The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Form
10-Q
and Article 10 of Regulation
S-X
and do not include all of the information
and footnote disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Companys Annual
Report on Form
10-K
for the fiscal year ended December 31, 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 as of April 1, 2016 and renamed on September 20, 2016), Repligen
Singapore Pte. Ltd. and our former subsidiary, TangenX Technology Corporation (acquired as of December 14, 2016 and merged into the Company as of June 30, 2017). 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 May 2014, the FASB issued ASU
No. 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 ASU
2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU
2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU
2016-10,
Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing; and ASU
2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The Company intends to adopt the provisions of Topic 606 using the modified retrospective method effective January 1, 2018. The Company has made substantial progress with its assessment of the impact of the new revenue standard on its current
contracts and principal revenue streams. Following the closing of the acquisition of Spectrum, Inc. (Spectrum), the Company will also need to assess the potential impact on the Spectrum revenue arrangements. Additionally, the Company
will begin to update its revenue recognition policies and procedures and develop a framework for the newly required financial statement disclosures during the third quarter of 2017 to prepare for the adoption of this standard. The Company has not
made a determination on the impact to its consolidated financial statements.
In July 2015, the FASB issued ASU
No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU
2015-11).
ASU
2015-11
requires inventory be measured at the lower of cost and net realizable value, and options that currently exist for market value be eliminated. ASU
2015-11
defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective prospectively for reporting periods beginning after
December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company adopted the provisions of ASU
2015-11
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) (ASU
2016-02).
ASU
2016-02
requires lessees to recognize a
right-of-use
asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be
required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The accounting applied by a lessor is largely unchanged from that applied under the current standard. The
standard must be adopted using a modified retrospective transition approach and provides for certain practical expedients. This 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.
6
In March 2016, the FASB issued ASU No.
2016-09, CompensationStock
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. This ASU is effective for public
entities for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted the provisions of this ASU as of January 1, 2017. As a result of this standard, 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 January 1, 2017. Since the Company maintained a full valuation allowance on its net U.S. deferred tax
assets as of the adoption date, the Company recorded a corresponding increase to the valuation allowance and the impact of adopting ASU
2016-09
on retained earnings is zero.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic 203): Classification of
Certain Cash Receipts and Cash Payments. ASU
No. 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 ASU
2016-15
to have a material impact
on its consolidated financial statements.
In January 2017, the FASB issued ASU No.
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.
In January 2017, the FASB issued ASU
No. 2017-04,
IntangiblesGoodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon
the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The
standard is effective for the Company on a prospective basis beginning on January 1, 2020, with early adoption permitted. This new guidance is not expected to have a material impact on the Companys consolidated financial statements.
Atoll GmbH
On April 1, 2016, the Companys subsidiary, Repligen Sweden, acquired Atoll GmbH (Atoll) from
UV-Cap
GmbH & Co. KG ( UV Cap) pursuant to a Share Purchase Agreement (the Atoll Share Purchase Agreement), dated as of March 31, 2016 (such acquisition, the Atoll
Acquisition), by and among Repligen Sweden, UV Cap, and the Company, in its capacity as guarantor of the obligations of Repligen Sweden under the Atoll Share Purchase Agreement. The Atoll Acquisition was subject to certain closing conditions
that did not occur until April 1, 2016. Payment for the Atoll 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 Companys common stock, par value of $0.01 per share
valued at $14.1 million (the Atoll Stock Consideration) to Repligen Sweden through a transfer by the Company on behalf of Repligen Sweden to fulfill Repligen Swedens obligation to deliver the Atoll Stock Consideration under
the Atoll Share Purchase Agreement. The issuance of the Atoll Stock Consideration was not registered under the Securities Act of 1933, as amended (the Securities Act), in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act. The Atoll Stock Consideration was based on the fair value of the Companys common stock on April 1, 2016.
This acquisition strengthened Repligens bioprocessing business by adding a complementary extension to an existing product line while expanding its
direct sales presence worldwide. On September 20, 2016, Atoll changed its name to Repligen GmbH.
The Atoll Acquisition was accounted for as a
purchase of a business under ASC 805, Business Combinations. The total purchase price of the Atoll Acquisition was $25.3 million, consisting of an upfront cash payment of $10.2 million, less $74,000 as a result of the final
determination of working capital, issuance of the Atoll Stock Consideration, and a future potential milestone payment of $1.1 million if specific revenue growth targets are met for 2016. The $1.1 million potential contingent consideration
had an initial probability weighted fair value at the time of the closing of the Atoll Acquisition of approximately $952,000.
7
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
|
|
$
|
10,176
|
|
Value of common stock issued
|
|
|
14,138
|
|
Estimated fair value of contingent consideration
|
|
|
952
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
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 UV Cap. Pursuant to the terms of the Atoll Share Purchase Agreement, the Company would make a contingent consideration payment of $1.1 million if specific revenue growth targets were met for 2016.
Because 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 required as of June 30, 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 $1,307,000 in transaction costs in 2016 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
|
|
Accounts receivable
|
|
|
697
|
|
Inventory
|
|
|
155
|
|
Other current assets
|
|
|
169
|
|
Fixed assets, net
|
|
|
114
|
|
Customer relationships
|
|
|
5,318
|
|
Developed technology
|
|
|
2,175
|
|
Non-competition
agreements
|
|
|
57
|
|
Trademark and trade name
|
|
|
11
|
|
Deferred tax assets
|
|
|
885
|
|
Accounts payable and other liabilities assumed
|
|
|
(599
|
)
|
Deferred tax liabilities
|
|
|
(2,202
|
)
|
Goodwill
|
|
|
17,077
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
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 13 years and $2.2 million represents the fair value of developed technology that will be amortized over a determined useful life of 14 years. $57,000 represents the fair value of
non-competition
agreements and $11,000 represents the fair value of trademarks and trade names that will be amortized over a determined useful life of 2 years. The aforementioned intangible assets will be
amortized on a straight-line basis.
The goodwill of $17.1 million represents future economic benefits expected to arise from synergies from
combining operations, utilizing the Companys existing sales infrastructure to increase market presence and the extension of existing customer relationships.
8
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 TangenXs innovative
single-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
Repligens filtration portfolio and complementing the OPUS
®
pre-packed
column product line in downstream purification. Effective June 30,
2017, the operations of TangenX were merged with and into the Company.
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 of the net assets acquired was approximately $37.1 million.
The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future
expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.
The total consideration transferred follows (in thousands):
|
|
|
|
|
Cash consideration
|
|
$
|
37,532
|
|
Less: working capital adjustment
|
|
|
(382
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
37,150
|
|
|
|
|
|
|
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 $376,000 in transaction costs for the
six-month
period ended June 30, 2017 and $935,000 in transaction costs for the year ended December 31, 2016
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 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
|
|
|
29,501
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
37,150
|
|
|
|
|
|
|
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 of
non-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.
9
The goodwill of $29.5 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 revenue of $1,865,000 and $3,838,000 for
the three- and
six-month
periods ended June 30, 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):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, 2016
|
|
|
Six months ended
June 30, 2016
|
|
Total revenue
|
|
$
|
30,676
|
|
|
$
|
57,628
|
|
Net income
|
|
$
|
4,191
|
|
|
$
|
9,309
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma information for the three- and
six-month
periods ended
June 30, 2016 was calculated after applying the Companys accounting policies and the impact of acquisition date fair value adjustments. The unaudited pro forma net income for the three- and
six-month
periods ended June 30, 2016 was adjusted to include acquisition-related transaction costs, inventory
step-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 as fair value adjustments to inventory and increased amortization for
the fair value of acquired intangible assets. The pro forma information does not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to
be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
Spectrum, Inc.
On August 1, 2017, the
Company completed the acquisition of Spectrum, pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated June 22, 2017 (the Spectrum Agreement). See Note 17 for further information.
Product Sales
The Companys 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 managements 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 elements 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 managements best estimate of selling price.
10
The Companys 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 ASC
605-25,
based on terms and conditions of the product arrangements, the
Company believes that these services and undelivered products can be accounted for separately from the delivered product element, as the delivered products have value to our customers 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 users 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 Companys financial statements historically.
Shipping and handling fees are recorded as a component of product revenue, with the associated costs recorded as a component of cost of product revenue.
Therapeutics Licensing Agreements
Activities under
licensing agreements are evaluated in accordance with ASC
605-25
to determine if they represent a multiple element revenue arrangement. The Company identifies the deliverables included within the agreement and
evaluates which deliverables represent separate units of accounting. The Company accounts for those components as separate units of accounting if the following two criteria are met:
|
|
|
The delivered item or items have value to the customer on a stand-alone basis; 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 Companys control.
|
Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the licensee could use the
delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the Company allocates the arrangement consideration to
those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based
on their relative selling price. Revenue is recognized for each unit of accounting when the appropriate revenue recognition criteria are met.
Future
milestone payments, if any, under a license agreement will be recognized under the provisions of ASC
605-28,
which the Company adopted on January 1, 2011. The Company has elected to recognize a payment
that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is substantive if:
|
|
|
It can only be achieved based in whole or in part on either the Companys performance or the occurrence of a specific outcome resulting from the Companys 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 Repligens histone deacetylase inhibitor (HDACi) portfolio. Pursuant
to the terms of the
11
BioMarin Asset Purchase Agreement, the Company is entitled to receive up to $160 million in potential future milestone payments, 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.
|
In addition, Repligen is eligible to receive royalties on sales of therapeutic products originating from the HDACi portfolio. The royalty rates are tiered and
begin in the
mid-single-digits
for the first HDACi portfolio product and for the first
non-HDACi
portfolio product with lesser amounts for any backup products developed
under the BioMarin Asset Purchase Agreement. The Companys 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 ASC
605-25
to determine if they represented a
multiple element revenue arrangement. The Company identified the following deliverables in the BioMarin Asset Purchase Agreement:
|
|
|
The assignment by the Company to BioMarin of its intellectual property rights in the 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,
BioMarins 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 evaluated the potential milestones in accordance with ASC
605-28,
which allows an entity to make an
accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This evaluation included an assessment of the risks that must be
overcome to achieve the respective milestone as well as whether the achievement of the milestone was due in part to our initial clinical work, the level of effort and investment required to achieve the respective milestone and whether the milestone
consideration is reasonable relative to all deliverables and payment terms in the arrangement. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is
substantive. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, assuming all other revenue recognition criteria are met.
The Company believes that the $60 million of specified clinical and regulatory milestone payments are substantive. Therefore, any such milestones
achieved will be recognized as revenue when earned.
Any milestones achieved upon specified commercial sales events or future royalty payments are
considered contingent revenue under the 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.
12
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
|
|
Balance at December 31, 2016
|
|
$
|
(5
|
)
|
|
$
|
(13,744
|
)
|
|
$
|
(13,749
|
)
|
Other comprehensive income
|
|
|
5
|
|
|
|
5,073
|
|
|
|
5,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
|
|
|
$
|
(8,671
|
)
|
|
$
|
(8,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reports earnings per share in accordance with ASC 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
stock options and warrants are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then
used to purchase common shares at the average market price during the period. Share-based payment awards that entitle their holders to receive
non-forfeitable
dividends before vesting are considered
participating securities and are considered in the calculation of basic and diluted earnings per share. There were no such participating securities outstanding during the three- and
six-month
periods ended
June 30, 2017 and 2016.
Basic and diluted weighted average shares outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares
|
|
|
34,097,805
|
|
|
|
33,649,296
|
|
|
|
33,995,323
|
|
|
|
33,336,989
|
|
Dilutive common stock options and restricted stock units
|
|
|
437,427
|
|
|
|
525,831
|
|
|
|
433,483
|
|
|
|
525,322
|
|
Dilutive effect of senior convertible notes
|
|
|
559,582
|
|
|
|
|
|
|
|
286,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares, assuming dilution
|
|
|
35,094,814
|
|
|
|
34,175,127
|
|
|
|
34,715,797
|
|
|
|
33,862,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017, there were outstanding options to purchase 803,532 shares of the Companys common stock at a
weighted average exercise price of $20.16 per share and 393,338 restricted stock units. For the three- and
six-month
periods ended June 30, 2017, 187,072 and 222,001 options to purchase shares of the
Companys 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 its senior convertible notes in cash, shares or any combination of the two. The
Company currently intends to settle the par value of its senior convertible notes in cash and any excess conversion premium in shares. The Company applies the provisions of ASC 260,
Earnings Per Share,
Subsection
10-45-44,
to determine the diluted weighted average shares outstanding as it relates to the conversion spread on its convertible notes. Accordingly, the par value of the
senior convertible notes is not included in the calculation of diluted income per share, but the dilutive effect of the conversion premium is considered in the calculation of diluted net income per share using the treasury stock method. The share
figures in the table above represent the estimated incremental shares that would be issued related to the conversion premium, assuming conversion of all the outstanding senior convertible notes as of June 30, 2017.
At June 30, 2016, there were outstanding options to purchase 1,315,739 shares of the Companys common stock at a weighted average exercise price of
$11.70 per share. For the three- and
six-month
periods ended June 30, 2016, 359,828 and 417,279 options to purchase shares of the Companys common stock, respectively, were excluded from the
calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and were therefore anti-dilutive. The Company intends to settle the par value of its
senior convertible notes in cash and any excess conversion premium in shares. Accordingly, the par value of the senior convertible notes is not included in the calculation of diluted income per share. As of June 30, 2016, there is no dilution
related to the conversion premium on these notes.
13
As detailed in Note 17, in July 2017, the Company completed a public offering in which a total of 3,228,069
shares of its common stock were sold to the public at a price of $42.75 per share.
6.
|
Cash, Cash Equivalents and Marketable Securities
|
At June 30, 2017 and December 31, 2016, the
Companys investments included money market funds and short-term marketable securities. These marketable securities are classified as
available-for-sale.
Marketable
securities are investments with original maturities of greater than 90 days. Long-term marketable securities are securities with maturities of greater than one year. The average remaining contractual maturity of marketable securities at
June 30, 2017 was approximately 2.0 months.
Management reviewed the Companys investments as of June 30, 2017 and December 31, 2016
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, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt securities
|
|
$
|
2,744
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,744
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no long-term marketable securities as of June 30, 2017.
At June 30, 2017, the Companys investments included two securities in unrealized loss positions with a total unrealized loss of less than $1,000
and a total fair market value of approximately $1,498,000. 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 three- and
six-month
periods ended June 30, 2017 and 2016.
Investments in marketable securities consisted of the following at December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
807
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
807
|
|
Corporate and other debt securities
|
|
|
18,745
|
|
|
|
2
|
|
|
|
(7
|
)
|
|
|
18,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
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, 2017.
Inventories relate to the Companys bioprocessing business. The Company values
inventory at cost or, if lower, market value, using the
first-in,
first-out
method. The Company reviews its inventories at least quarterly and records a provision for
excess and obsolete inventory based on its estimates of expected sales volume, production capacity and expiration dates of raw materials,
work-in-process
and finished
products. Expected sales volumes are determined based on supply forecasts provided by key customers for the next 3 to 12 months. The Company writes down inventory that has become obsolete, inventory that has a cost basis in excess of its expected
net
14
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 $406,000 at June 30, 2017 and $435,000 at December 31, 2016.
A
change in the estimated timing or amount of demand for the Companys 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, 2017
|
|
|
December 31,
2016
|
|
Raw Materials
|
|
$
|
16,538
|
|
|
$
|
14,954
|
|
Work-in-process
|
|
|
2,461
|
|
|
|
2,789
|
|
Finished products
|
|
|
7,086
|
|
|
|
6,953
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,085
|
|
|
$
|
24,696
|
|
|
|
|
|
|
|
|
|
|
8.
|
Property, Plant and Equipment
|
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Leasehold improvements
|
|
$
|
15,272
|
|
|
$
|
14,592
|
|
Equipment
|
|
|
16,471
|
|
|
|
15,214
|
|
Furniture and fixtures
|
|
|
3,732
|
|
|
|
3,218
|
|
Construction in progress
|
|
|
1,604
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
37,079
|
|
|
|
34,288
|
|
Less: accumulated depreciation
|
|
|
(21,083
|
)
|
|
|
(19,332
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
15,996
|
|
|
$
|
14,956
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense totaled approximately $1,858,000 and $1,535,000 for the
six-month
periods ended June 30, 2017 and 2016, respectively.
Intangible assets 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 Companys statements of comprehensive income.
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 assets 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, 2017.
15
Intangible assets consisted of the following at June 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted
Average
Useful Life
(in years)
|
|
Technology developed
|
|
$
|
13,119
|
|
|
$
|
(1,926
|
)
|
|
|
17
|
|
Patents
|
|
|
240
|
|
|
|
(223
|
)
|
|
|
8
|
|
Customer relationships
|
|
|
23,312
|
|
|
|
(6,260
|
)
|
|
|
11
|
|
Trademark
|
|
|
711
|
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
|
89
|
|
|
|
(49
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
37,471
|
|
|
$
|
(8,458
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consisted of the following at December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted
Average
Useful Life
(in years)
|
|
Technology developed
|
|
$
|
12,911
|
|
|
$
|
(1,468
|
)
|
|
|
17
|
|
Patents
|
|
|
240
|
|
|
|
(208
|
)
|
|
|
8
|
|
Customer relationships
|
|
|
22,555
|
|
|
|
(4,995
|
)
|
|
|
11
|
|
Trademark/ tradename
|
|
|
711
|
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
|
84
|
|
|
|
(24
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
36,501
|
|
|
$
|
(6,695
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for amortized intangible assets was approximately $1,484,000 and $932,000 for the
six-month
periods ended June 30, 2017 and 2016, respectively. As of June 30, 2017, the Company expects to record amortization expense as follows (in thousands):
|
|
|
|
|
Years Ending
|
|
Amortization Expense
|
|
December 31, 2017 (six months remaining)
|
|
$
|
1,708
|
|
December 31, 2018
|
|
|
2,904
|
|
December 31, 2019
|
|
|
2,870
|
|
December 31, 2020
|
|
|
2,388
|
|
December 31, 2021
|
|
|
2,227
|
|
The amounts reported above do not include amortization expense related to intangible assets acquired as part of the Spectrum
Acquisition, as reported in Note 17, below.
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Employee compensation
|
|
$
|
4,602
|
|
|
$
|
5,586
|
|
Accrued interest payable
|
|
|
204
|
|
|
|
204
|
|
Accrued purchases
|
|
|
659
|
|
|
|
382
|
|
Taxes
|
|
|
539
|
|
|
|
1,692
|
|
Contingent consideration
|
|
|
|
|
|
|
6,119
|
|
Royalties
|
|
|
450
|
|
|
|
248
|
|
Professional fees
|
|
|
1,505
|
|
|
|
411
|
|
Unearned revenue
|
|
|
864
|
|
|
|
408
|
|
Other accrued expenses
|
|
|
745
|
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,568
|
|
|
$
|
16,014
|
|
|
|
|
|
|
|
|
|
|
16
The carrying value of the Companys convertible senior notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
2.125% Convertible Senior Notes due 2021:
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
Unamortized debt discount
|
|
|
(15,114
|
)
|
|
|
(16,777
|
)
|
Unamortized debt issuance costs
|
|
|
(2,658
|
)
|
|
|
(2,951
|
)
|
|
|
|
|
|
|
|
|
|
Total convertible senior notes
|
|
$
|
97,228
|
|
|
$
|
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 $111.1 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 Companys common stock, cash or a combination thereof, at the Companys election. It is the Companys 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 Companys common stock.
The conversion rate for the Notes will initially be 31.1813 shares of the Companys 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 Companys 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, 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 Companys stock. Based
on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and asset base and with similar maturity, the Company estimated the implied interest rate, assuming no conversion option.
Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The
estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $96,289,000 upon issuance, calculated as the present value of implied future payments based on the $115 million aggregate
principal amount. The equity component of the Notes was recognized as a debt discount, recorded in additional
paid-in
capital, and represents the difference between the aggregate principal of the Notes and the
fair value of the Notes without conversion option on their issuance date. The debt discount is amortized to interest expense using the effective interest method over five years, or the life of the Notes. The Company assesses the equity
classification of the cash conversion feature quarterly, and it is not remeasured as long as it continues to meet the conditions for equity classification.
17
Interest expense recognized on the Notes during the three-month period ended June 30, 2017
includes $611,000, $839,000 and $147,000 for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. Interest expense recognized on the Notes during the
six-month
period ended June 30, 2017 includes $1,222,000, $1,663,000 and $293,000 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, 2017, the carrying value of the Notes was approximately
$97.2 million and the fair value of the principal was approximately $165.5 million. The fair value of the Notes was determined based on the most recent trade activity of the Notes as of June 30, 2017.
12.
|
Stock-Based Compensation
|
For the three-month periods ended June 30, 2017 and 2016, the Company
recorded stock-based compensation expense of approximately $1,496,000 and $1,137,000, 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 $3,027,000 and $2,059,000 for the
six-month
periods ended June 30, 2017 and 2016, respectively, for share-based awards granted under the Plans.
The following table presents stock-based compensation expense included in the Companys consolidated statements of comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of product revenue
|
|
$
|
153
|
|
|
$
|
84
|
|
|
$
|
294
|
|
|
$
|
144
|
|
Research and development
|
|
|
79
|
|
|
|
105
|
|
|
|
211
|
|
|
|
185
|
|
Selling, general and administrative
|
|
|
1,264
|
|
|
|
948
|
|
|
|
2,522
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,496
|
|
|
$
|
1,137
|
|
|
$
|
3,027
|
|
|
$
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, with
20%-33%
vesting on the first anniversary of the date of grant and the
remainder vesting in equal yearly installments thereafter. Nonqualified options issued to
non-employee
directors under the Plans generally vest over one year. Options granted under the Plans have a maximum
term of ten years from the date of grant and generally, the exercise price of the stock options equals the fair market value of the Companys common stock on the date of grant. At June 30, 2017, options to purchase 803,532 shares and
393,338 restricted stock units were outstanding under the Plans. At June 30, 2017, 1,483,367 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 employees requisite service period on a straight-line basis. 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.
18
Information regarding option activity for the
six-month
period ended
June 30, 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 December 31, 2016
|
|
|
882,748
|
|
|
$
|
16.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
101,844
|
|
|
|
33.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(149,903
|
)
|
|
|
10.04
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(31,157
|
)
|
|
|
20.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2017
|
|
|
803,532
|
|
|
$
|
20.16
|
|
|
|
6.90
|
|
|
$
|
17,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2017
|
|
|
439,980
|
|
|
$
|
14.98
|
|
|
|
5.71
|
|
|
$
|
11,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2017 (1)
|
|
|
790,545
|
|
|
$
|
20.04
|
|
|
|
6.87
|
|
|
$
|
16,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the number of vested options as of June 30, 2017 plus the number of unvested options expected to vest as of June 30, 2017 based on the unvested outstanding options at June 30, 2017 adjusted for
estimated forfeiture rates of 8% for awards granted to
non-executive
level employees and 3% for awards granted to executive level employees.
|
The aggregate intrinsic value in the table above represents the total
pre-tax
intrinsic value (the difference between
the closing price of the common stock on June 30, 2017 of $41.44 per share and the exercise price of each
in-the-money
option) that would have been received by the
option holders had all option holders exercised their options on June 30, 2017.
The weighted average grant date fair value of options granted during
the
six-month
periods ended June 30, 2017 and 2016 was $16.94 and $13.55, respectively. The total fair value of stock options that vested during the
six-month
periods ended June 30, 2017 and 2016 was approximately $1,734,000 and $1,195,000, respectively.
Information regarding restricted stock unit activity
for the three months ended June 30, 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
|
|
|
146,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(94,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(12,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding at June 30, 2017
|
|
|
393,338
|
|
|
$
|
|
|
|
|
2.93
|
|
|
$
|
16,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2017
(1)
|
|
|
362,788
|
|
|
$
|
|
|
|
|
2.82
|
|
|
$
|
15,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the number of vested restricted stock units as of June 30, 2017 plus the number of unvested restricted stock units expected to vest as of June 30, 2017 based on the unvested outstanding restricted
stock units at June 30, 2017 adjusted for estimated forfeiture rates of 8% for awards granted to
non-executive
level employees and 3% for awards granted to executive level employees.
|
The aggregate intrinsic value in the table above represents the total
pre-tax
intrinsic value (equal to the closing
price of the common stock on June 30, 2017 of $41.44 per share) that would have been received by the restricted stock unit holders had all holders exercised on June 30, 2017. The aggregate intrinsic value of restricted stock units
exercised during the
six-month
periods ended June 30, 2017 and 2016 was approximately $3,231,000 and $1,392,000, respectively.
The weighted average grant date fair value of restricted stock units granted during the three months ended June 30, 2017 and 2016 was $33.06 and $26.07,
respectively. The total grant date fair value of restricted stock units that vested during the
six-month
periods ended June 30, 2017 and 2016 was approximately $2,373,000 and $1,201,000, respectively.
As of June 30, 2017, there was $14,437,000 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 2.74 years.
19
The Companys effective tax rate for the three- and
six-month
periods ended June 30, 2017 was (130.9%) and (49.0%), respectively, compared to 27.9% and 30.5%, respectively, for the corresponding periods in the prior year. In
the second quarter of 2017, the Company completed a sale of intellectual property from the Repligen Corporation to Repligen Sweden AB that allowed for the Company to utilize certain of its U.S. deferred tax assets. Accordingly, the Company reduced
its valuation allowance on its U.S. deferred tax assets by approximately $9,200,000 in the second quarter of 2017 and recorded a $5,625,000 tax benefit on the Companys consolidated statement of operations as a result of the sale of the
intellectual property. For the three- and
six-month
periods ended June 30, 2017, the effective tax rate was lower than the U.S. statutory tax rate of 34% primarily due to this sale of intellectual
property. Additionally, the effective tax rate is lower than the U.S. statutory tax rate due to lower statutory tax rates on foreign profits. For the three- and
six-month
periods ended June 30, 2016,
the effective tax rate was lower than the U.S. statutory tax rate of 34% primarily due to increased foreign profits at lower tax rates, partially offset by unbenefited domestic losses.
At December 31, 2016, the Company had net operating loss carryforwards of approximately $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 state business tax credit carryforwards of approximately $442,000 available to reduce future domestic income taxes, if
any. The net operating loss and business tax credits carryforwards will continue to expire at various dates through December 2036. The net operating loss and business tax credit carryforwards are subject to review and possible adjustment by the
Internal Revenue Service. While an IRC Section 382 study was completed through June 30, 2017, and no current limitations were identified, use of these net operating loss and business tax credit carryforwards may be limited in the future
based on certain changes in the ownership interest of significant stockholders.
As of June 30, 2017, after accounting for the sale of intellectual
property to Repligen Sweden AB as detailed above, the Company concluded that realization of the remainder of its deferred tax assets in the United States is not more likely than not, and as such, the Company maintained a valuation allowance against
its net U.S. deferred tax assets, after considerations for deferred tax liabilities which will not be utilized as a future source of income.
ASU
2016-09
states that previously unrecognized excess tax benefits related to stock based compensation should be recognized on a modified retrospective basis. As such, the Company increased its U.S. federal and state
net operating loss carryovers by approximately $5.3 million as of January 1, 2017 for previously unrecognized stock based compensation excess tax benefits outstanding as of the beginning of the period. Because the Company maintained a full
valuation allowance on its U.S. deferred tax assets at that date, the Company recorded a corresponding increase to the valuation allowance as of January 1, 2017, and the impact of adopting ASU
2016-09
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 subsidiarys operations prior to the Atoll Acquisition on April 1, 2016. There were no material findings as a result of this examination, and the examination was closed by the
German tax authorities.
The Companys tax returns are subject to examination by federal, state and international taxing 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 Companys
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
|
20
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 Companys 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, 2017.
The following fair value hierarchy table presents information about each major category of the Companys assets measured
at fair value on a recurring basis as of June 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using:
|
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant
other observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
94,863
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94,863
|
|
Corporate and other debt securities
|
|
|
|
|
|
|
2,744
|
|
|
|
|
|
|
|
2,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,863
|
|
|
$
|
2,744
|
|
|
$
|
|
|
|
$
|
97,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no other assets or liabilities for which fair value measurement is either required or has been elected to be
applied.
As of December 31, 2016, the Company had accrued liabilities with a fair value of $6,119,000 related to contingent consideration in
connection with the Refine and Atoll business combinations. The contingent consideration related to Refine was based on actual 2016 revenues. The contingent consideration related to Atoll was based on meeting revenue growth targets in 2016. These
valuations are Level 3 valuations, as the primary inputs are unobservable. All contingent consideration liabilities were paid in the first quarter of 2017.
The following table provides a rollforward of the fair value of contingent consideration (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
6,119
|
|
Payments
|
|
|
(6,119
|
)
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
|
|
|
|
|
|
|
In May 2016, the Company issued $115 million aggregate principal amount of the Notes due June 1, 2021. Interest
is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2016. As of June 30, 2017, the carrying value of the Notes was $97.2 million, net of unamortized discount, and the fair
value of the Notes was approximately $165.5 million. The fair value of the Notes was determined based on the most recent trade activity of the Notes as of June 30, 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
re-measurements
to fair value during the three months ended June 30, 2017 of financial assets and
liabilities that are not measured at fair value on a recurring basis.
21
15.
|
Commitments and Contingencies
|
Future minimum rental commitments under the Companys leases as of
June 30, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
Minimum Rental
Commitments
|
|
2017 (six months remaining)
|
|
$
|
1,355
|
|
2018
|
|
|
2,707
|
|
2019
|
|
|
2,567
|
|
2020
|
|
|
2,567
|
|
2021
|
|
|
2,567
|
|
Thereafter
|
|
|
1,812
|
|
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 Companys principal operating segment.
The following table represents the Companys total revenue by geographic area (based on the location of the customer):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
|
38
|
%
|
|
|
45
|
%
|
|
|
38
|
%
|
|
|
37
|
%
|
Sweden
|
|
|
29
|
%
|
|
|
29
|
%
|
|
|
28
|
%
|
|
|
31
|
%
|
United Kingdom and Ireland
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
16
|
%
|
Other
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from significant customers as a percentage of the Companys total revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
GE Healthcare
|
|
|
28
|
%
|
|
|
28
|
%
|
|
|
28
|
%
|
|
|
31
|
%
|
MilliporeSigma
|
|
|
19
|
%
|
|
|
30
|
%
|
|
|
20
|
%
|
|
|
30
|
%
|
Significant accounts receivable balances as a percentage of the Companys total trade accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
GE Healthcare
|
|
|
20
|
%
|
|
|
26
|
%
|
MilliporeSigma
|
|
|
15
|
%
|
|
|
8
|
%
|
Customer C
|
|
|
14
|
%
|
|
|
|
|
Acquisition of Spectrum, Inc.
On August 1, 2017, the Company completed the acquisition of Spectrum pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated
as of June 22, 2017, by and among the Company and Spectrum (such acquisition, the Spectrum Acquisition).
Spectrum is a diversified
filtration company with a differentiated portfolio of hollow fiber cartridges, bench-top to commercial scale filtration and perfusion systems and a broad portfolio of disposable and single-use solutions. Spectrums products are primarily used
for the filtration, isolation, purification and concentration of monoclonal antibodies, vaccines, recombinant proteins, diagnostic products and cell therapies where the company offers both standard and customized solutions to its bioprocessing
customers.
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Spectrums filtration products include its KrosFlo
®
line of hollow-fiber cartridges, tangential flow filtration (TFF) systems and single-use flow path consumables, as well as its Spectra/Por
®
portfolio of laboratory dialysis products and its
Pro-Connex
®
single-use hollow fiber Module-Bag-Tubing (MBT) sets. Outside of filtration, the company sells its Spectra/Chrom
®
liquid
chromatography products for research applications. These bioprocessing products account for the majority of Spectrum revenues. Spectrum also offers a line of operating room products.
The Spectrum Acquisition will be accounted for as a purchase of a business under ASC 805, Business Combinations. The Spectrum Acquisition was funded through
payment of approximately $124.2 million in cash and 6,153,995 shares of the Companys common stock totaling $247.6 million for a total purchase price of $371.8 million.
Consideration Transferred
The Company accounted for the
Spectrum Acquisition as a purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of Spectrum were recorded as of the acquisition date, at their respective fair values, and consolidated with those of the
Company. The fair value of the net assets acquired was approximately $371.8 million.
The estimated consideration and preliminary purchase price
information has been prepared using a preliminary valuation. An updated purchase price valuation and allocation will be completed in the third quarter of 2017. 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 Repligen believes to be
reasonable. However, actual results may differ from these estimates.
The total consideration transferred follows (in thousands):
|
|
|
|
|
Cash consideration
|
|
$
|
124,686
|
|
Equity consideration
|
|
|
247,575
|
|
Less: working capital adjustment
|
|
|
(449
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
371,812
|
|
|
|
|
|
|
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 has incurred $2,395,000 in transaction costs related to the Spectrum Acquisition for the three- and
six-month
periods ended June 30, 2017. The transaction costs
are included in selling, general and administrative expenses in the consolidated statements of operations.
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Fair Value of Net Assets Acquired
The allocation of purchase price was based on the fair value of assets acquired and liabilities based on the preliminary valuation. The components and
allocation of the purchase price consists of the following amounts (in thousands):
|
|
|
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Cash and cash equivalents
|
|
$
|
7,071
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|
Marketable securities
|
|
|
990
|
|
Accounts receivable
|
|
|
5,950
|
|
Inventory
|
|
|
11,349
|
|
Prepaid expenses and other current assets
|
|
|
891
|
|
Fixed assets
|
|
|
5,613
|
|
Customer relationships
|
|
|
73,530
|
|
Developed technology
|
|
|
37,630
|
|
Trademark and tradename
|
|
|
2,140
|
|
Non-competition agreements
|
|
|
770
|
|
Other assets
|
|
|
988
|
|
Goodwill
|
|
|
276,241
|
|
Accounts payable
|
|
|
(1,287
|
)
|
Accrued liabilities
|
|
|
(2,248
|
)
|
Deferred tax liabilities, net
|
|
|
(42,629
|
)
|
Unrecognized tax benefit
|
|
|
(576
|
)
|
Estimated closing indebtedness
|
|
|
(2,635
|
)
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Estimated transaction costs
|
|
|
(1,976
|
)
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
371,812
|
|
|
|
|
|
|
The preliminary purchase price allocation is subject to adjustment as purchase accounting is finalized. The final purchase
price allocation will be determined upon completion of a final valuation analysis, and the fair value allocation of assets acquired and liabilities assumed could differ materially from the preliminary valuation analysis. The final allocation may
include, but not be limited to, changes in the fair value of property, plant and equipment and changes in allocations to intangible assets and goodwill, as well as changes in the values of other assets and liabilities.
Due to the proximity of the closing date of the Spectrum Acquisition to the filing date of these financial statements, financial information from Spectrum, as
well as other financial information related to the Spectrum Acquisition, could not be reasonably obtained in order to prepare pro forma financial statement disclosures as of and for the three- and
six-month
periods ended June 30, 2017.
Public Offering of Common Stock
On July 3, 2017, the Company completed a public offering in which 2,807,017 shares of its common stock were sold to the public at a price of $42.75 per
share. The underwriters were granted an option, which they exercised in full, to purchase an additional 421,052 shares of the Companys common stock. The total proceeds from this offering, net of underwriting discounts, commissions and other
offering expenses, totaled approximately $129.4 million.
24