through December 31, 2016 and $1,973,000 for the three months ended March 31, 2017. The Company has included the operating results of TangenX in its consolidated statements of operations since the December 15, 2016 acquisition date. The following table presents unaudited supplemental pro forma information as if the TangenX Acquisition had occurred as of January 1, 2016 (in thousands, except per share data):

   March 31, 2017   March 31, 2016 

Total revenue

   30,590    26,952 

Net income

   3,608    5,118 

Earnings per share:

    

Basic

  $0.11   $0.15 
  

 

 

   

 

 

 

Diluted

  $0.10   $0.15 
  

 

 

   

 

 

 

The unaudited pro forma information for the three months ended March 31, 2017 and 2016 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. Unaudited pro forma net income for three months ended March 31, 2017 was adjusted to exclude acquisition-related transaction costs and inventorystep-up charges. The unaudited pro forma net income for the three months ended March 31, 2016 was adjusted to include acquisition-related transaction costs, inventorystep-up charges, amortization of intangible assets and income tax benefits resulting from the acquisition.

These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments to reflect the pro forma results of operations as if the acquisition had occurred as of the beginning of the periods presented, such amounts mayas fair value adjustments to inventory and increased amortization for the fair value of acquired intangible assets. The pro forma information does not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to be subject to change.indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.

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 between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a stand-alone basis. The selling price of the undelivered elements is determined by the price charged when the element is sold separately, or in cases when the item is not sold separately, by third-party evidence of selling price or management’s best estimate of selling price.

The Company’s product revenues are from the sale of bioprocessing products, equipment devices, and related consumables used with these equipment devices to customers in the life science and biopharmaceutical industries. On product sales to end customers, 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, our product arrangements for equipment sales are multiple element arrangements, and may include services, such as installation and training, and multiple products, such as consumables and spare parts. In accordance with ASC605-25, based on terms and conditions of the product arrangements, the Company believes that these services and undelivered products can be accounted for separately from the delivered product element, as the delivered products have value to our customers on a standalone basis. Accordingly, revenue for services not yet performed at the time of product shipment are deferred and recognized as such services are performed. The relative selling price of any undelivered products is also deferred at the time of shipment and recognized as revenue when these products are delivered. For product sales to distributors, the Company recognizes revenue for both equipment and consumables upon delivery to the distributor

unless direct shipment to the end user is requested. In this case, revenue is recognized upon delivery to the end user’s location. In general, distributors are responsible for shipment to the end customer along with installation, training and acceptance of the equipment by the end customer. Sales to distributors are not contingent upon resale of the product.

At the time of sale, the Company also evaluates the need to accrue for warranty and sales returns. The supply agreements the Company has with its customers and the related purchase orders identify the terms and conditions of each sale and the price of the goods ordered. Due to the nature of the sales arrangements, inventory produced for sale is tested for quality specifications prior to shipment. Since the product is manufactured to order and in compliance with required specifications prior to shipment, the likelihood of sales return, warranty or other issues is largely diminished. Furthermore, there is no customer right of return in our sales agreements. Sales returns and warranty issues are infrequent and have not had a material impact on the Company’s financial statements historically.

Shipping and handling fees are recorded as a component of product revenue, with the associated costs recorded as a component of cost of product revenue.

Therapeutics Licensing Agreements

Activities under licensing agreements are evaluated in accordance with ASC605-25 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.basis; and

 

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 ASC605-28, 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 Repligen’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 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, forcomprised of:

Up to $60 million related to the development,achievement of specified clinical and regulatory approvalmilestone events; and

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

In addition, Repligen is eligible to receive royalties on sales of therapeutic products originating from the HDACi portfolio. The royalty rates are tiered and begin in themid-single-digits for the first HDACi portfolio product and for the firstnon-HDACi portfolio product with lesser amounts for any backup products developed under the BioMarin Asset Purchase Agreement. Repligen’sThe Company’s receipt of these royalties is subject to customary offsets and deductions. There are no refund provisions in this agreement. 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 ASC605-25 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 Repligenthe Company to BioMarin of its intellectual property rights in the Repligen Technology (“Repligen Know-How” and “Repligen Patents”)HDACi portfolio and the Scripps Agreement (the “Transferred Assets”); and

 

The transfer of certain notebooks, data, documents, biological materials (if any) and other such documents in our 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 $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 Repligen had not sold these items on a standalone basis previously, Repligen had no vendor-specific objective evidence of selling price. Furthermore, Repligen did not have detailed third-party evidence of selling price, and as a result we used our best estimate of selling price for each item. In determining these prices, Repligen considered what Repligen would be willing to sell the items for on a standalone basis, what the market would bear for such items and what another party might charge for these items.

The up-front arrangement consideration allocated to the Transferred Assets was recognized upon execution of the 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 $2,000,000, the amount of the up-front payment, as revenue in the three months ended March 31, 2014.

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 ASC605-28, which allows an entity to make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This evaluation included an assessment of the risks that must be overcome to achieve the respective milestone as well as whether the achievement of the milestone was due in part to our initial clinical work, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, assuming all other revenue recognition criteria are met.

The Company believes that the $60 million of specified clinical and regulatory milestone payments are substantive. Therefore, any such milestones achieved will be recognized as revenue when earned.

Any milestones achieved upon specified commercial sales events or future royalty payments are considered contingent revenue under the 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 (in thousands):

 

(In thousands)

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

Balance at December 31, 2015

  $(11  $(8,555  $(8,566

Balance at December 31, 2016

  $(5  $(13,744  $(13,749

Other comprehensive income

   15     (633   (618   4    1,027    1,031 
  

 

   

 

   

 

   

 

   

 

   

 

 

Balance at June 30, 2016

  $4    $(9,188  $(9,184

Balance at March 31, 2017

  $(1  $(12,717  $(12,718
  

 

   

 

   

 

   

 

   

 

   

 

 

5. Earnings Per Share

The Company reports earnings per share in accordance with Accounting Standards CodificationASC Topic 260, “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”“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 receivenon-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, 2016March 31, 2017 and 2015.2016.

Basic and diluted weighted average shares outstanding were as follows:

 

  Three months ended
June 30,
   Six months ended
June 30,
   Three months ended
March 31,
 
  2016   2015   2016   2015   2017   2016 

Weighted average common shares

   33,649,296     32,870,473     33,336,989     32,827,536     33,891,702    33,024,681 

Dilutive common stock options

   525,831     800,223     525,322     754,146     490,620    468,894 
  

 

   

 

   

 

   

 

   

 

   

 

 

Weighted average common shares, assuming dilution

   34,175,127     33,670,696     33,862,311     33,581,682     34,382,322    33,493,575 
  

 

   

 

   

 

   

 

   

 

   

 

 

At June 30, 2016,March 31, 2017, there were outstanding options to purchase 1,315,739805,903 shares of the Company’s common stock at a weighted average exercise price of $11.70$19.68 per share.share and restricted stock units to acquire 404,781 shares of the Company’s common stock. For the three- and six-month periodsthree months ended June 30, 2016, 359,828 and 417,279March 31, 2017, 458,685 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. As provided by the terms of the indenture underlying the senior convertible notes, the Company has a choice to settle the conversion obligation for the Convertible Notes in cash, shares or any combination of the two. The Company has excludedcurrently intends to settle the effectspar value of the Convertible Notes in cash and any excess conversion premium in shares. The Company applies the provisions of ASC 260,Earnings Per Share, Subsection10-45-44, to determine the diluted weighted average shares outstanding as it relates to the conversion spread on its convertible senior notes issuednotes. Accordingly, the par value of the Convertible Notes will not be included in May 2016 on earningsthe calculation of diluted income per share, as it isbut the dilutive effect of the conversion premium will be considered in the calculation of diluted net income per share using the treasury stock method. The dilutive impact of the Company’s intentconvertible notes is based on the difference between the Company’s current period average stock price and the conversion price of the convertible notes, provided there is a premium. Pursuant to settle these notes in cash.this accounting standard, there is no dilution from the accreted principal of the Convertible Notes as of March 31, 2017.

At June 30, 2015,March 31, 2016, there were outstanding options to purchase 1,265,4861,312,508 shares of the Company’s common stock at a weighted average exercise price of $9.68$11.50 per share. For the three- and six-month periodsmonth period ended June 30, 2015, 126,541 and 150,041 options to purchaseMarch 31, 2016, 520,030 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 June 30,March 31, 2017 and December 31, 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 asavailable-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 isMarch 31, 2017 was approximately 3.532.3 months.

Management reviewed the Company’s investments as of June 30, 2016March 31, 2017 and December 31, 20152016 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, 2016March 31, 2017 (in thousands):

 

  June 30, 2016   March 31, 2017 
  Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair Value   Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair
Value
 

Marketable securities:

                

U.S. Government and agency securities

  $3,927    $2    $—     $3,929    $402   $—     $—     $402 

Corporate and other debt securities

   5,250     2     —      5,252     11,779    1    (2   11,778 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $9,177    $4    $—     $9,181    $12,181   $1   $(2  $12,180 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

There were no long-term marketable securities as of June 30, 2016.March 31, 2017.

At June 30, 2016,March 31, 2017, the Company’s investments included threeseven securities in unrealized loss positions with a total unrealized loss of less than $1,000approximately $2,000 and a total fair market value of approximately $1,302,000.$3,946,000. 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 sixthree months ended June 30, 2016 or the six months ended June 30, 2015.March 31, 2017 and 2016.

Investments in marketable securities consisted of the following at December 31, 20152016 (in thousands):

 

  December 31, 2015   December 31, 2016 
  Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair Value   Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
 Fair
Value
 

Marketable securities:

               

U.S. Government and agency securities

  $7,029    $—     $(6  $7,023    $807   $—     $—    $807 

Corporate and other debt securities

   10,659     7     (7   10,659     18,745    2    (7 18,740 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 
   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    $19,552   $2   $(7 $19,547 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

There were no long-term marketable securities as of December 31, 2016.

The contractual maturities of all money market funds and marketable securities are less than one year as of June 30, 2016.March 31, 2017.

7. Inventories

Inventories relate to the Company’s bioprocessing business. The Company values inventory at cost or, if lower, market value, using thefirst-in,first-out method. The Company reviews its inventories at least quarterly and records a provision for excess and obsolete inventory based on its estimates of expected sales volume, production capacity and expiration dates of raw materials,work-in-process and finished products. Expected sales volumes are determined based on supply forecasts provided by key customers for the next 3 to 12 months. The Company writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. Manufacturing of bioprocessing finished goods is done to order and tested for quality specifications prior to shipment. Reserves for excess and obsolete inventory were approximately $343,000$385,000 at June 30, 2016March 31, 2017 and $435,000 at December 31, 2015.2016.

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
   March 31, 2017   December 31,
2016
 

Raw Materials

  $14,895    $10,671    $15,417   $14,954 

Work-in-process

   2,091     1,586     2,769    2,789 

Finished products

   6,211     5,741     5,771    6,953 
  

 

   

 

   

 

   

 

 

Total

  $23,197    $17,998    $23,957   $24,696 
  

 

   

 

   

 

   

 

 

8. Property, Plant and Equipment

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

 

  June 30, 2016   December 31, 2015   March 31, 2017   December 31, 2016 

Leasehold improvements

  $13,557    $13,306    $15,196   $14,592 

Equipment

   14,682     13,758     15,501    15,214 

Furniture and fixtures

   3,080     2,808     3,418    3,218 

Construction in progress

   621     425     1,142    1,264 
  

 

   

 

   

 

   

 

 

Total property, plant and equipment

   31,940     30,297     35,257    34,288 

Less: accumulated depreciation

   (18,233   (16,496   (19,884   (19,332
  

 

   

 

   

 

   

 

 

Property, plant and equipment, net

  $13,707    $13,801    $15,373   $14,956 
  

 

   

 

   

 

   

 

 

Depreciation expense totaled approximately $1,535,000$928,000 and $1,494,000$751,000 for the six-month periodsthree months ended June 30,March 31, 2017 and 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).

During the third quarter of 2016, the Company launched its XCellTM ATFsingle-use product line. The Refine Technology, LLC tradename and Company performed an assessment of thein-process research and development assets and their estimated useful lives to determine if any circumstances exist that would result in an impairment. The Company has determined that the fair value of these intangible assets exceeds their carrying values and are therefore not amortized. impaired; accordingly, the Company reclassifiedin-process research and development intangible assets to developed technology and began to amortize these intangible assets in the third quarter of 2016.

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.March 31, 2017.

Intangible assets consisted of the following at June 30, 2016March 31, 2017 (in thousands):

 

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

Technology – developed

  $5,413    $(1,208   13    $12,949   $(1,685   17 

In process research and development

   1,600     —      —   

Patents

   240     (192   8     240    (215   8 

Customer relationships

   16,959     (4,385   11     22,697    (5,525   11 

Trademark

   700     —      —      711    —      —   

Other intangibles

   67     (8   2     85    (35   2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total intangible assets

  $24,979    $(5,793   12    $36,682   $(7,460   13 
  

 

   

 

     

 

   

 

   

Intangible assets consisted of the following at December 31, 20152016 (in thousands):

 

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

Technology – developed

  $3,295    $(782   12    $12,911   $(1,468   17 

In process research and development

   1,600     —      —   

Patents

   240     (177   8     240    (208   8 

Customer relationships

   11,805     (3,926   9     22,555    (4,995   11 

Trademark

   700     —      —   

Trademark/ tradename

   711    —      —   

Other intangibles

   84    (24   2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total intangible assets

  $17,640    $(4,885   10    $36,501   $(6,695   13 
  

 

   

 

     

 

   

 

   

Amortization expense for amortized intangible assets was approximately $932,000$715,000 and $801,000$399,000 for the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively. As of June 30, 2016,March 31, 2017, 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  

Years Ending

Amortization Expense

December 31, 2017 (nine months remaining)

2,265

December 31, 2018

2,832

December 31, 2019

2,799

December 31, 2020

2,494

December 31, 2021

2,190

10. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

  June 30, 2016   December 31, 2015   March 31, 2017   December 31, 2016 

Employee compensation

  $3,800    $4,680    $3,439   $5,586 

Accrued interest payable

   251     —      815    204 

Accrued purchases

   718     604     566    382 

Taxes

   457     166     1,604    1,692 

Current portion of contingent consideration

   5,878     4,480  

Contingent consideration

   —      6,119 

Royalties

   857    248 

Professional fees

   441     269     494    411 

Unearned revenue

   202     258     441    408 

Other accrued expenses

   1,915     1,600     900    964 
  

 

   

 

   

 

   

 

 

Total

  $13,662    $12,057    $9,116   $16,014 
  

 

   

 

   

 

   

 

 

11. Long Term Debt

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

 

  June 30, 2016   December 31, 2015   March 31, 2017   December 31, 2016 

2.125% Convertible Senior Notes due 2021:

        

Principal amount

  $115,000    $—      $115,000   $115,000 

Unamortized debt discount

   (18,387   —       (15,952   (16,777

Unamortized debt issuance costs

   (3,233   —       (2,806   (2,951
  

 

   

 

   

 

   

 

 

Total convertible senior notes

  $93,380    $—      $96,242   $95,272 
  

 

   

 

   

 

   

 

 

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$111.1 million. The Notes bear interest at the rate of 2.125% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016.

The Notes will mature on June 1, 2021, unless earlier repurchased, redeemed or converted in accordance with their terms. Prior to March 1, 2021, the Notes will be convertible at the option of holders of the Notes only upon satisfaction of certain conditions and during certain periods, and thereafter, the 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. It is the Company’s current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company’s common stock.

The conversion rate for the Notes will initially be 31.1813 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $32.07 per common share, and is subject to adjustment under the terms of the Notes. Holders of the Notes may require the Company to repurchase their Notes upon the occurrence of a fundamental change prior to maturity for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

The Company will not have the right to redeem the Notes prior to June 5, 2019, but may redeem the Notes, at its option, in whole or in part, on any business day on or after June 5, 2019 and prior to the maturity date if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption. The redemption price will be equal to 100% of the principal amount of the principal amount of Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

The Notes contain customary terms and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the holders of at least 25% in aggregate principal amount of the outstanding Notes may declare 100% of the principal of, and any accrued and unpaid interest on, all of the Notes to be due and payable. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the Notes will become due and payable automatically. Notwithstanding the foregoing, the Notes provide that, to the extent the Company elects and for up to 270 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants consist exclusively of the right to receive additional interest on the Notes. The Company is not aware of any events of default, current events or market conditions that would allow holders to call or convert the Notes as of June 30, 2016.March 31, 2017.

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 additionalpaid-in capital, and represents the difference between the aggregate principal of the Notes and the fair value of the Notes without conversion option on their issuance date. The debt discount is amortized to interest expense using the effective interest method over five years, or the life of the Notes. The Company assesses the equity componentclassification of the cash conversion feature quarterly, and it is not remeasured as long as it continues to meet the conditions for equity classification.

Interest expense recognized on the Notes during the three monththree-month period ended June 30, 2016March 31, 2017 includes $251,000, $324,000$611,000, $825,000 and $57,000$145,000 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,March 31, 2017, the carrying value of the Notes was approximately $93.4$96.2 million and the fair value of the principal was approximately $124.3$144.3 million. The fair value of the Notes was determined based on the most recent trade activity of the Notes as of March 31, 2017.

12. Stock-Based Compensation

For the three months ended June 30,March 31, 2017 and 2016, and 2015, the Company recorded stock-based compensation expense of approximately $1,137,000$1,531,000 and $985,000,$922,000, 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 approximately $2,059,000 and $1,687,000 for the six-month periods ended June 30, 2016 and 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 (in thousands)(loss):

 

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

Cost of product revenue

  $84    $63    $144    $106  

Research and development

   105     90     185     159  

Selling, general and administrative

   948     832     1,730     1,422  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,137    $985    $2,059    $1,687  
  

 

 

   

 

 

   

 

 

   

 

 

 

   Three Months Ended
March 31,
 
   2017   2016 

Cost of product revenue

  $141   $60 

Research and development

   132    80 

Selling, general and administrative

   1,258    782 
  

 

 

   

 

 

 

Total

  $1,531   $922 
  

 

 

   

 

 

 

The 2012 Plan allows for the granting of incentive and nonqualified options to purchase shares of common stock, restricted stock and other equity awards. Incentive options granted to employees under the Plans generally vest over a three to five-year period, with20%-33% vesting on the first anniversary of the date of grant and the remainder vesting in equal yearly installments thereafter. Nonqualified options issued tonon-employee directors 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 June 30, 2016,March 31, 2017, options to purchase 1,315,739805,903 shares and 404,781 restricted stock units were outstanding under the Plans. At June 30, 2016, 1,976,534March 31, 2017, 1,531,010 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 stock option awards on the grant 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 market 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 sixthree months ended June 30, 2016March 31, 2017 under the Plans is summarized below:

 

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

Options outstanding at 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  
  

 

 

   

 

 

   

 

 

   

 

 

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

Options outstanding at December 31, 2016

   882,748   $16.88     

Granted

   86,215    32.40     

Exercised

   (137,903   9.67     

Forfeited/cancelled

   (25,157   21.31     
  

 

 

       

Options outstanding at March 31, 2017

   805,903   $19.68    7.08   $12,706 
  

 

 

       

Options exercisable at March 31, 2017

   406,859   $14.18   ��5.73   $8,659 
  

 

 

       

Vested and expected to vest at March 31, 2017 (1)

   791,227   $19.57    7.05   $12,530 
  

 

 

       

 

(1) This representsRepresents the number of vested options as of June 30, 2016March 31, 2017 plus the number of unvested options expected to vest as of June 30, 2016March 31, 2017 based on the unvested outstanding options at June 30, 2016March 31, 2017 adjusted for estimated forfeiture rates of 8% for awards granted tonon-executive level employees and 3% for awards granted to executive level employees.

The aggregate intrinsic value in the table above represents the totalpre-tax intrinsic value (the difference between the closing price of the common stock on June 30, 2016March 31, 2017 of $27.36$35.20 per share and the exercise price of eachin-the-money option) that would have been received by the option holders had all option holders exercised their options on June 30, 2016.March 31, 2017.

The weighted average grant date fair value of options granted during the sixthree months ended June 30,March 31, 2017 and 2016 was $16.46 and 2015 was $20.11 and $21.83,$13.49, respectively. The total fair value of stock options that vested during the sixthree months ended June 30,March 31, 2017 and 2016 and 2015 was approximately $2,396,000$1,195,000 and $1,522,000,$645,000, respectively.

Information regarding restricted stock unit activity for the three months ended March 31, 2017 under the Plans is summarized below:

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

Restricted stock units outstanding at December 31, 2016

   353,838   $—       

Granted

   125,067    —       

Exercised

   (63,811   —       

Forfeited/cancelled

   (10,313   —       
  

 

 

       

Restricted stock units outstanding at March 31, 2017

   404,781   $—      3.12   $14,248 
  

 

 

       

Vested and expected to vest at March 31, 2017 (1)

   378,579   $—      3.01   $13,326 
  

 

 

       

(1)Represents the number of vested restricted stock units as of March 31, 2017 plus the number of unvested restricted stock units expected to vest as of March 31, 2017 based on the unvested outstanding restricted stock units at March 31, 2017 adjusted for estimated forfeiture rates of 8% for awards granted tonon-executive level employees and 3% for awards granted to executive level employees.

The aggregate intrinsic value in the table above represents the totalpre-tax intrinsic value (equal to the closing price of the common stock on March 31, 2017 of $35.20 per share) that would have been received by the restricted stock unit holders had all holders exercised on March 31, 2017. The aggregate intrinsic value of restricted stock units exercised during the three months ended March 31, 2017 and 2016 was approximately $2,064,000 and $1,009,000, respectively.

The weighted average grant date fair value of restricted stock units granted during the three months ended March 31, 2017 and 2016 was $32.18 and $26.05, respectively. The total grant date fair value of restricted stock units that vested during the three months ended March 31, 2017 and 2016 was approximately $1,616,000 and $742,000, respectively.

As of June 30, 2016,March 31, 2017, there was approximately $9,613,000$14,921,000 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 2.91 years. The Company expects 708,325 unvested options to vest over the next five2.94 years.

13. Income Taxes

The Company’s effective tax rate for the three and six months ended June 30, 2016March 31, 2017 was 27.9% and 30.5%, respectively,24.6% compared to 17.0% and 23.5%, respectively,36.0% for the corresponding periodsperiod in the prior year. For the current three and six month periods,period, the effective tax rate was lower than the U.S. statutory tax rate of 34% primarily due to increased foreign profits at lower statutory tax rates offset by unbenefited domestic losses.in foreign jurisdictions. For the three and six monthsmonth period ended June 30, 2015,March 31, 2016, the effective tax rate differed fromwas higher than the U.S. statutory tax rate of 34% primarilymainly due to the lower statutory tax rate in Sweden and a reserve reversal attributable to a correctiontreatment of an income tax audit accrual.

contingent consideration expense.

As ofAt December 31, 2015,2016, the Company has U.S.had net operating loss carryforwards of approximately $46,984,000$48,550,000 in the U.S., net operating loss carryforwards of approximately €2,287,000 (approximately $2,407,000) in Germany, federal business tax credit carryforwards of $1,745,000 and U.S.state business tax credit carryforwards of approximately $1,920,000$442,000 available to reduce future federaldomestic income taxes, if any. The net operating loss and business tax credits carryforwards will continue to expire at various dates through December 2035. Net2036. The net operating loss carryforwards and availablebusiness tax creditscredit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.

As of December 31, 2015,2016, the Company concluded that realization of deferred tax assets in the United States beyond December 31, 2015 is not more likely than not, and as such, the Company maintained a valuation allowance against the majority of 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 remainingnet U.S. deferred tax assets.assets, after considerations for deferred tax liabilities which will not be utilized as a future source of income.

ASU2016-09 states that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. As such, the Company increased its U.S. federal and state net operating loss carryovers by approximately $5.3 million for previously unrecognized excess tax benefits outstanding as of the beginning of the period. Since the Company maintains a full valuation allowance on its net U.S. deferred tax assets, the Company recorded a corresponding increase to the valuation allowance and the impact of adopting ASU2016-09 on retained earnings is zero.

In the first quarter of 2017, Repligen Germany GmbH was subject to a tax examination for the years 2012 through 2015. The examination was general in nature, covering all aspects of the subsidiary’s operations prior to the Atoll Acquisition on April 1, 2016. There were no material findings as a result of this examination, and the Company’s acquisition of Atoll GmbH on April 1, 2016,examination was closed by the Company acquired intangible assets of approximately €6,640,000. Because the amortization of these intangible assets is not deductible under German tax law, the Company recorded deferredauthorities.

The Company’s tax liabilities of approximately €1,972,000 (approximately $2,190,000) as of June 30, 2016. Additionally, the Company was able to retain net operating losses 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 fiscal years ended December 31, 2012, 2013, 2014 and 2015returns are subject to examination by U.S. federal, state and Swedeninternational taxing authorities.authorities for the following periods:

Jurisdiction

Fiscal years subject
to examination

United States – federal and state

2013-2016

Sweden

2011-2016

Germany

2016

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 June 30, 2016.March 31, 2017.

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 June 30, 2016March 31, 2017 (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

  $131,939    $—     $—     $131,939    $85,292   $—     $—     $85,292 

U.S. Government and agency securities

   3,629     300     —      3,929     402    —      —      402 

Corporate and other debt securities

   —      5,252     —      5,252     —      11,778    —      11,778 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $135,568    $5,552    $—     $141,120    $85,694   $11,778   $—     $97,472 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

        

Contingent consideration – short-term

  $—      $—     $5,878    $5,878  

Convertible senior notes

   —      124,295     —      124,295  
  

 

   

 

   

 

   

 

 

Total

  $—     $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. The

As of December 31, 2016, the Company had accrued liabilities forwith a fair value of $6,119,000 related to contingent consideration are recorded in connection with the BioFlash Partners, LLC (“BioFlash”), Refine Technology, LLC (“Refine”) and Atoll business combinations. The contingent consideration related to BioFlash is valued using management’s estimates of royalties to be paid to the former shareholders of BioFlashRefine was based on sales of the acquired assets. The contingent consideration related to Refine 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.actual 2016 revenues. The contingent consideration related to Atoll is valued using management’s estimates of expected future milestone paymentswas based on forecasted sales.meeting revenue growth targets in 2016. These valuations are Level 3 valuations, as the primary inputs are unobservable.

Changes All contingent consideration liabilities were paid in the fair valuefirst quarter of contingent consideration in the six-month period ended June 30, 2016 are primarily attributable to an increase to the expected 2016 Refine milestone payment of $2,629,000, a $4,350,000 milestone payment to Refine and a $130,000 minimum royalty payment made to BioFlash, which were previously accrued. Additionally, the Company recorded contingent consideration of €836,000 (approximately $928,000) related to the Atoll acquisition.2017.

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

 

Balance at December 31, 2015

  $6,788  

Additions

   928  

Payments

   (4,480

Changes in fair value

   2,642  
  

 

 

 

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 June 30, 2016

$4,648

Valuation technique

Probability-adjusted
discounted cash flow

Remaining period in which milestones can be achieved

2016

   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 the probabilities of successful achievement of 2016 sales milestones. During the first six months of 2016, the estimated fair value of the 2016 contingent payment was increased by $2,629,000 to $4,648,000 based on revised sales forecasts. 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.

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.

Balance at December 31, 2016

  $6,119 

Payments

   (6,119
  

 

 

 

Balance at March 31, 2017

  $—   
  

 

 

 

In May 2016, the Company issued $115 million aggregate principal amount of 2.125% convertible senior notesthe Notes due June 1, 2021 (the “Notes”).2021. 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,March 31, 2017, the carrying value of the Notes was $93.3$96.2 million, net of unamortized discount, and the fair value of the Notes was approximately $124.3$144.3 million. The fair value of the Notes was determined based on the most recent trade activity of the Notes as of March 31, 2017. These valuations are Level 1 valuations, as the valuations are based on unadjusted quoted prices in active markets that the Company has the ability to access. The Notes are discussed in more detail in Note 11, “Long Term Debt.

There were no remeasurementsre-measurements to fair value during the three months ended June 30, 2016March 31, 2017 of financial assets and liabilities that are not measured at fair value on a recurring basis.

15. Commitments and Contingencies

Future minimum rental commitments under the Company’s leases as of June 30, 2016March 31, 2017 are as follows (in thousands):

 

  Minimum Rental
Commitments
   Minimum Rental
Commitments
 

2016

  $2,031  

2017

   1,434  

2017 (nine months remaining)

  $2,028 

2018

   1,434     2,647 

2019

   1,387     2,506 

2020

   1,371     2,500 

2021

   2,467 

Thereafter

   2,700     1,705 

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
June 30,
 Six months ended
June 30,
   Three months ended
March 31,
 
  2016 2015 2016 2015   2017 2016 

United States

   45 21 37 25   38 30

Sweden

   29 51 31 44   27 24

Ireland

   10 4

United Kingdom

   6 17 10 18   5 13

Other

   20 11 22 13   20 29
  

 

  

 

  

 

  

 

   

 

  

 

 

Total

   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
June 30,
 Six months ended
June 30,
   Three months ended
March 31,
 
  2016 2015 2016 2015   2017 2016 

GE Healthcare

   28 51 31 44   27 24

MilliporeSigma

   30 25 30 31   21 28

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

 

  June 30,
2016
 December 31,
2015
   March 31,
2017
 December 31,
2016
 

GE Healthcare

   49 13   25 26

MilliporeSigma

   13 32   15 8

Bioprocessing Customer C

   3 21

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

Overview

We are a bioprocessing-focused, global life sciences company bringing over 30 years of expertise and innovation to our customers. Our mission is to inspire advances in bioprocessing as a trusted partner in the production of biologic drugs that improve human health worldwide.

Focused on delivering cost and process efficiencies, Repligen isoffers innovative technologies that help set new standards in the way that our customers manufacture biologic drugs We develop and market a bioprocessing company that develops, manufactures and markets innovativebroad range of high-value products and flexible solutions used to manufacturethat address critical steps in the production of biologic drugs. Biologics, ordrugs – principally monoclonal antibodies,antibody-based therapeutics, recombinant proteins and vaccines – while ensuring that the highest drug quality and safety standards are manufacturedupheld.

Since our strategic decision in 2012 to focus fully on building our bioprocessing business, we have expanded and diversified our product offering beyond our core Protein A affinity ligands portfolio, and believe we are well-positioned in the bioprocessing market assingle-use and continuous processing technologies are increasingly adopted by biopharmaceutical manufacturers. This expansion has been through a complexcombination of internal innovation and acquisition, with a clear focus on technology leadership as a path to market leadership. Our Proteins business today includes cell culture growth factors in addition to our longstanding Protein A ligands. In recent years, we have significantly expanded our Chromatography business, which includes ourbest-in-class OPUS®pre-packed columns as well as our ELISA kits and chromatography resins. In addition, we have established an exceptional Filtration business that includes our leading XCell™ ATF and TangenX™ tangential flow filtration (“TFF”) product lines.

Our team has substantial experience in biomanufacturing and works proactively with industry leaders and customers to develop innovative solutions that address pressure points in the bioproduction process. Our bioprocessing products drive process involving the use of live cells to produce the drug, followed by multiple separationefficiency, cost and purification processes. Our productsyield improvements for our customers. In upstream processes, our XCell™ ATF filtration devices and cell culture supplements are used in this processclinical and commercial-stage manufacturing to enhance end product yields for the manufacturer while lowering costs and reducing risks through increased process efficiencies.

For over twenty-five years, we have been a global market leader in native and recombinant forms of Protein A, a critical reagent used in theimprove biologic drug yields. In downstream purification of therapeutic monoclonal antibodies, or mAbs, one of the largest and fastest-growing class of biologic drugs on the market. Ourprocesses, our Protein A ligands are a critical component of Protein A resins currentlyused to purify over 65 antibody-based drugs on the market and in over 300 drugs in clinical development. Also in downstream processes, our OPUS®pre-packed chromatography columns (PPCs) are used in the commercial productionpurification of over 50 mAbs,clinical-stage biologics, and in clinical stage production of over 300 investigational mAbs. In upstream bioprocessing, where a biologic drug product is grown in bioreactors, we supply several growth factor productsour TangenX™ Sius™ TFF filtration cassettes are used to supplementconcentrate clinical and commercial-stage biologic drugs.

We manufacture and supply our Protein products, such as Protein A ligands, through long-term agreements with major life sciences companies, such as GE Healthcare and MilliporeSigma, who in turn produce and sell Protein A resins to end users (biopharmaceutical companies and CMOs). We manufacture and supply our cell culture mediasupplements through a distribution agreement with MilliporeSigma.

We sell our Chromatography and enhance cell productivity. Filtration products directly to biopharmaceutical companies and contract manufacturing organizations (“CMOs”). These products are manufactured or assembled internally and marketed globally through a direct commercial organization in the United States and Europe, and through a combination of direct sales and distributors in Asia. Since 2014, we have steadily invested in our global commercial organization to support our growing Chromatography and Filtration businesses; we have added 32 sales, marketing, product management, service and applications personnel to form a39-person commercial team as of March 31, 2017.

Our commercial and R&D teams have a track record of successfully launching new products and building new markets for acquired technologies. For example, since acquiring the XCell™ ATF business in 2014, we have rapidly expanded its market penetration through increased customer interaction, product extensions and new applications that increase flexibility and convenience for customers, while streamlining their biomanufacturing workflows.

Our acquisitions since 2012 have bolstered ourdirect-to-customer product offering. In 2014, we acquired our market-leading XCell™ ATF line from Refine Technologies LLC. We completed two acquisitions in 2016, acquiring Atoll GmbH (“Atoll”) in April and TangenX Technology Corporation (“TangenX”) in December. The Atoll Acquisition strengthened our Chromatography business by broadening our line of OPUS®pre-packed columns (to includelab- and process development-scale columns) and establishing a customer-facing center in Europe. The TangenX Acquisition strengthened our Filtration business, balancing our existing upstream XCell™ ATF line with a downstream line of TangenX™ Sius™ TFF filtration systems areproducts.

Our internal innovation has also used upstream to increase cell retention and accelerate cell productivity, resulting in significantly higherdriven the growth of ourdirect-to-customer product yield from a bioreactor. In downstream bioprocessing, where the biologic drug product is separated and purified,offerings. Internally, we developed and market our innovativeprocess-scale OPUS® line ofpre-packed chromatography columns. Also through internal innovation, we have extended both our OPUS® and XCell™ ATF product lines, to include more size options and technology features to benefit our customers. For example in 2016 we introduced OPUS® R, a resin recovery feature on our largest OPUS®columns, for use in bench-scale through clinical production-scale purification. We deliver OPUS pre-packed with chromatography resinsand we launched asingle-use (disposable) alternative to our stainless steel XCell™ ATF Systems, XCell™ ATFSingle-use.

Many of our customers’ choice,products are early in their adoption cycle and, customizedtogether with the expansion of our commercial organization and strategic acquisitions, have contributed to their size requirements. In the industry, OPUS is oneproduct revenue expansion from $41.8 million in 2012 to $104.5 million in 2016. While all product franchises have grown, our diversification strategy has resulted in our direct product sales accounting for approximately 50% of the leading “single-use” technologies that are being adoptedour bioprocessing revenue in 2016, compared to approximately 20% in 2012. To meet increased demand for their convenience, flexibilityour products, we have increased and reliability as biomanufacturers seek wayscontinue to increase productivity while reducing facility sizethe volume and cost.

We generally manufacture and sell Protein A ligands through long-term supply agreements, and we sellscale of manufacturing at our XCell ATF and OPUS lines direct to end users (biopharmaceutical developers and contracttwo 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 and Sweden and plan to expand manufacturing capacity at our newly acquired manufacturing facilities in the United States and Germany.

Through strategic acquisitionsCustomers use our products to produce initial quantities of drug for clinical studies, thenscale-up to larger volumes as the drug progresses to commercial production following regulatory approval. Detailed specifications for a drug’s manufacturing process are included in applications that must be approved by regulators, such as the U.S. Food and internal product development, we have expanded our portfolio ofDrug Administration (“FDA”) and the European Medicines Agency, throughout the clinical trial process and prior to final commercial approval. As a result, products that we sell direct to end users. This expansion includes our acquisitionbecome part of the Alternating Tangential Flow (“ATF”) System (now XCell™ ATF) which we acquired under an asset purchase agreementmanufacturing specifications of a late-stage clinical or commercial process can be very “sticky” due to the costs and uncertainties associated with Refine Technology LLC, or Refine, on June 2, 2014. This acquisition strengthened our upstream 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, and provides an important customer-facing center in 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 discontinued our clinical development programs, and outlicensed those programs to biopharmaceutical companies including Pfizer, Inc. and BioMarin, under agreements that allow us to share in the potential commercialization of the subject compounds.displacing them.

Critical Accounting Policies and Estimates

A “critical accounting policy” is one which is both important to the portrayal of the Company’sour 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 of Financial Condition and Results of Operations and our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report on Form10-K for the year ended December 31, 2015.2016.

Results of Operations

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

Revenues

Revenues for the three-month periods ended March 31, 2017 and 2016 were as follows:

(in thousands, except percentages)  Three months ended March 31, 
   2017   2016   $ Change   % Change 

Product revenue

  $30,569   $25,094   $5,475    22

Royalty and other revenue

   21    —      21    100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $30,590   $25,094   $5,496    22
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales of bioprocessing products for the three months ended June 30,March 31, 2017 and 2016 were $30,569,000 and 2015 were $29,170,000 and $21,457,000,$25,094,000, respectively, representing an increase of $7,713,000,$5,475,000, or 36%22%. This increase was primarily due to increases in orders for our chromatography columns and ATF products from our key bioprocessing customers.customers, in addition to revenues from the Atoll Acquisition and TangenX Acquisition in the first quarter of 2017. Sales of our bioprocessing products are impacted by the timing of

orders, development efforts at our customers orend-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend.

Costs and operating expenses

Total costs and operating expenses for the three-month periods ended June 30,March 31, 2017 and 2016 and 2015 were comprised of the following:

 

  Three months ended
June 30,
   % Change 
  2016   2015   2016 vs. 2015 
(in thousands, except percentages)  Three months ended March 31, 
  (in thousands, except percentages)   2017   2016   $ Change   % Change 

Cost of product revenue

  $12,644    $8,586     47  $13,990   $11,069   $2,921    26

Research and development

   1,890     1,252     51   1,742    1,539    203    13

Selling, general and administrative

   8,140     6,242     30   9,182    7,018    2,164    31

Contingent consideration – fair value adjustments

   637     768     (17%)    —      2,005    (2,005   (100%) 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total costs and operating expenses

  $23,311    $16,848     38  $24,914   $21,631   $3,283    15
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cost of product revenue was approximately $12,644,000$13,990,000 and $8,586,000$11,069,000 for the three-month periods ended June 30,March 31, 2017 and 2016, and 2015, respectively, an increase of $4,058,000$2,921,000 or 47%26%. This increase is primarily due to the increased product revenue noted above. Gross margins may fluctuate over the remainder of 20162017 based on expected production volume and shipments, and product mix.

Research and development expenses were approximately $1,890,000$1,742,000 and $1,252,000$1,539,000 for the three-month periods ended June 30,March 31, 2017 and 2016, and 2015, respectively, an increase of $638,000$203,000 or 51%13%. This increase is primarily related to the timing and scale of our various 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$9,182,000 and $6,242,000$7,018,000 for the three-month periods ended June 30,March 31, 2017 and 2016, and 2015, respectively, an increase of $1,898,000$2,164,000, or 30%31%. This increase is primarily due to the continued buildout of our administrative infrastructure to support future growth, thecontinued expansion of our customer-facing activities to drive sales of our bioprocessing products and costs incurred related to the acquisitionadditional expense resulting from our acquisitions of Atoll on April 1, 2016.and TangenX.

Contingent consideration fair value adjustments were approximately $637,000$2,005,000 for the three-month period ended March 31, 2016. This fair value adjustment during the first quarter of 2016 was related to the increased probability of achieving the 2016 sales milestone under the Refine acquisition agreement. There was no such expense in the first quarter of 2017, as the contingent consideration periods for the Atoll Acquisition and $768,000Refine Acquisition ended in 2016.

Investment income

Investment income for the three-month periods ended June 30,March 31, 2017 and 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.was as follows:

Investment income

(in thousands, except percentages)  Three months ended March 31, 
   2017   2016   $ Change   % Change 

Investment income

  $96   $61   $35    57

Investment income includes income earned on invested cash balances. InvestmentThe increase in investment income was approximately $76,000 and $19,000 forin the current three-month periods ended June 30, 2016 and 2015, respectively. This increase of $57,000, or 300%,period 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,March 31, 2017 and 2016 and 2015, respectively. This increase of $630,000was as follows:

(in thousands, except percentages)  Three months ended March 31, 
   2017   2016   $ Change   % Change 

Interest expense

  $(1,585  $(5  $(1,580   (31,600%) 

Increases in interest expense in the current three-month period is attributable to interest expense related to the issuance ofon our convertible senior notes issued in May 2016.

Other income (expense)expense

Other income was approximately $75,000 and other expense was approximately ($269,000) for the three-month periods ended June 30,March 31, 2017 and 2016 was as follows:

(in thousands, except percentages)  Three months ended March 31, 
   2017   2016   $ Change   % Change 

Other expense

  $(120  $(979  $859    88

Other expense was approximately $120,000 and 2015, respectively,approximately $979,000 for the three-month periods ended March 31, 2017 and 2016, respectively. The decrease in other expense was primarily attributable to foreign currency gainslosses in the first quarter of 2016 on cash balances denominated in U.S. dollars and losses.British pounds held and subsequently converted to local currency holdings by Repligen Sweden.

Provision for income taxes

Provision for income taxes for the three-month periods ended March 31, 2017 and 2016 was as follows:

(in thousands, except percentages)  Three months ended March 31, 
   2017   2016   $ Change   % Change 

Income tax provision

  $999   $915   $84    9

For the three months ended June 30, 2016,March 31, 2017, we had income before taxes of approximately $5,372,000$4,067,000 and recorded a tax provision of approximately $1,500,000$999,000 for an effective tax rate of approximately 28%24.6%. 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 For the three 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 six-month periods ended June 30, 2016 and 2015 were comprised of the following:

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

Cost of product revenue

  $23,713    $16,659     42

Research and development

   3,430     2,819     22

Selling, general and administrative

   15,159     12,267     24

Contingent consideration – fair value adjustments

   2,642     1,881     40
  

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

  $44,944    $33,626     34
  

 

 

   

 

 

   

 

 

 

Cost of product revenue was approximately $23,713,000 and $16,659,000 for the six-month periods ended June 30, 2016 and 2015, respectively, an increase of $7,054,000 or 42%. 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 $3,430,000 and $2,819,000 for the six-month periods ended June 30, 2016 and 2015, respectively, an increase of $611,000 or 22%. 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 $15,159,000 and $12,267,000 for thesix-month periods ended June 30, 2016 and 2015, respectively, an increase of $2,892,000 or 24%. 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 $2,642,000 and $1,881,000 for the six-month periods ended June 30, 2016 and 2015, respectively, an increase of $761,000 or 40%. 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 $137,000 and $56,000 for the six-month periods ended June 30, 2016 and 2015, respectively. This increase of $81,000, or 145%, 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 $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 expense was approximately ($904,000) and ($137,000) for the six-month periods ended June 30, 2016 and 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 six months ended June 30,March 31, 2016, we had income before taxes of approximately $7,911,000$2,540,000 and recorded a tax provision of approximately $2,415,000$915,000 for an effective tax rate of approximately 31%36.0%. 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 and the tax treatment of contingent consideration expense recorded in the first halfquarter of 2016.

Non-GAAP Financial Measures

We providenon-GAAP adjusted income from operations, non-GAAPoperations; adjusted net incomeincome; adjusted cost of product revenue; adjusted sales, general and administrative expense; and adjusted EBITDA as supplemental measures to GAAP measures regarding our operating performance. These financial measures exclude the impact of certain acquisition related items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of eachnon-GAAP financial measures to its most comparable GAAP financial measures are described below.

We include this financial information because we believe these measures provide a more accurate comparison of our financial results between periods and more accurately reflect how management reviews its financial results. We excluded the impact of certain acquisition related items because we believe that the resulting charges do not accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.

Non-GAAP Adjusted Income from Operations

Non-GAAP adjustedAdjusted income from operations is measured by taking income from operations as reported in accordance with GAAP and excluding acquisition costs, amortization of intangible assets and contingent consideration expensesexpense 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-monththree-month periods ended June 30,March 31, 2017 and 2016 and 2015 (in thousands):

 

  Three months ended June 30,   Six months ended June 30,   Three Months Ended March 31, 
  2016   2015   2016   2015   2017   2016 

GAAP income from operations

  $5,859    $4,609    $9,321    $8,648    $5,676   $3,463 

Non-GAAP adjustments to net income:

        

Adjustments to income from operations:

    

Acquisition costs

   725     —       1,118     —       402    393 

Intangible amortization

   715    399 

Contingent consideration – fair value adjustments

   637     769     2,642     1,881     —      2,005 
  

 

   

 

   

 

   

 

   

 

   

 

 

Non-GAAP adjusted income from operations

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

Adjusted income from operations

  $6,793   $6,260 
  

 

   

 

   

 

   

 

   

 

   

 

 

Non-GAAP Adjusted Net Income

Non-GAAP adjustedAdjusted net income is measured by taking net income as reported in accordance with GAAP and excluding acquisition costs, amortization of intangible assets and related tax effects, contingent consideration expensesexpense andnon-cash interest expense booked through our consolidated statements of comprehensive income. The following is a reconciliation of net income in accordance with GAAP to non-GAAP adjusted net income for the three-month periods ended June 30, 2016March 31, 2017 and 2015:2016:

 

   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 2015:

  Six Months Ended June 30,   Three Months Ended March 31, 
  2016   2015   2017   2016 
  (in thousands)
Amount
   Fully Diluted
Earnings per
Share
   (in thousands)
Amount
   Fully Diluted
Earnings per
Share
   (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    $3,068   $0.09   $1,625   $0.05 

Non-GAAP adjustments to net income:

        

Adjustments to net income:

        

Acquisition costs

   1,118     0.03     —       —       402    0.01    393    0.01 

Intangible amortization

   715    0.02    399    0.01 

Contingent consideration – fair value adjustments

   2,642     0.08     1,881     0.06     —      —      2,005    0.06 

Non-cash interest expense

   382     0.01     —       —       970    0.03    —      —   

Tax effect of intangible amortization

   (101   (0.00   (104   (0.00
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Non-GAAP adjusted net income

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

Adjusted net income

  $5,054   $0.15   $4,318   $0.13 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Adjusted EBITDA

Adjusted EBITDA is measured by taking net income as reported in accordance with GAAP, excluding investment income, interest expense, taxes, depreciation and amortization, and excluding acquisition costs and contingent consideration expenses booked through our consolidated statements of comprehensive income. The following is a reconciliation of net income in accordance with GAAP to adjusted EBITDA for the three- and six-monththree-month periods ended June 30,March 31, 2017 and 2016 and 2015 (in thousands):

 

  Three months ended June 30,   Six months ended June 30,   Three Months Ended March 31, 
  2016   2015   2016   2015   2017   2016 

GAAP net income

  $3,872    $3,612    $5,496    $6,542    $3,068   $1,625 

Non-GAAP EBITDA adjustments to net income:

        

Adjustments to net income:

    

Investment income

   (76   (19   (137   (56   (96   (61

Interest expense

   638     8     643     17     1,585    5 

Tax provision

   1,500     739     2,415     2,008     999    915 

Depreciation

   785     745     1,536     1,494     928    751 

Amortization

   533     400     932     801     715    399 
  

 

   

 

   

 

   

 

   

 

   

 

 

EBITDA

   7,252     5,485     10,885     10,806     7,199    3,634 

Other non-GAAP adjustments:

        

Other adjustments:

    

Acquisition costs

   725     —       1,118     —       402    393 

Contingent consideration – fair value adjustments

   637     769     2,642     1,881     —      2,005 
  

 

   

 

   

 

   

 

   

 

   

 

 

Adjusted EBITDA

  $8,614    $6,254    $14,645    $12,687    $7,601   $6,032 
  

 

   

 

   

 

   

 

   

 

   

 

 

Liquidity and capital resources

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

At June 30, 2016,March 31, 2017, we had cash and marketable securities of $181,803,000$141,843,000 compared to $73,407,000$141,780,000 at December 31, 2015.2016. 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 June 30, 2016March 31, 2017 and December 31, 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 six-monththree-month period ended June 30, 2016,March 31, 2017, our operating activities provided cash of $6,753,000$1,147,000 reflecting net income of $5,496,000$3,068,000 andnon-cash charges totaling $7,766,000 including$4,152,000 primarily related to depreciation, amortization,non-cash interest expense and stock-based compensation charges, deferred tax expenses and the revaluation of contingent consideration. A decreasecharges. An increase in accounts receivable provided $892,000consumed $2,415,000 of cash, and was primarily due to the 22% quarter over quarter increase in revenues. A decrease in accounts payable consumed $452,000 of cash, which was primarily due to the timing of purchases and payments to vendors. Payments of accrued liabilities consumed $4,220,000 of cash, receiptsand were mainly due to the payment of contingent consideration to Refine and Atoll related to 2016 sales milestones. The remaining cash flow used in operations resulted from customers.net favorable changes in various other working capital accounts.

For the three-month period ended March 31, 2016, our operating activities consumed cash of $3,811,000 reflecting net income of $1,625,000 andnon-cash charges totaling $4,077,000 including depreciation, amortization, stock-based compensation charges and the revaluation of contingent consideration. An increase in accounts receivable consumed $1,149,000 of cash, and was primarily due to the 21% quarter over quarter increase in revenues. An increase in inventories consumed $5,093,000$3,092,000 of cash to support future revenues. A decrease in accounts payable consumed $1,600,000 of cash, which was primarily due to the timing of purchases and payments to vendors. Payments of accrued liabilities consumed $3,239,000$4,277,000 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 $5,113,000, reflecting net income of $6,542,000 and non-cash charges totaling $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 $6,820,000 of cash, and was primarily due to a 41% increase in product revenues as well as timing of sales and payments from customers. The remaining cash flow used in operations resulted from net unfavorable changes in various other working capital accounts.

Investing activities

We place our marketable security investments in high quality credit instruments as specified in our investment policy guidelines. Our investing activities provided $20,000$6,077,000 for the six-monththree-month period ended June 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,March 31, 2017, primarily due to net redemptions of marketable securities of $2,240,000$7,372,000 offset by $1,737,000$1,295,000 used for fixed asset additions. For the three-month period ended March 31, 2016, our investing activities provided $1,200,000, primarily due to net redemptions of marketable debt securities of $1,631,000, offset by $431,000 used for fixed asset additions.

Financing activities

For the six-monththree-month period ended June 30, 2016 and 2015,March 31, 2017, our financing activities provided cashused $330,000 of $111,783,000cash. We made contingent consideration payments of $1,663,000 related to the initial valuation of the likelihood that the 2016 XCell™ ATF sales milestones and $587,000, respectively. In May 2016, we received netAtoll revenue growth milestones would be achieved. These payments were partially offset by proceeds of $111.3 million from the issuance of our 2.125% Convertible Senior Notes due 2021.stock option exercises totaling $1,333,000. For the six-monththree-month period ended June 30,March 31, 2016, proceeds from exercises of $958,000$821,000 were partially offset by contingent consideration payments of $498,000 which stemmed fromrelated to 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 $686,000 were partially offset by contingent consideration payments of $99,000 which stemmed from the initial valuation of the likelihood that the 2014XCell™ ATF sales milestone would be achieved.

We do not currently use derivative financial instruments.

Working capital increased by approximately $112,120,000$8,970,000 to $196,591,000$172,048,000 at June 30, 2016March 31, 2017 from $84,471,000$163,078,000 at December 31, 20152016 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 and Atoll and recognize expected synergies;

 

our identification and execution of strategic acquisitions or business combinations;

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 businesses, products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the foreseeable future.next twelve months. We expect operating expenses in the year ending December 31, 20162017 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.portfolio and future repayment of convertible debt.

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 oroff-balance sheet financing arrangements as of June 30, 2016.March 31, 2017.

Contractual Obligations

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

   Payments Due by Period 

(In thousands)

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

Operating lease obligations

  $10,662    $2,337    $2,868    $2,758    $2,700  

Purchase obligations(1)

   6,432     6,432     —      —      —   

Contingent consideration(2)

   5,878     5,878     —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $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 on our consolidated balance sheets.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form10-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 Form10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form10-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 agreements with BioMarin, General Electric and 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 sciences companies, our history of losses and expectation of incurring losses, our ability to generate future revenues, our ability to successfully integrate Refine, Atoll and Atoll,TangenX, our ability to raise additional capital to fund potential acquisitions, our volatile stock price, and the effects of our anti-takeover 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 Form10-K for the year ended December 31, 20152016 and in this Quarterly Report on FormForm 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 increase in interest rates would result in an approximate $27,000$24,000 decrease in the fair value of our investments as of June 30, 2016.March 31, 2017. 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 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 Repligen Sweden, a wholly-owned subsidiary, may be denominated in Swedish kronor, British pound sterling, U.S. dollars, or Euros while the entity’s functional currency is the Swedish krona. Transactions by AtollRepligen Germany 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 XCell™ ATF system products are denominated in foreign currencies. Exchange gains or losses resulting from the translation between the transactional currency and the functional currency are included in net income (loss).income. Fluctuations in exchange rates may adversely affect our results of operations, financial position and cash flows. We currently do not seek to hedge this exposure to fluctuations in exchange rates.

 

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 Rules13a-15(e) or15d-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

We acquiredOn April 1, 2016, we completed our acquisition of Atoll GmbH, and on December 14, 2016, we completed our acquisition of TangenX Technology Corporation. As a result, we are in the second quarterprocess of 2016. Theintegrating the applicable internal controls for each business into our internal control over financial results of Atoll are includedreporting. Other than the foregoing, there have been no changes 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 isidentified in accordanceconnection with the SEC’s general guidanceevaluation required by paragraph (d) of Securities Exchange Act Rule13a-15 or Rule15d-15 that an assessment of a recently acquired business may be omitted from our scopeoccurred in the year of acquisition.

Other than the change noted above, there was no change in the Company’s internal control over financial reportingthree months ended March 31, 2017 that occurred during the period covered by this Quarterly Report on Form 10-Q that hashave materially affected, or isare reasonably likely to materially affect, the Company’sour 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 Form10-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 Form10-K for the year ended December 31, 20152016 and subsequent filings as well as risks and uncertainties discussed elsewhere in this Quarterly Report on Form10-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 Form10-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 April 2016, in connection with the acquisition of the 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 exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506(b) promulgated under Regulation D.None.

 

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 Form10-Q for the quarter ended September 30, 1999 and incorporated herein by reference).
3.2  Amended and RestatedBy-Laws (filed as Exhibit 3.2 to Repligen Corporation’s Quarterly Report on Form10-Q for the quarter ended September 30, 2003 and incorporated herein by reference).
3.3  Amendment No. 1 to the Amended and RestatedBy-Laws (filed as Exhibit 3.1 to Repligen Corporation’s Current Report on Form8-K filed on December 20, 2011 and incorporated herein by reference).
3.4  

Amendment No. 2 to the Amended and RestatedBy-Laws (filed as Exhibit 3.1 to Repligen Corporation’s Current Report on Form8-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 Form8-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

31.1 +Rule13a-14(a)/15d-14(a) Certification.
31.2 +Rule13a-14(a)/15d-14(a) Certification.
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 Form10-Q for the quarterly period ended June 30, 2016,March 31, 2017, 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: AugustMay 4, 20162017 By: 

/S/ TONY J. HUNT

  Tony J. Hunt
  President and Chief Executive Officer
  (Principal executive officer)
  Repligen Corporation
Date: AugustMay 4, 20162017 By: 

/S/ JON SNODGRES

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

 

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