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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
        
    
to
    
    
        
    
Commission File Number
000-14656
 
 
REPLIGEN CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
  
04-2729386
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
41 Seyon Street, Bldg. 1, Suite 100
Waltham, MA
  
02453
(Address of Principal Executive Offices)
  
(Zip Code)
(781) 250-0111
Registrant’s Telephone Number, Including Area Code
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, par value $0.01 per share
  
RGEN
  
The Nasdaq Global Select Market
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.:
 
Large accelerated filer   ☒    Accelerated filer   ☐
Non-accelerated filer   ☐    Smaller reporting company   ☐
     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 by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act.):    Yes  ☐    No  ☒
The number of shares outstanding of the registrant’s common stock on November 2, 2020 was 52,619,271.
 
 
 
Table of Contents
 
        
PAGE
  
  
Item 1.
     
       3  
       4  
       5  
       7  
       8  
Item 2.
        28  
Item 3.
        40  
Item 4.
        41  
  
Item 1.
        42  
Item 1A.
        42  
Item 2.
        42  
Item 3.
        42  
Item 4.
        42  
Item 5.
        42  
Item 6.
        43  
     44  
 
2
PART I – FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements
REPLIGEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except share data)
 
    
September 30,
2020
    
December 31,
2019
  
Assets
     
Current assets:
     
Cash and cash equivalents
    $ 553,302     $ 528,392  
Restricted cash
      —         9,015  
Accounts receivable, net of allowances of $621 and $525 at September 30, 2020 and December 31, 2019, respectively
      55,830       43,068  
Royalties and other receivables
      95       148  
Unbilled receivables
      —         456  
Inventories, net
      78,531       54,832  
Prepaid expenses and other current assets
      8,970       5,917  
  
 
 
    
 
 
  
Total current assets
      696,728       641,828  
Property, plant and equipment, net
      55,355       48,455  
Intangible assets, net
      215,385       212,552  
Goodwill
      482,043       468,413  
Deferred tax assets
      2,192       2,920  
Operating lease right of use assets
      24,201       25,707  
Other assets
      412       238  
  
 
 
    
 
 
  
Total assets
    $ 1,476,316     $ 1,400,113  
  
 
 
    
 
 
  
Liabilities and Stockholders’ Equity
     
Current liabilities:
     
Accounts payable
    $ 14,483     $ 11,425  
Operating lease liability
      4,460       3,557  
Accrued liabilities
      32,041       33,331  
  
 
 
    
 
 
  
Total current liabilities
      50,984       48,313  
Convertible senior notes, net
      240,942       232,767  
Deferred tax liabilities
      29,435       29,944  
Operating lease liability, long-term
      26,378       26,995  
Other liabilities, long-term
      3,707       2,326  
  
 
 
    
 
 
  
Total liabilities
      351,446       340,345
  
 
 
    
 
 
  
Commitments and contingencies (Note 10)
   
Stockholders’ equity:
     
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding
      —         —    
Common stock, $0.01 par value; 80,000,000 shares authorized; 52,606,700 shares at September 30, 2020 and 52,078,258 shares at December 31, 2019 issued and outstanding
      526       521  
Additional
paid-in
capital
      1,087,996       1,068,431  
Accumulated other comprehensive loss
      (9,723 )      (15,027 ) 
Retained
earnings
      46,071       5,843  
  
 
 
    
 
 
  
Total stockholders’ equity
      1,124,870       1,059,768  
  
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 1,476,316     $ 1,400,113  
  
 
 
    
 
 
  
The accompanying notes are an integral part of these consolidated financial statements.
 
3
REPLIGEN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands, except per share data)
 
    
Three Months Ended

September 30,
    
Nine Months Ended

September 30,
  
    
2020
    
2019
    
2020
    
2019
  
Revenue:
         
Products
    $ 94,029     $ 69,419     $ 257,521     $ 200,701  
Royalty and other revenue
      31       26       91       70  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total revenue
      94,060       69,445       257,612       200,771  
  
 
 
    
 
 
    
 
 
    
 
 
  
Costs and operating expenses:
         
Cost of product revenue
      39,626       31,425       108,471       88,978  
Research and development
      4,422       5,427       13,460       14,278  
Selling, general and administrative
      29,051       24,629       83,277       67,326  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total costs and operating expenses
      73,099       61,481       205,208       170,582  
  
 
 
    
 
 
    
 
 
    
 
 
  
Income from operations
      20,961       7,964       52,404       30,189  
  
 
 
    
 
 
    
 
 
    
 
 
  
Other income (expenses):
         
Investment income
      82       1,898       1,699       3,616  
Loss on extinguishment of debt
      —       (5,650 )      —       (5,650 ) 
Interest expense
      (3,052 )      (2,857 )      (9,032 )      (6,326 ) 
Other (expenses) income
      (248 )      316       (632 )      (23 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Other expenses, net
      (3,218 )      (6,293 )      (7,965 )      (8,383 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Income before income taxes
      17,743       1,671       44,439       21,806  
Income tax provision
      3,191       12       4,211       3,999  
  
 
 
    
 
 
    
 
 
    
 
 
  
Net income
    $ 14,552     $ 1,659     $ 40,228     $ 17,807  
  
 
 
    
 
 
    
 
 
    
 
 
  
Earnings per share:
         
Basic
    $ 0.28     $ 0.03     $ 0.77     $ 0.38  
  
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
    $ 0.27     $ 0.03     $ 0.75     $ 0.37  
  
 
 
    
 
 
    
 
 
    
 
 
  
Weighted average common shares outstanding:
         
Basic
      52,545       50,852       52,341       47,087  
  
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
      53,469       51,809       53,300       47,930  
  
 
 
    
 
 
    
 
 
    
 
 
  
Net income
    $ 14,552     $ 1,659     $ 40,228     $ 17,807  
Other comprehensive income (loss):
         
Foreign currency translation adjustment
      4,390       (6,741 )      5,304       (9,901 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive income (loss)
    $ 18,942     $ (5,082 )    $ 45,532     $ 7,906  
  
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these consolidated financial statements.
 
4
REPLIGEN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands, except share data)
 
    
Nine Months Ended September 30, 2020
  
    
Common Stock
     
Additional

Paid-

In Capital
     
Accumulated

Other
Comprehensive

Loss
    
Retained
Earnings
     
Total

Stockholders’

Equity
  
    
Number of

Shares
     
Par

Value
  
Balance at December 31, 2019
      52,078,258      $ 521      $ 1,068,431      $ (15,027 )    $ 5,843      $ 1,059,768  
Net income
      —          —          —          —         40,228        40,228  
Exercise of stock options and vesting of stock units
      528,442        5        7,073        —         —          7,078  
Stock-based compensation expense
      —          —          12,492        —         —          12,492  
Translation adjustment
      —          —          —          5,304       —          5,304  
  
 
 
     
 
 
     
 
 
     
 
 
    
 
 
     
 
 
  
Balance as of September 30, 2020
      52,606,700      $ 526      $ 1,087,996      $ (9,723 )    $ 46,071      $ 1,124,870  
  
 
 
     
 
 
     
 
 
     
 
 
    
 
 
     
 
 
  
 
    
Three Months Ended September 30, 2020
  
    
Common Stock
     
Additional

Paid-

In Capital
     
Accumulated

Other
Comprehensive

Loss
    
Retained
Earnings
     
Total

Stockholders’

Equity
  
    
Number of

Shares
     
Par

Value
  
Balance at June 30, 2020
      52,494,884      $ 525      $ 1,082,096      $ (14,113 )    $ 31,519      $ 1,100,027  
Net income
      —          —          —          —         14,552        14,552  
Exercise of stock options and vesting of stock units
      111,816        1        1,675        —         —          1,676  
Stock-based compensation expense
      —          —          4,225        —         —          4,225  
Translation adjustment
      —          —          —          4,390       —          4,390  
  
 
 
     
 
 
     
 
 
     
 
 
    
 
 
     
 
 
  
Balance as of September 30, 2020
      52,606,700      $ 526      $ 1,087,996      $ (9,723 )    $ 46,071      $ 1,124,870  
  
 
 
     
 
 
     
 
 
     
 
 
    
 
 
     
 
 
  
 
    
Nine Months Ended September 30, 2019
  
    
Common Stock
     
Additional

Paid-

In Capital
    
Accumulated

Other
Comprehensive

Loss
    
Retained
Earnings/
(Accumulated
Deficit)
    
Total

Stockholders’

Equity
  
    
Number of

Shares
    
Par

Value
  
Balance at December 31, 2018
      43,917,378     $ 439      $ 642,590     $ (11,893 )    $ (15,568 )    $ 615,568  
Net income
      —         —          —         —         17,807       17,807  
Issuance of common stock for debt conversion
      2,316,229       23        198,734       —         —         198,757  
Reduction for equity component from debt conversion, net of tax
      —         —          (200,079 )      —         —         (200,079 ) 
Exercise of stock options and vesting of stock units
      311,299       3        1,055       —         —         1,058  
Issuance of common stock pursuant to the acquisition of C Technologies, Inc.
      779,221       8        53,930       —         —         53,938  
Tax withholding on vesting of restricted stock units
      (3,077 )      —          (290 )      —         —         (290 ) 
Equity component of 0.375% senior convertible notes, net of tax
      —         —          38,088       —         —         38,088  
Proceeds from issuance of common stock, net of issuance cost of $18,607
      4,731,531       48        320,665       —         —         320,713  
Stock-based compensation expense
      —         —          9,459       —         —         9,459  
Translation adjustment
      —         —          —         (9,901 )      —         (9,901 ) 
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of September 30, 2019
      52,052,581     $ 521      $ 1,064,152     $ (21,794 )    $ 2,239     $ 1,045,118  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
 
5
    
Three Months Ended September 30, 2019
  
    
Common Stock
     
Additional

Paid-

In Capital
    
Accumulated

Other
Comprehensive

Loss
    
Retained
Earnings
     
Total

Stockholders’

Equity
  
    
Number of

Shares
    
Par

Value
  
Balance at June 30, 2019
      48,086,422     $ 481      $ 892,960     $ (15,053 )    $ 580      $ 878,968  
Net income
      —         —          —         —         1,659        1,659  
Issuance of common stock for debt conversion
      2,316,200       23        198,732       —         —          198,755  
Reduction of equity component from debt conversion, net of tax
      —         —          (200,079 )      —         —          (200,079 ) 
Exercise of stock options and vesting of stock units
      66,036       1        493       —         —          494  
Tax withholding on vesting of restricted stock units
      (3,077 )      —          (290 )      —         —          (290 ) 
Equity component of 0.375% senior convertible notes, net of tax
      —         —          38,088       —         —          38,088  
Proceeds from issuance of common stock, net of issuance cost of $6,981
      1,587,000       16        131,073       —         —          131,089  
Stock-based compensation expense
      —         —          3,175       —         —          3,175  
Translation adjustment
      —         —          —         (6,741 )      —          (6,741 ) 
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
Balance as of September 30, 2019
      52,052,581     $ 521      $ 1,064,152     $ (21,794 )    $ 2,239      $ 1,045,118  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
  
The accompanying notes are an integral part of these consolidated financial statements.
 
6
REPLIGEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
    
Nine Months Ended

September 30,
  
    
2020
    
2019
  
Cash flows from operating activities:
     
Net income
    $ 40,228     $ 17,807  
Adjustments to reconcile net income to net cash provided by operating activities:
     
Depreciation and amortization
      19,581       14,791  
Non-cash
interest expense
      8,175       4,863  
Stock-based compensation expense
      12,492       9,459  
Deferred income taxes, net
      72       (9,680 ) 
Loss on extinguishment of debt
      —         5,650  
Other
      228       114  
Changes in operating assets and liabilities, excluding impact of acquisitions:
     
Accounts receivable
      (11,515 )      (6,734 ) 
Royalties and other receivables
      157       26  
Unbilled receivables
      456       2,047  
Inventories
      (22,767 )      (4,891 ) 
Prepaid expenses and other assets
      (2,908 )      (1,075 ) 
Operating lease right of use assets
      2,574       787  
Other assets
      (260 )      (66 ) 
Accounts payable
      3,317       (780 ) 
Accrued expenses
      (2,712 )      7,263  
Operating lease liability
      (831 )      (607 ) 
Long-term liabilities
      1,467       10,568  
  
 
 
    
 
 
  
Total cash provided by operating activities
      47,754       49,542  
  
 
 
    
 
 
  
Cash flows from investing activities:
     
Acquisitions, net of cash acquired
      (28,445 )      (182,154 ) 
Additions to capitalized software costs
      (3,585 )      (4,630 ) 
Purchases of property, plant and equipment
      (11,067 )      (11,413 ) 
  
 
 
    
 
 
  
Total cash used in investing activities
      (43,097 )      (198,197 ) 
  
 
 
    
 
 
  
Cash flows from financing activities:
     
Proceeds from exercise
of stock options 
      7,088       1,058  
Payment of tax withholding obligation on vesting of restricted stock
      (10 )      (290 ) 
Proceeds from issuance of convertible debt, net
      —         278,555  
Proceeds from issuance of common stock, net
      —         320,713  
Repayment of senior convertible notes
      —         (114,989 ) 
  
 
 
    
 
 
  
Total cash provided by financing activities
      7,078       485,047  
  
 
 
    
 
 
  
Effect of exchange rate changes on cash, cash equivalents and restricted cash
      4,160       (7,785 ) 
  
 
 
    
 
 
  
Net increase in cash, cash equivalents and restricted cash
      15,895       328,607  
  
 
 
    
 
 
  
Cash, cash equivalents and restricted cash, beginning of period
      537,407       193,822  
  
 
 
    
 
 
  
Cash, cash equivalents and restricted cash, end of period
    $ 553,302     $ 522,429  
  
 
 
    
 
 
  
Supplemental disclosure of
non-cash
investing and financing activities:
     
Assets acquired under operating leases
    $ 1,456     $ —    
  
 
 
    
 
 
  
Fair value of 2,316,229 shares of common stock issued for conversion of convertible notes
    $ —       $ 198,757  
  
 
 
    
 
 
  
Fair value of common stock issued for acquisition of C Technologies, Inc.
    $ —       $ 53,938  
  
 
 
    
 
 
  
The accompanying notes are an integral part of these consolidated financial statements.
 
7
REPLIGEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements included herein have been prepared by Repligen Corporation (the “Company”, “Repligen” or “we”) in accordance with generally accepted accounting principles in the United States (“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 GAAP. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form
10-K
(“Form
10-K”)
for the fiscal year ended December 31, 2019.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Repligen Sweden AB, Repligen GmbH, Spectrum LifeSciences, LLC and its subsidiaries (“Spectrum”), C Technologies, Inc. (“C Technologies”), Engineered Molding Technology (“EMT”) and Repligen Singapore Pte. Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company made no material changes in the application of
 its
 significant accounting policies that were disclosed in its Form
10-K.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal, recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the entire year.
Risks and Uncertainties
The ultimate impact that the current pandemic of the novel coronavirus (“COVID-19”), may have on the Company and its customers, employees, suppliers, vendors, business partners and distribution channels is currently unknown. The Company is closely monitoring the impact of this evolving situation on all aspects of its business. While COVID-19 did not materially affect the Company’s financial results and business operations in the Company’s three and nine months ended September 30, 2020, the Company is unable to predict the impact that COVID-19 may have on its financial position and operations moving forward due to numerous uncertainties. These estimates may change as new events occur and additional information is obtained, and actual results could differ materially from these estimates under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19 and will make adjustments to its operations as necessary. 
Recent Accounting Standards Updates
We consider the applicability and impact of all Accounting Standards Updates on the Company’s consolidated financial statements. Updates not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position or results of operations. Recently issued Accounting Standards Updates that we feel may be applicable to the Company are as follows:
Recently Issued Accounting Standard Updates – Adopted During the Period
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”)
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.”
ASU
2018-13
includes amendments that aim to improve the effectiveness of fair value measurement disclosures. The amendments in this guidance modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement,
“Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements
,
”
including the consideration of costs and benefits. The Company adopted ASU
2018-13
on January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2020.
 
8
In August 2018, the FASB issued ASU
2018-15,
“Intangibles – Goodwill and Other –
Internal-Use
Software (Subtopic
350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”
ASU
2018-15
aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software (and hosting arrangements that include an
internal-use
software license). The guidance also requires the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The Company adopted ASU
2018-13
on January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2020.
In June 2016, the FASB issued ASU
2016-13,
“
Financial Instruments-Credit Losses (Topic 326).”
ASU
2016-13
significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU
2016-13
replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. The Company adopted ASU
2016-13
on January 1, 2020. The Company assessed all potential impacts that the adoption of this guidance has on its consolidated financial statements. Based on the composition of the Company’s investment portfolio, accounts receivable, current market conditions and historical credit loss activity, the adoption of ASU
2016-13
by the Company did not have a material impact on its consolidated financial position, results of operations or cash flows as of and for the three and nine months ended September 30, 2020. The Company continues to monitor processes and controls for indications of an adjustment for future economic conditions at quarterly and annual reporting periods. See Note 5,
“Credit Losses,”
below for more information on the Company’s adoption of ASC 326.
In November 2018, the FASB issued ASU
2018-18,
“Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.”
ASU
2018-18
clarifies the interaction between Topic 808,
“Collaborative Arrangements,”
and Topic 606,
“Revenue from Contracts with Customers,”
by making targeted improvements to GAAP for collaborative arrangements and providing guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. This includes improving comparability in the presentation of revenue for certain transactions between collaborative arrangement participants by allowing presentation of the units of account in collaborative arrangements that are within the scope of Topic 606 together with revenue accounted for under Topic 606. The Company adopted ASU
2018-13
on January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2020.
In December 2019, the FASB issued ASU
2019-12,
“
Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.”
ASU
2019-12
simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, including, but not limited to, the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, the exceptions related to the recognition of a deferred tax liability related to an equity method investment and the exception to methodology for calculating income taxes in an interim period when a
year-to-date
loss exceeds the anticipated loss for the year. The Company adopted ASU
2018-13
on January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2020.
Recently Issued Accounting Standard Updates – Not Yet Adopted
In August 2020, the FASB issued ASU
2020-06,
“
Debt - Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging - Contracts in Entity
’
s Own Equity (Subtopic
815-40).
”
ASU
2020-06
simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. ASU
2020-06
also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. ASU
2020-06
is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the timing and impact of the adoption of ASU
2020-06
on the Company’s consolidated financial statements.
 
9
2.
Fair Value Measurements
The Company uses various valuation approaches in determining the fair value of its assets and liabilities. 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.
As of September 30, 2020 and December 31, 2019, cash and cash equivalents on the Company’s consolidated balance sheets included $395.6 million and $415.6 million, respectively, in a money market account. These funds are valued on a recurring basis using Level 1 inputs.
In July 2019, the Company issued $287.5 million aggregate principal amount of the Company’s 0.375% Convertible Senior Notes due July 15, 2024 (the “2019 Notes”). Interest is payable semi-annually in arrears on January 15 and July 15 of each year. The 2019 Notes will mature on July 15, 2024
,
unless earlier converted or repurchased in accordance with their terms. As of September 30, 2020, the carrying value of the 2019 Notes was $240.9 million, net of unamortized discount, and the fair value of the 2019 Notes was $416.0 million. The fair value of the 2019 Notes is a Level 1 valuation and was determined based on the most recent trade activity of the 2019 Notes as of September 30, 2020. The 2019 Notes are discussed in more detail in Note 8,
“Convertible Senior Notes”
to these consolidated financial statements.
The Company’s
non-financial
assets include goodwill and other intangible assets, which we classify as Level 3 items. These assets are measured at fair value on a
non-recurring
basis as part of our impairment testing. See Note 6,
“Goodwill and Intangible Assets,”
below for additional information related to goodwill and intangible assets, and our impairment testing.
During the three and nine months ended September 30, 2020, there were no remeasurements to fair value of financial assets and liabilities that are not measured at fair value on a recurring basis.
 
3.
Acquisitions
Engineered Molding Technology LLC
On July 13, 2020, the Company completed the acquisition of 100% of the membership interests of Engineered Molding Technology LLC (“EMT”), a New York limited liability company
,
pursuant to a Membership Interest Purchase Agreement, dated June 26, 2020, by and among the Company, EMT, and Michael Pandori and Todd Etesse, the legal and beneficial owners of EMT (such acquisition, the “EMT Acquisition”).
EMT, which is headquartered in Clifton Park, New York, is an innovator and manufacturer of
single-use
silicone assemblies and components used in the manufacturing of biologic drugs. EMT’s standard and custom molding as well as their over-molded connectors and silicone tubing products are key components in
single-use
filtration and chromatography systems. EMT’s products will complement and expand Repligen’s
single-use
product offerings.
Consideration Transferred
The EMT
Acquisition
was accounted for as a purchase of a business under ASC 805,
“Business Combinations”.
Total consideration paid was $28.5 million
,
which included $2.2 million
 
deposited into an escrow account against which the Company may make claim
s
 
for indemnification
.
Under the acquisition method of accounting, the net assets of EMT were recorded as of the acquisition date, at their respective fair values, and consolidated with those of Repligen. The fair value of the net tangible assets acquired is estimated to be approximately $1.5 million, the fair value of the intangible assets acquired is estimated to be $14.4 million, and the residual goodwill is estimated to be approximately $12.6 million. The estimated consideration and preliminary purchase price information has been prepared using a preliminary valuation. The preparation of the valuation required the use of significant assumptions and
 
estimates
. Critical estimates included, but were not 
 
10
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.
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 $1.0 million and $1.1 million of acquisition related costs during the three and nine months ended September 30, 2020. The transaction costs are included in selling, general and
administrative
expenses in the consolidated statements of comprehensive income (loss).
Fair Value of Net Assets Acquired
The allocation of purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date, based on the preliminary valuation. As additional information becomes available, the Company may further revise its preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from July 13, 2020). Any such revisions or changes may be material. The components and allocation of the purchase price consists of the following amounts (amounts in thousands):
 
Cash and cash equivalents
    $ 69  
Accounts receivable
      1,057  
Inventory
      449  
Prepaid expenses and other current assets
      7  
Fixed assets, net
      472  
Operating lease right of use assets
      1,050  
Customer relationships
      11,080  
Developed technology
      2,910  
Trademark and tradename
      320  
Non-compete
agreements
      50  
Goodwill
      12,573  
Accounts payable
      (283 ) 
Accrued liabilities
      (190 ) 
Operating lease liability
      (211 ) 
Operating lease liability, long-term
      (839 ) 
  
 
 
  
Fair value of net assets acquired
   
$
28,514
 
  
 
 
  
Acquired Goodwill
The goodwill of $12.6 million represents future economic benefits expected to arise from anticipated synergies from the integration of EMT. These synergies include certain cost savings, operating efficiencies and other strategic benefits projected to be achieved as a result of the EMT Acquisition. Substantially all of the goodwill recorded is expected to be deductible for income tax purposes.
Intangible Assets
The following table sets forth the components of the identified intangible assets associated with the EMT Acquisition and their estimated useful lives:
 
    
Useful life
     
Fair Value
  
           
(Amounts in thousands)
  
Customer relationships
      14 years      $ 11,080  
Developed technology
      11 years        2,910  
Trademark and tradename
      14 years        320  
Non-competition
agreements
      3 years        50  
     
 
 
  
      $ 14,360  
     
 
 
  
 
11
Revenue, Net Income and Pro Forma Presentation
The Company has included the operating results of EMT in its consolidated statements of comprehensive income (loss) since the July 13, 2020 acquisition date. The Company does not consider this acquisition to be material to its consolidated statements of comprehensive income (loss) and therefore has not included pro forma results.
C Technologies, Inc.
On May 31, 2019, Repligen acquired C Technologies, pursuant to the terms of a Stock Purchase Agreement (the “Agreement”), by and among Repligen, C Technologies and Craig Harrison, an individual and sole stockholder of C Technologies (such acquisition, the “C Technologies Acquisition”).
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 $4.0 million in transaction costs for the nine months ended September 30, 2019. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of comprehensive income (loss). In connection with the transaction, an additional $9.0 million was paid to employees during the second quarter of 2020, based on their continued employment with the Company one year after the date of the close of the C Technologies Acquisition.
 
The
 Company has recognized $3.7 million of compensation expense associated
 
with
this amount due to employees
during the nine months ended September 30, 2020 
and has recognized $9.0 million of compensation expense associated with this amount due since the C Technologies Acquisition.
Fair Value of Net Assets Acquired
The allocation of purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date, based on the preliminary valuation. The Company obtained this information during due diligence and through other sources. In the months after closing, the Company obtained additional information about these assets and liabilities as it learned more about C Technologies. The Company refined the estimates of fair value to more accurately allocate the purchase price. Only items identified as of the acquisition date were considered for subsequent adjustment. We made appropriate adjustments to the purchase price allocation during the measurement period, which was one year from the acquisition date. The components and allocation of the purchase price consists of the following amounts (amounts in thousands):
 
Cash and cash equivalents
    $ 3,795  
Restricted cash
      26,933  
Accounts receivable
      3,044  
Inventory
      3,783  
Prepaid expenses and other current assets
      93  
Fixed assets
      40  
Operating lease right of use asset
      3,836  
Customer relationships
      59,680  
Developed technology
      28,920  
Trademark and tradename
      1,570  
Non-competition
agreements
      660  
Goodwill
      142,314  
Deferred taxes
      895  
Accounts payable
      (436 ) 
Accrued liabilities
      (2,767 ) 
Accrued bonus
      (26,928 ) 
Deferred revenue
      (1,709 ) 
Operating lease liability
      (51 ) 
Operating lease liability, long-term
      (3,785 ) 
  
 
 
  
Fair value of net assets acquired
   
$
239,887
 
  
 
 
  
Acquired Goodwill
The goodwill of $142.3 million represents future economic benefits expected to arise from synergies from combining operations and commercial organizations to increase market presence and the extension of existing customer relationships. Substantially all of the goodwill recorded is expected to be deductible for income tax purposes. Pursuant to the Company’s business combination accounting policy included in Note 2,
“
Summary of Significant Accounting Policies – Business Combinations, Goodwill and Intangible Assets,
”
of the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2019, the Company
 
12
recorded goodwill adjustments for the effects on goodwill of changes to net assets acquired during the period that such change is identified, provided that any such change is within the measurement period (up to one year from the date of the acquisition). In March 2020, the Company recorded an adjustment to goodwill of $0.3 million related to additional state income tax liabilities to be paid to the seller, which were incurred from the Company’s finalized 338(h)(10) tax election.
Revenue, Net Income and Pro Forma Presentation
The Company recorded revenue from C Technologies of $9.0 million and $23.3 million for the three and nine months ended September 30, 2020, respectively, and $16.4 million from May 31, 2019, the date of acquisition, to December 31, 2019. The Company recorded a net income from C Technologies’ results of operations of $2.1 million and a net loss of $0.8 million for the three and nine months ended September 30, 2020, respectively, and a net loss of $7.4 million from May 31, 2019 to December 31, 2019. The Company has included the operating results of C Technologies in its consolidated statements of comprehensive income (loss) since the May 31, 2019 acquisition date. The following pro forma financial information presents the combined results of operations of Repligen and C Technologies as if the acquisition had occurred on January 1, 2019 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the C Technologies Acquisition, factually supportable and have a recurring impact. These pro forma adjustments include amortization expense on the acquired identifiable intangible assets, adjustments to stock-based compensation expense for equity compensation issued to C Technologies employees and the income tax effect of the adjustments made. In addition, acquisition-related transaction costs and an accounting adjustment to record inventory at fair value were excluded from pro forma net income in 2019.
Prior to the C Technologies Acquisition, C Technologies did not generate monthly or quarterly financial statements that were prepared in accordance with GAAP.
The following pro forma financial information does not reflect any adjustments for anticipated expense savings resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on January 1, 2019 or of future results (amounts in thousands, except per share data):
 
    
Nine Months Ended

September 30,
  
    
2019
  
Pro forma total revenue
    $ 209,960  
Pro forma net income
    $ 21,012  
Pro forma earnings per share:
   
Basic
    $ 0.45  
  
 
 
  
Diluted
    $ 0.44  
  
 
 
  
 
4.
Revenue Recognition
The Company generates revenue from the sale of bioprocessing products, equipment devices, and related consumables used with these equipment devices to customers in the life science and biopharmaceutical industries. Under ASC 606,
“Revenue from Contracts with Customers,”
revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers.
Disaggregation of Revenue
Revenues for the three and nine months ended September 30, 2020 and 2019 were as follows:
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2020
     
2019
     
2020
     
2019
  
    
(Amounts in thousands)
  
Product revenue
    $ 94,029      $ 69,419      $ 257,521      $ 200,701  
Royalty and other income
      31        26        91        70  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total revenue
    $ 94,060      $ 69,445      $ 257,612      $ 200,771  
  
 
 
     
 
 
     
 
 
     
 
 
  
When disaggregating revenue, the Company considered all of the economic factors that may affect its revenues. Because all of its revenues are from bioprocessing customers, there are no differences in the nature, timing and uncertainty of the Company’s
 
13
revenues and cash flows from any of its product lines. However, given that the Company’s revenues are generated in different geographic regions, factors such as regulatory and geopolitical factors within those regions could impact the nature, timing and uncertainty of the Company’s revenues and cash flows. In addition, a significant portion of the Company’s revenues are generated from two customers; therefore, economic factors specific to these two customers could impact the nature, timing and uncertainty of the Company’s revenues and cash flows.
Disaggregated revenue from contracts with customers by geographic region can be found in Note 15,
“Segment Reporting,”
below.
Revenue from significant customers that represent 10% or more of the Company’s total revenue is as follows:
 
    
Three Months Ended

September 30,
     
Nine Months Ended

September 30,
  
    
2020
     
2019
     
2020
     
2019
  
    
(Amounts in thousands)
  
Cytiva (formerly GE Healthcare)
      N/A        N/A        N/A      $ 23,759  
MilliporeSigma
      N/A      $ 9,458      $ 29,387      $ 28,354  
Chromatography Products
The Company’s chromatography products include a number of products used in the downstream purification and quality control of biological drugs. The majority of chromatography revenue relates to the OPUS
®
pre-packed
chromatography column line. OPUS columns are designed to be disposable following a production campaign. Each OPUS column is delivered
pre-packaged
with the customer’s choice of chromatography resin, which is either provided by the Company for the customer or customer supplied. In either scenario, the OPUS column and resin are not interdependent of one another and are therefore considered distinct products that represent separate performance obligations. Chromatography product revenue is generally recognized at a point in time upon transfer of control to the customer.
Filtration Products
The Company’s filtration products generate revenue through the sale of KrosFlo
®
hollow fiber TFF systems, TangenX
®
flat sheet cassettes, Spectrum
®
hollow fiber filters, membranes and modules, XCell ATF
®
systems and related consumables
.
 Supporting our systems, we also sell 
 ProConnex
®
single-use
flow path assemblies
 
and custom silicone-based, single-use flow path assemblies and components from EMT
.
The Company’s KrosFlo systems are used in the filtration, isolation, purification and concentration of biologics and diagnostic products. TFF is a rapid and efficient method for separation and purification of biomolecules that is widely used in laboratory, process development and process scale applications in biopharmaceutical manufacturing. Sales of large-scale systems generally include components and consumables as well as training and installation services at the request of the customer. Because the initial sale of components and consumables are necessary for the operation of the system, such items are combined with the systems as a single performance obligation. Training and installation services do not significantly modify or customize these systems and therefore represent a distinct performance obligation.
The Company’s TangenX flat sheet cassettes (SIUS
®
, SIUS Gamma
®
and PRO) are not highly interdependent on one another and are therefore considered distinct products that represent separate performance obligations. Product revenue from the sale of TangenX flat sheet cassettes are generally recognized at a point in time upon transfer of control of the customer.
The Company’s other filtration product offerings are not highly interdependent of one another and are therefore considered distinct products that represent separate performance obligations. Revenue on these products is generally recognized at a point in time upon transfer of control to the customer. The Company invoices the customer for the installation and training services in an amount that directly corresponds with the value to the customer of the Company’s performance to date; therefore, revenue recognized is based on the amount billable to the customer in accordance with the practical expedient under ASC
606-10-55-18.
The Company also markets the XCell ATF system, a technologically advanced filtration device used in upstream processes to continuously remove cellular metabolic waste products during the course of a fermentation run, freeing healthy cells to continue producing the biologic drug of interest. XCell ATF systems typically include a filtration system and consumables (i.e., tubing sets, metal stands) as well as training and installation services at the request of the customer. The filtration system and consumables are considered distinct products and therefore represent separate performance obligations. First time purchasers of the systems typically purchase a controller that is shipped with the tubing set(s) and metal stand(s). The controller is not considered distinct as it is a proprietary product that is highly interdependent with the filtration system; therefore, the controller is combined with the filtration system and accounted for as a single performance obligation. The training and installation services do not significantly modify or customize the XCell ATF system and therefore represent a distinct performance obligation. XCell
 
ATF system product revenue related to the filtration system (including the controller if applicable) and consumables is generally
 
14
recognized at a point in time upon transfer of control to the customer. XCell ATF system service revenue related to training and installation services is generally recognized over time, as the customer simultaneously receives and consumes the benefits as the Company performs. The Company invoices the customer for the installation and training services in an amount that directly corresponds with the value to the customer of the Company’s performance to date; therefore, revenue recognized is based on the amount billable to the customer in accordance with the practical expedient under ASC
606-10-55-18.
On July 13, 2020, the Company consummated the EMT Acquisition and added EMT’s silicone-based,
single-use
components and manifolds to its filtration franchise. These products are key components in
single-use
filtration and chromatography systems and will help expand its line of
single-use
ProConnex flow paths, streamline its supply chain for ATF and provide more flexibility as the Company scales and expands its
single-use
and systems portfolios.
Process Analytics Products
The Process Analytics franchise generates revenue primarily through the sale of the SoloVPE and FlowVPE Slope Spectroscopy systems, consumables and service. These products complement and support the Company’s existing Filtration, Chromatography and Proteins franchises as they allow end users to make
in-line
protein concentration measurements in filtration, chromatography and fill-finish applications, designed to allow for real-time process monitoring.
Protein Products
The Company’s Protein franchise generates revenue through the sale of Protein A affinity ligands and growth factors. Protein A ligands are an essential component of Protein A chromatography resins (media) used in the purification of virtually all
mAb-based
drugs on the market or in development. The Company manufactures multiple forms of Protein A ligands under long-term supply agreements with major life sciences companies, who in turn sell their Protein A chromatography media to end users (biopharmaceutical manufacturers). The Company also manufactures growth factors for sale under long-term supply agreements with certain life sciences companies as well as
 
for
 
direct sales to its customers. Each protein product is considered distinct and therefore represents a separate performance obligation. Protein product revenue is generally recognized at a point in time upon transfer of control to the customer.
Other Products
The Company’s other products include operating room products sold to hospitals. Other product revenue is generally recognized at a point in time upon transfer of control to the customer.
Transaction Price Allocated to Future Performance Obligations
Remaining performance obligations represents the transaction price of contracts for which work has not been performed or has been partially performed. The Company’s future performance obligations relate primarily to the installation and training of certain of its systems sold to customers. These performance obligations are completed within one year of receipt of a purchase order from its customers. Accordingly, the Company has elected to not disclose the value of these unsatisfied performance obligations as provided under ASC
606-10-50-14.
Contract Balances from Contracts with Customers
The following table provides information about receivables and deferred revenues from contracts with customers as of September 30, 2020 (amounts in thousands):
 
    
2020
  
Balances from contracts with customers only:
   
Accounts receivable
    $ 55,830  
Deferred revenue (included in accrued liabilities in the consolidated balance sheets)
   
$
 10,141  
Revenue recognized during the nine-month period ended September 30, 2020 relating to:
   
The beginning deferred revenue balance
    $ 3,133  
Changes in pricing related to products or services satisfied in previous periods
   
$
 —    
The timing of revenue recognition, billings and cash collections results in the accounts receivables and deferred revenue balances on the Company’s consolidated balance sheets. 
 
15
A contract asset is created when the Company satisfies a performance obligation by transferring a promised good to the customer. Contract assets may represent conditional or unconditional rights to consideration. The right is conditional, and recorded as a contract asset, if the Company must first satisfy another performance obligation in the contract before it is entitled to payment from the customer. Contract assets are transferred to billed receivables once the right becomes unconditional. If the Company has the unconditional right to receive consideration from the customer, the contract asset is accounted for as a billed receivable and presented separately from other contract assets. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due.
When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.
Costs to Obtain or Fulfill a Customer Contract
The Company’s sales commission structure is based on achieving revenue targets. The commissions are driven by revenue derived from customer purchase orders which are short term in nature.
Applying the practical expedient in paragraph
340-40-25-4,
the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and administrative expenses. When shipping and handling costs are incurred after a customer obtains control of the products, the Company accounts for these as costs to fulfill the promise and not as a separate performance obligation.
 
5.
Credit Losses
Effective January 1, 2020, the Company adopted ASU
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”
prospectively. ASU
2016-13
replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The guidance requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due. Upon adoption, changes in the allowance were not material for the transition period starting January 1, 2020 through the nine months ended September 30, 2020.
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivables. Customers are pooled based on sharing specific risk factors, including geographic location. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances.
Customers are assessed for credit worthiness upfront through a credit review, which includes assessment based on the Company’s analysis of their financial statements when a credit rating is not available. The Company evaluates contract terms and conditions, country and political risk, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectable after all collection efforts have been exhausted. Estimates of potential credit losses are used to determine the allowance. It is based on assessment of anticipated payment and all other historical, current and future information that is reasonably available.
The accounts receivable balance on the Company’s consolidated balance sheet as of September 30, 2020 was $55.8 million, net of $0.6 million of allowances. The following table provides a roll-forward of the allowance for credit losses in 2020 that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected (amounts in thousands):
 
16
    
2020
  
Balance at January 1, 2020
    $ (525 ) 
Current period change
 for expected credit losses
      (133 ) 
  
 
 
  
Balance at March 31, 2020
      (658 ) 
Current period change for write-offs
      37  
Current period change for expected credit losses
      83  
  
 
 
  
Balance at June 30, 2020
      (538 ) 
Current period change for expected credit losses
      (83 ) 
  
 
 
  
Balance at September 30, 2020
    $ (621 ) 
  
 
 
  
 
6.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of identifiable assets acquired and liabilities assumed. Goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually in accordance with ASC 350,
“Intangibles – Goodwill and Other”
. The following table represents the change in the carrying value of goodwill for the nine months ended September 30, 2020 (amounts in thousands):
 
Balance as of December 31, 2019
    $ 468,413  
Acquisition of Engineered Molding Technology
      12,573  
Goodwill adjustment related to C Technologies, Inc.
      293  
Cumulative translation adjustment
      764  
  
 
 
  
Balance as of September 30, 2020
    $ 482,043  
  
 
 
  
During each of the fourth quarters of 2019, 2018 and 2017, the Company completed its annual impairment assessments and concluded that goodwill was not impaired in any of those years. The Company has not identified any “triggering” events which indicate an impairment of goodwill in the three and nine months ended September 30, 2020.
Intangible Assets
Intangible assets with a definitive life are amortized over their useful lives using the straight-line method, and the amortization expense is recorded within cost of product revenue and selling, general and administrative expenses in the Company’s statements of comprehensive income (loss). 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 the Company’s products. An impairment results if the carrying value of the asset exceeds the estimated fair value of the asset. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company continues to believe that its intangible assets are recoverable at September 30, 2020.
Indefinite-lived assets are reviewed for impairment at least annually. There has been no impairment of the Company’s intangible assets for the periods presented.
 
17
Intangible assets, net consisted of the following at September 30, 2020:
 
    
September 30, 2020
  
    
Gross
Carrying
Value
     
Accumulated

Amortization
     
Net
Carrying
Value
     
Weighted
Average
Useful Life

(in years)
  
    
(Amounts in thousands)
         
Finite-lived intangible assets:
            
Technology - developed
    $ 85,196      $ (13,054 )     $ 72,142        18  
Patents
      240        (240 )       —          8  
Customer relationships
      172,325        (33,861 )       138,464        15  
Trademarks
      4,072        (480 )       3,592        19  
Other intangibles
      1,750        (1,263 )       487        3  
  
 
 
     
 
 
     
 
 
     
Total finite-lived intangible assets
      263,583        (48,898 )       214,685        16  
Indefinite-lived intangible asset:
            
Trademarks
      700        —          700        —    
  
 
 
     
 
 
     
 
 
     
Total intangible assets
    $ 264,283      $ (48,898 )     $ 215,385     
  
 
 
     
 
 
     
 
 
     
Intangible assets consisted of the following at December 31, 2019:
 
    
December 31, 2019
  
    
Gross
Carrying
Value
     
Accumulated

Amortization
     
Net
Carrying
Value
     
Weighted
Average
Useful Life

(in years)
  
    
(Amounts in thousands)
         
Finite-lived intangible assets:
            
Technology - developed
    $ 82,169      $ (9,669 )     $ 72,500        19  
Patents
      240        (240 )       —          8  
Customer relationships
      160,825        (25,642 )       135,183        15  
Trademarks
      3,752        (333 )       3,419        20  
Other intangibles
      1,697        (947 )       750        3  
  
 
 
     
 
 
     
 
 
     
Total finite-lived intangible assets
      248,683        (36,831 )       211,852        16  
Indefinite-lived intangible asset:
            
Trademarks
      700        —          700        —    
  
 
 
     
 
 
     
 
 
     
Total intangible assets
    $ 249,383      $ (36,831 )     $ 212,552     
  
 
 
     
 
 
     
 
 
     
Amortization expense for finite-lived intangible assets was $4.0 million and $3.9 million for the three months ended September 30, 2020 and 2019, respectively. Amortization expense was $11.8 million and $9.6 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the Company expects to record the following amortization expense in future periods (amounts in thousands):
 
For the Nine Months Ended September 30,
   
Estimated
Amortization
Expense
  
2020 (remaining three months)
    $ 3,964  
2021
      15,855  
2022
      15,853  
2023
      15,749  
2024
      15,298  
2025 and thereafter
      147,966  
  
 
 
  
Total
    $ 214,685  
  
 
 
  
 
18
7.
Consolidated Balance Sheet Detail
Inventories, net
Inventories, net consists of the following:
 
    
As of
  
    
September 30,
2020
     
December 31,
2019
  
    
(Amounts in thousands)
  
Raw materials
    $ 42,201      $ 29,328  
Work-in-process
      6,192        8,360  
Finished products
      30,138        17,144  
  
 
 
     
 
 
  
Total inventories, net
    $ 78,531      $ 54,832  
  
 
 
     
 
 
  
Property, Plant and Equipment
Property, plant and equipment consist of the following:
 
    
As of
  
    
September 30,
2020
     
December 31,
2019
  
    
(Amounts in thousands)
  
Land
    $ 1,023      $ 1,023  
Buildings
      989        764  
Leasehold improvements
      29,776        23,905  
Equipment
      39,094        36,257  
Furniture, fixtures and office equipment
      8,055        6,312  
Computer hardware and software
      14,468        8,810  
Construction in progress
      6,416        6,707  
Other
      348        56  
  
 
 
     
 
 
  
Total property, plant and equipment
      100,169        83,834  
Less - Accumulated depreciation
      (44,814 )       (35,379 ) 
  
 
 
     
 
 
  
Total property, plant and equipment, net
    $ 55,355      $ 48,455  
  
 
 
     
 
 
  
Depreciation expense totaled $2.8 million and $1.8 million for the three months ended September 30, 2020 and 2019, respectively. Depreciation expenses totaled $7.8 million and $5.2 million for the nine months ended September 30, 2020 and 2019, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
 
    
As of
  
    
September 30,
2020
     
December 31,
2019
  
    
(Amounts in thousands)
  
Employee compensation
    $ 14,652      $ 19,850  
Taxes
      2,759        3,874  
Royalty and license fees
      1,000        123  
Warranties
      737        1,500  
Professional fees
      1,745        1,081  
Deferred revenue
      10,141        5,005  
Other
      1,007        1,898  
  
 
 
     
 
 
  
Total accrued liabilities
    $ 32,041      $ 33,331  
  
 
 
     
 
 
  
 
8.
Convertible Senior Notes
0.375% Convertible Senior Notes due 2024
On July 19, 2019, the Company issued $287.5 million aggregate principal amount of 0.375% Convertible Senior Notes due 2024 (“2019 Notes”), which includes the underwriters’ exercise in full of an option to purchase an additional $37.5 million aggregate principal amount of 2019 Notes (the “Notes Offering”). The net proceeds of the Notes Offering, after deducting underwriting discounts and commissions and other related offering expenses payable by the Company, were approximately $278.5 million.
 
19
The 2019 Notes are senior, unsecured obligations of the Company, and bear interest at a rate of 0.375% per year. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The 2019 Notes will mature on July 15, 2024, unless earlier repurchased or converted in accordance with their terms. The initial conversion rate for the 2019 Notes is 8.6749 shares of the Company’s common stock per $1,000 principal amount of 2019 Notes (which is equivalent to an initial conversion price of approximately $115.28 per share). Prior to the close of business on the business day immediately preceding April 15, 2024, the 2019 Notes will be convertible at the option of the holders of 2019 Notes only upon the satisfaction of specified conditions and during certain periods. Thereafter until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2019 Notes will be convertible at the options of the holders of 2019 Notes at any time regardless of these conditions. Conversion of the 2019 Notes will be settled in cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. The 2019 Notes are not redeemable by the Company prior to maturity.
Holders of 2019 Notes may require the Company to repurchase their 2019 Notes upon the occurrence of a fundamental change prior to maturity at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events, the Company will, under certain circumstances, increase the conversion rate for holders of 2019 Notes who elect to convert their 2019 Notes in connection with such corporate events.
As of September 30, 2020, the conditions allowing holders of the 2019 Notes to convert have not been met and therefore the 2019 Notes are not yet convertible and are recorded as a long-term liability in the Company’s consolidated balance sheet at September 30, 2020. No 2019 Notes were converted by the holders of such notes in the third quarter of 2020. In the event the closing price conditions are met in the fourth quarter of 2020 or a future fiscal quarter, the 2019 Notes will be convertible at a holder’s option during the immediately following fiscal quarter.
The Company accounts for the 2019 Notes as separate liability and equity components. We determined the carrying amount of the liability component as the present value of its cash flows using a discount rate of 4.5% based on comparative convertible transactions for similar companies. The proceeds allocated to the debt conversion feature were $52.1 million. This amount was calculated by deducting the carrying value of the liability component from the principal amount of the 2019 Notes as a whole. The difference represents a debt discount that is amortized to interest expense on the Company’s consolidated statement of comprehensive income (loss) over the term of the 2019 Notes using the effective interest rate method. The Company will assess the equity classification of the cash conversion feature quarterly, and it is not
re-measured
as long as it continues to meet the conditions for equity classification.
The Company allocates transaction costs related to the issuance of the 2019 Notes to the liability and equity components using the same proportions as the initial carrying value of the 2019 Notes. Transaction costs related to the liability component were $7.4 million and are being amortized to interest expense using the effective interest method over the term of the 2019 Notes. Transaction costs attributable to the equity component were $1.6 million and are netted with the equity component of the 2019 Notes in stockholders’ equity of the Company’s consolidated balance sheet at September 30, 2020.
The net carrying value of the liability component of the 2019 Notes is as follows:
 
    
As of
  
    
September 30,
2020
     
December 31,
2019
  
    
(Amounts in thousands)
  
0.375% convertible senior notes due 2024:
      
Principal amount
    $ 287,500      $ 287,500  
Less: unamortized debt discount
      (40,764 )       (47,921 ) 
Less: unamortized debt issuance costs
      (5,794 )       (6,812 ) 
  
 
 
     
 
 
  
Total debt
      240,942        232,767  
Less: current portion
      —          —    
  
 
 
     
 
 
  
Net carrying amount
    $ 240,942      $ 232,767  
  
 
 
     
 
 
  
Interest expense recognized on the 2019 Notes for the three months ended September 30, 2020 was $0.3 million, $2.4 million and $0.3 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. Interest expense recognized on the 2019 Notes for the nine months ended September 30, 2020 was $0.8 million, $7.2 million and $1.0 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 2019 Notes is 5.1%, which included the interest on the
 
20
2019 Notes, amortization of the debt discount and debt issuance costs. As of September 30, 2020, the carrying value of the 2019 Notes was $240.9 million and the fair value of the principal was $416.0 million. The fair value of the 2019 Notes was determined based on the most recent trade activity of the 2019 Notes as of September 30, 2020.
Conversion of the 2.125% Convertible Senior Notes due 2021
The Company utilized a portion of the proceeds from the issuance of the 2019 Notes to settle its outstanding 2.125% Convertible Senior Notes due 2021 (the “2016 Notes”) during the third quarter of 2019. On July 16, 2019, the Company entered into separate privately negotiated agreements with certain holders of the 2016 Notes to exchange an aggregate of $92.0 million principal aggregate amount of the 2016 Notes for shares of the Company’s common stock, together with cash, in private placement transactions (the “Note Exchanges”). On July 19, 2019 and July 22, 2019, the Company used approximately $92.3 million (including $0.3 million of accrued interest) and 1,850,155 shares of its common stock valued at $161.0 million to settle the Note Exchanges for total consideration of $253.3 million, of which $163.6 million was allocated to reacquiring the equity component of the 2016 Notes. The Company allocated the consideration transferred to the liability and equity components using the same proportions as the initial carrying value of the 2016 Notes. The transaction resulted in a loss on extinguishment of debt of $4.6 million in the Company’s consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2019.
On July 19, 2019, the Company issued a Notice of Redemption in respect of the 2016 Notes, which provided that, on September 23, 2019, the Company would redeem all 2016 Notes that had not been converted, repurchased or exchanged prior to such date at a redemption price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest. On September 23, 2019, the Company used $23.0 million and 466,045 shares of its common stock valued at $37.8 million to settle the remaining 2016 Notes for a total of $60.8 million, of which $38.3 million was allocated to reacquiring the equity component of the 2016 Notes. This transaction resulted in a loss on extinguishment of debt of $1.1 million recorded on the Company’s consolidated statements of comprehensive income (loss). The total loss for the three and nine months ended September 30, 2019 of $5.7 million represents the difference between the fair value of the liability component of the 2016 Notes and its related carrying value immediately before the exchange.
The fair value of the liability component was calculated using a discounted cash flow technique with an effective interest rate of 3.9%, representing the estimated nonconvertible debt borrowing rate with a maturity as of the measurement date consistent with the 2016 Notes maturity date of June 1, 2021. In addition, in accordance with this guidance, a portion of the fair value of the consideration transferred is allocated to the reacquisition of the equity component, which is the difference between the fair value of the consideration transferred and the fair value of the liability component immediately before the exchange. As a result, on a gross basis, $200.1 million was allocated to the reacquisition of the equity component of the original instrument, which is recorded net of deferred taxes within additional
paid-in
capital on the Company’s consolidated balance sheet.
The cash conversion feature of the 2016 Notes required bifurcation from the 2016 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 2016 Notes, which resulted in a fair value of the liability component of $96.3 million upon issuance, calculated as the present value of implied future payments based on the $115.0 million aggregate principal amount. The equity component of the 2016 Notes was recognized as a debt discount, recorded in additional
paid-in
capital, and represents the difference between the aggregate principal of the 2016 Notes and the fair value of the 2016 Notes without conversion option on their issuance date. The debt discount was amortized to interest expense using the effective interest method over five years, or the life of the 2016 Notes.
Interest expense recognized on the 2016 Notes for the three months ended September 30, 2019 was $0.1 million, $0.5 million and $0.1 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. Interest expense recognized on the 2016 Notes for the nine months ended September 30, 2019 was $1.3 million, $2.4 million and $0.4 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 2016 Notes was 6.6%, which included the interest on the 2016 Notes, amortization of the debt discount and debt issuance costs.
 
21
9.
Stockholders’ Equity
Public Offerings of Common Stock
On July 19, 2019, the Company completed a public offering in which 1,587,000 shares of its common stock, including the underwriters’ exercise in full of an option to purchase an additional 207,000 shares, were sold to the public at a price of $87.00 per share (the “Stock Offering”). The net proceeds of the Stock Offering, after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company, were approximately $131.1 million.
On May 3, 2019, the Company completed a public offering in which 3,144,531 shares of its common stock, which includes the underwriters’ exercise in full of an option to purchase up to an additional 410,156 shares, were sold to the public at a price of $64.00 per share. The total proceeds received by the Company from this offering, net of underwriting discounts and commissions and other estimated offering expenses payable by the Company, totaled approximately $189.6 million.
Stock Option and Incentive Plans
At the Company’s 2018 annual meeting of shareholders held on May 16, 2018, the Company’s shareholders approved the 2018 Stock Option and Incentive Plan (the “2018 Plan”). Under the 2018 Plan the number of shares of the Company’s common stock that are reserved and available for issuance is 2,778,000 plus the number of shares of common stock available for issuance under the Company’s Amended and Restated 2012 Stock Option and Incentive Plan (the “2012 Plan”). The shares of common stock underlying any awards under the 2018 Plan and 2012 Plan (together, the “Plans”) that are forfeited, canceled or otherwise terminated (other than by exercise) shall be added back to the shares of stock available for issuance under the 2018 Plan. At September 30, 2020, 2,325,314 shares were available for future grant under the 2018 Plan.
Stock-Based Compensation
For the three months ended September 30, 2020 and 2019, th
e
 Company recorded stock-based compensation expense of $4.2 million and $3.2 million, respectively, for share-based awards granted under the Plans. For the nine months ended September 30, 2020 and 2019, the Company recorded stock-based compensation expense of $12.5 million and $9.5 million, respectively. The following table presents stock-based compensation expense in the Company’s consolidated statements of comprehensive income (loss):
 
    
Three Months Ended

September 30,
     
Nine Months Ended

September 30,
  
    
2020
     
2019
     
2020
     
2019
  
           
(Amounts in thousands)
         
Cost of product revenue
    $ 563      $ 375      $ 1,421      $ 992  
Research and development
      326        351        1,092        992  
Selling, general and administrative
      3,336        2,449        9,979        7,475  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total stock-based compensation
    $ 4,225      $ 3,175      $ 12,492      $ 9,459  
  
 
 
     
 
 
     
 
 
     
 
 
  
The 2018 Plan allows for the granting of incentive and nonqualified options to purchase shares of common stock, restricted stock and other equity awards. Employee grants 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. In the first quarter of 2018, to create a longer-term retention incentive, the Company’s Compensation Committee granted long-term incentive compensation awards to its Chief Executive Officer consisting of both stock options and restricted stock units (“RSUs”) that are subject to time-based vesting over nine years. Options granted under the Plans have a maximum term of ten years from the date of grant and generally, the exercise price of the stock options equals the fair market value of the Company’s common stock on the date of grant. At September 30, 2020, options to purchase 723,914 shares and 675,567 stock units were outstanding under the Plans.
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 RSUs. The Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. The Company recognizes expense on awards with service-based vesting over the employee’s requisite service period on a straight-line basis. The Company issues performance stock units to certain employees that are tied to company and/or individual performance metrics and recognizes expense on performance-based awards over the vesting period based on the probability that the performance metrics will be achieved. The Company recognizes stock-based compensation expense for options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted for estimated forfeitures.
 
22
Information regarding option activity for the nine months ended September 30, 2020 under the Plans is summarized below:
 
    
Shares
     
Weighted

average

exercise

price
     
Weighted-
Average
Remaining
Contractual
Term

(in Years)
     
Aggregate
Intrinsic Value

(in Thousands)
  
Options outstanding at December 31, 2019
      957,559      $ 30.81        
Granted
      69,698      $ 104.61        
Exercised
      (303,343 )     $ 23.37        
Forfeited/expired/cancelled
      —        $ —          
  
 
 
           
Options outstanding at September 30, 2020
      723,914      $ 41.03        7.02      $ 77,102  
  
 
 
           
Options exercisable at September 30, 2020
      339,191      $ 31.00        6.05      $ 39,528  
  
 
 
           
Vested and expected to vest at September 30, 2020
(1)
      693,689           6.98      $ 74,178  
  
 
 
           
 
  (1)
Represents the number of vested options as of September 30, 2020 plus the number of unvested options expected to vest as of September 30, 2020 based on the unvested outstanding options at September 30, 2020 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 September 30, 2020, the last business day of the third quarter of 2020, of $147.54 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 September 30, 2020. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2020 and 2019 was $30.7 million and $5.2 million, respectively.
The weighted average grant date fair value of options granted during the nine months ended September 30, 2020 and 2019 was $48.13 and $30.07, respectively. The total fair value of stock options that vested during the nine months ended September 30, 2020 and 2019 was $2.6 million and $2.9 million, respectively.
The fair value of stock units is calculated using the closing price of the Company’s common stock on the date of grant. Information regarding stock unit activity, which includes activity for restricted stock units and performance stock units, for the nine months ended September 30, 2020 under the Plans is summarized below:
 
    
Shares
     
Weighted-
Average
Remaining
Contractual
Term

(in Years)
     
Aggregate
Intrinsic Value

(in Thousands)
  
Unvested at December 31, 2019
      734,984        
Awarded
      187,942        
Vested
      (225,204 )       
Forfeited/expired/cancelled
      (22,155 )       
  
 
 
        
Unvested at September 30, 2020
      675,567        3.39      $ 99,673  
  
 
 
        
Vested and expected to vest at September 30, 2020
(1)
      650,436        3.20      $ 95,965  
  
 
 
        
 
  (1)
Represents the number of vested stock units as of September 30, 2020 plus the number of unvested stock units expected to vest as of September 30, 2020 based on the unvested outstanding stock units at September 30, 2020 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 September 30, 2020, the last business day of the third quarter of 2020, of $147.54 per share, as stock units do not have an exercise price) that would have been received by the stock unit holders had all holders exercised on September 30, 2020. The aggregate intrinsic value of stock units vested during the nine months ended September 30, 2020 and 2019 was $25.0 million and $15.5 million, respectively.
 
23
The weighted average grant date fair value of stock units vested during the nine months ended September 30, 2020 and 2019 was $66.00 and $33.46, respectively. The total fair value of stock units that vested during the nine months ended September 30, 2020 and 2019 was $9.8 million and $7.6 million, respectively.
As of September 30, 2020, there was $47.0 million of total unrecognized compensation cost related to unvested share-based awards. This cost is expected to be recognized over a weighted average remaining requisite service period of 3.61 years. The Company expects 1,833,239 unvested options and stock units to vest over the next five years.
 
10.
Commitments and Contingencies
Licensing and Research Agreements
The Company licenses certain technologies that are, or may be, incorporated into its technology under several agreements and also has entered into several clinical research agreements which require the Company to fund certain research projects. Generally, the license agreements require the Company to pay annual maintenance fees and royalties on product sales once a product has been established using the technologies. Research and development expenses associated with license agreements were immaterial amounts for the three and nine months ended September 30, 2020 and 2019.
In June 2018, the Company secured an agreement with Navigo
 Proteins
 for the exclusive
co-development
of multiple affinity ligands for which Repligen holds commercialization rights. The Company is manufacturing and has agreed to supply the first of these ligands,
NGL-Impact
®
, exclusively to Purolite Life Sciences (“Purolite”), who will pair the Company’s high-performance ligand with Purolite’s agarose jetting base bead technology used in their Jetted A50 Protein A resin product. The Company also signed a long-term supply agreement with Purolite for
NGL-Impact
and other potential additional affinity ligands that may advance from the Company’s Navigo collaboration.
 
In September 2020, Repligen and Navigo Proteins successfully completed co-development of an affinity ligand targeting the SARS-CoV-2 spike protein, to be utilized in the purification of COVID-19 vaccines. The Company has proceeded with scaling up and manufacturing this ligand and the development and validation of the related affinity chromatography resin, which will be marketed by Repligen.
 
The Navigo and Purolite agreements are supportive of the Company’s strategy to secure and reinforce the Company’s proteins business. The Company made royalty payments to Navigo of $0.2 million and $0.4 million during the three and nine months ended September 30, 2020
, respectively
.
 
11.
Accumulated Other Comprehensive Loss
The following shows the changes in the components of accumulated other comprehensive loss for the nine months ended September 30, 2020 which consisted of only foreign currency translation adjustments for the periods shown (amounts in thousands):
 
    
Foreign
  
    
Currency
  
    
Translation
  
    
Adjustment
  
Balance as of December 31, 2019
    $ (15,027 ) 
Other comprehensive income
      5,304  
  
 
 
  
Balance as of September 30, 2020
    $ (9,723 ) 
  
 
 
  
 
12.
Income Taxes
The Company’s effective tax rate for the three and nine months ended
 September
 30, 2020 was 18.0% and 9.5%, compared to 0.7% and 18.3% for the corresponding periods in the prior year. The effective tax rates for the three and nine months ended
September
 30, 2020 and 2019 were lower than the U.S. statutory rate of 21% primarily due to windfall benefits on stock option exercises and the vesting of stock units.
The Company is subject to a territorial tax system under the Tax Cuts and Jobs Act (“TCJA”) enacted in December 2017, in which the Company is required to provide for tax on Global Intangible
Low-Taxed
Income (“GILTI”) earned by certain foreign subsidiaries. The Company has adopted an accounting policy to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.
On March 27, 2020, President Trump signed the $2.2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act, the third congressional bill to address
COVID-19,
provides for loans and other benefits to businesses, expanded unemployment insurance, direct payments to those with middle-income and below wages, new appropriations funding for healthcare and other priorities, and tax changes, including deferrals of employer payroll tax
 
24
liabilities, coupled with an employee retention tax credit and rollbacks of TCJA limitations on net operating losses (“NOLs”) and the Section 163(j) business interest limitation and a TCJA technical correction on qualified improvement property. The Company evaluated the provisions of the CARES Act and no provision had a material effect on the Company’s financial position or results of operations at September 30, 2020 and the three and nine months then ended.
The Company’s tax returns are subject to examination by federal, state and international tax authorities for the following periods:
 
Jurisdiction
   
Fiscal Years
Subject to
Examination
  
United States - federal and state
     
2016-2019
  
Sweden
      2013-2019  
Germany
      2019  
Netherlands
      2013-2019  
 
13.
Earnings Per Share
The Company reports earnings per share in accordance with ASC 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, performance stock units 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. In periods when the Company has a net loss, stock awards are excluded from the calculation of earnings per share as their inclusion would have an antidilutive effect.
Basic and diluted weighted average shares outstanding were as follows:
 
    
Three Months Ended

September 30,
     
Nine Months Ended

September 30,
  
    
2020
     
2019
     
2020
     
2019
  
    
(Amounts in thousands, except per share data)
  
Net income
    $ 14,552      $ 1,659      $ 40,228      $ 17,807  
  
 
 
     
 
 
     
 
 
     
 
 
  
Weighted average shares used in computing net income per share -
 
diluted
      52,545        50,852        52,341        47,087  
Effect of dilutive shares:
            
Stock options and restricted stock awards
      916        957        951        843  
Dilutive effect of unvested performance stock units
      8        —          8        —    
  
 
 
     
 
 
     
 
 
     
 
 
  
Dilutive potential common shares
      924        957        959        843  
  
 
 
     
 
 
     
 
 
     
 
 
  
Weighted average shares used in computing net income per share - diluted
      53,469        51,809        53,300        47,930  
  
 
 
     
 
 
     
 
 
     
 
 
  
Earnings per share:
            
Basic
    $ 0.28      $ 0.03      $ 0.77      $ 0.38  
  
 
 
     
 
 
     
 
 
     
 
 
  
Diluted
    $ 0.27      $ 0.03      $ 0.75      $ 0.37  
  
 
 
     
 
 
     
 
 
     
 
 
  
At September 30, 2020, there were outstanding options to purchase 723,914 shares of the Company’s common stock at a weighted average exercise price of $41.03 per share and 675,567 shares of common stock issuable upon the vesting of stock units, which include RSUs and performance stock units. For the three and nine months ended September 30, 2020, 60,202 and 117,160 shares of the Company’s common stock were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and were therefore anti-dilutive.
At September 30, 2019, there were outstanding options to purchase 959,916 shares of the Company’s common stock at a weighted average exercise price of $30.44 per share and 740,213 shares issuable upon the vesting of stock units. For the three and nine months ended September 30, 2019, 47,705 and 85,503 shares of the Company’s common stock were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and were therefore anti-dilutive.
 
25
As provided by the terms of the indenture underlying the
2016
Notes, the Company had a choice to settl
e
 the conversion obligation for the
2016
Notes in cash, shares or any combination of the two. During the third quarter of
2019
, the Company settled the remaining
2016
Notes for a total aggregate principal of $
115.0
 million and
2,316,200
shares of its common stock. As of March 
31
,
2019
, the par value of the
2016
Notes is not included in the calculation of diluted earnings per share, but the dilutive effect of the conversion premium is considered in the calculation of diluted earnings per share using the treasury stock method. The dilutive impact of the
2016
Notes was based on the difference between the Company’s current period average stock price and the conversion price of the
2016
Notes, provided there was a premium.
In July 2019, the Company issued $287.5 million aggregate principal amount of the 2019 Notes. As provided by the terms of the indenture underlying the 2019 Notes, conversion of the 2019 Notes will be settled in cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. As of
September
 30, 2020, the 2019 Notes were not convertible. The Company currently intends to settle the par value of the 2019 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 the 2019 Notes. Accordingly, the par value of the 2019 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 dilutive impact of the 2019 Notes is based on the difference between the Company’s current period average stock price and the conversion price of the 2019 Notes, provided there is a premium. Pursuant to this accounting standard, there is no dilution from the accreted principal of the 2019 Notes for the three and nine months ended September 30, 2020.
 
14.
Related Party Transactions
Certain facilities leased by Spectrum are owned by Roy Eddleman, the former owner of Spectrum. As of September 30, 2020, Mr. Eddleman owned greater than 5% of the Company’s outstanding shares and the Company considers him to be a related party. The lease amounts paid to this shareholder prior to the public offering were negotiated in connection with the Spectrum Acquisition. The Company incurred rent expense totaling $0.1 million and $0.5 million for the three and nine months ended September 30, 2020 related to these leases.
 
15.
Segment Reporting
The Company views its operations, makes decisions regarding how to allocate resources and manages its business as one reportable segment and one reporting unit. As a result, the financial information disclosed herein represents all of the material financial information related to the Company.
The following table represents the Company’s total revenue by geographic area (based on the location of the customer):
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
    
2020
    
2019
    
2020
    
2019
  
Revenue by customers’ geographic locations:
         
North America
      50 %      54 %      48 %      51 % 
Europe
      36 %      33 %      38 %      37 % 
APAC
/Other
      14 %      13 %      14 %      12 % 
  
 
 
    
 
 
    
 
 
    
 
 
  
Total revenue
      100 %      100 %      100 %      100 % 
  
 
 
    
 
 
    
 
 
    
 
 
  
 
 
Concentrations of Credit Risk and Significant Customers
Financial instruments that subject the Company to significant concentrations of credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivable. Per the Company’s investment policy, cash equivalents and marketable securities are invested in financial instruments with high credit ratings and credit exposure to any one issue, issuer (with the exception of U.S. treasury obligations) and type of instrument is limited. At September 30, 2020 and December 31, 2019, the Company had no investments associated with foreign exchange contracts, options contracts or other foreign hedging arrangements.
Concentration of credit risk with respect to accounts receivable is limited to customers to whom the Company makes significant sales. While a reserve for the potential
write-off
of accounts receivable is maintained, the Company has not written off any significant accounts to date. To control credit risk, the Company performs regular credit evaluations of its customers’ financial condition.
 
26
Revenue from significant customers that represent 10% or more of the Company’s total revenue is as follows:
 
    
Three Months Ended

September 30,
    
Nine Months Ended

September 30,
  
    
2020
     
2019
    
2020
    
2019
  
Cytiva (formerly GE Healthcare)
      N/A        N/A       N/A       12 % 
MilliporeSigma
      N/A        14 %      11 %      14 % 
There were no accounts receivable balances as of September 30, 2020 representing 10% or more of the Company’s total trade accounts receivable and royalties and other receivable balances. As of December 31, 2019, the accounts receivable balance with Cytiva (formerly GE Healthcare) represented 18% of the Company’s total trade accounts receivable and royalties and other receivables balances.
 
16.
Subsequent Events
Acquisition of
Non-Metallic
Solutions, Inc.
On October 15, 2020, the Company entered into a Stock Purchase Agreement with
Non-Metallic
Solutions, Inc. (“NMS”), a Massachusetts corporation, and William Malloneé and Derek Masser, the legal and beneficial owners of NMS, to purchase NMS, which transaction subsequently closed on October 20, 2020 (the “NMS Acquisition”).
NMS, which is headquartered in Auburn, Massachusetts, is a manufacturer of fabricated plastics, custom containers, and related assemblies and components used in the manufacturing of biologic drugs. NMS’s products will complement and expand Repligen’s
single-use
product offerings.
The Company will account for the NMS Acquisition as a purchase of a business under the acquisition method of accounting and has engaged a third-party valuation firm to assist with the valuation of the business acquired. The estimated purchase price allocation for the NMS Acquisition will be included in the Annual Report on Form
10-K
for the period ended December 31, 2020. As disclosed in the Quarterly Report on Form 10-Q for the period ended June 30, 2020, the Company voluntarily adopted the amendments to financial disclosure requirements around the significance tests in the “significant subsidiaries” definition in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2. As a result, the Company determined that NMS is not a significant subsidiary and therefore no separate financial statements are required.
Proposed Acquisition of ARTeSYN Biosolutions
On October 27, 2020, the Company executed an Equity and Asset Purchase Agreement (“Purchase Agreement”) with ARTeSYN Biosolutions Holdings Ireland Limited, a company organized under the laws of Ireland (“ARTeSYN”), Third Creek Holdings, LLC, a Nevada limited liability company, Alphinity, LLC, a Nevada limited liability company (“Alphinity”, and together with Third Creek Holdings, LLC the “Sellers”), and Michael Gagne, solely in his capacity as the representative of the Sellers, pursuant to which the Company will acquire (i) all of the outstanding equity securities of ARTeSYN and (ii) certain assets from Alphinity related to the business of ARTeSYN (collectively, the “ARTeSYN Acquisition”) for approximately $200 million, comprised of approximately $130 million in cash to Third Creek and Alphinity and approximately $70 million in Repligen common stock to Third Creek. Subject to certain closing conditions, including the expiration and termination of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, the transaction is expected to close in the fourth quarter of 2020.
ARTeSYN, headquartered in Waterford, Ireland, is a biosystems innovator that has had success with its single-use chromatography and filtration systems, which are considered the gold standard in downstream bioprocessing due to their performance, automation and low hold-up volumes. The proposed ARTeSYN Acquisition, combined with the recent acquisitions of EMT and NMS, further establishes Repligen as a premier player in single-use systems and associated integrated flow path assemblies. ARTeSYN has established downstream processing leadership with a suite of state of the art single-use systems for chromatography, filtration, continuous manufacturing and media/buffer prep workflows. In addition, the Company has integrated unique flow path assemblies utilizing EMT’s silicone extrusion and molding technology, to deliver highly differentiated, low hold-up volume systems that minimize product loss during processing.
The Company will account for the ARTeSYN Acquisition as a purchase of a business under ASC 805. Under the acquisition method of accounting, the net assets of ARTeSYN will be recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company. The Company has engaged a third-party valuation firm to assist with the valuation of the business acquired, which is expected to be completed in the fourth quarter of 2020. The preparation of the valuation requires the use of significant assumptions and estimates. Critical estimates will include, but are not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. Actual results may differ from these estimates.
 
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Repligen and its subsidiaries, collectively doing business as Repligen Corporation (“Repligen”, “we”, “our”, or “the Company”) is a global life sciences company that develops and commercializes highly innovated bioprocessing technologies and systems that increase efficiencies and flexibility in the process of manufacturing biological drugs.
As the overall market for biologics continues to grow and expand, our customers – primarily large biopharmaceutical companies and contract development and manufacturing organizations – face critical production cost, capacity, quality and time pressures. Built to address these concerns, our products are helping to set new standards for the way biologics are manufactured. We are committed to inspiring advances in bioprocessing as a trusted partner in the production of critical biologic drugs – including monoclonal antibodies (“mAb”), recombinant proteins, vaccines and gene therapies – that are improving human health worldwide.
We currently operate as one bioprocessing business, with a comprehensive suite of products to serve both upstream and downstream processes in biological drug manufacturing. Building on over 35 years of industry expertise, we have developed a broad and diversified product portfolio that reflects our passion for innovation and the customer-first culture that drives our entire organization. We continue to capitalize on opportunities to maximize the value of our product platform through both organic growth initiatives (internal innovation and commercial leverage) and targeted acquisitions.
Our Products
Our bioprocessing business is comprised of four main franchises, three of which we sell directly to
end-users
(Chromatography, Filtration and Process Analytics) and one that we sell primarily through supply agreements (Proteins).
Direct-to-Customer
Products
Since 2012, we have significantly expanded our
direct-to-customer
presence through our Chromatography, Filtration and Process Analytics franchises, each of which includes novel and differentiated technologies. We have diversified and grown our
direct-to-customer
product offering through internal innovation and through strategic, accretive acquisitions of assets or businesses that leverage existing product lines and/or expand our customer and geographic scope.
To support our sales growth goals for these products, we make ongoing investments in our commercial organization, our research and development (“R&D”) team and our manufacturing capacity. Our commercial and R&D teams work together to develop and launch new products and applications that address specific biomanufacturing challenges, and to build new markets for acquired technologies. We have seven key manufacturing sites across the United States, Sweden and Germany, with additional capacity being added by the end of 2021 in the Netherlands. We regularly evaluate and invest in capacity as needed to ensure timely deliveries and to stay ahead of increased customer demand for our products.
A substantial piece of our revenue comes from consumable and/or single-campaign
(“single-use”)
products as compared to associated equipment. The customization, scalability and
plug-and-play
convenience of consumable and/or
single-use
products, and in many cases the closed nature of our technologies, make them ideal for use in biologics manufacturing processes where contamination risk is a critical concern of our customers.
Chromatography
Our Chromatography franchise includes a number of products used in downstream purification, development, manufacturing and quality control of biological drugs. The main driver of growth in this portfolio is our OPUS
®
pre-packed
column product line.
Additional chromatography products include our affinity capture resins, such as CaptivA
®
Protein A resins, that are used in a small number of commercial drug processes and our ELISA test kits, used by quality control departments to detect and measure the presence of leached Protein A and/or growth factor in the final product.
OPUS
Pre-Packed
Columns
Our Chromatography franchise features a wide range of OPUS columns, which we deliver to our customers sealed and
pre-packed
with their choice of resin. These are
single-use
or
multiple-use
disposable columns that replace the use of customer-packed glass columns used in downstream purification processes. By designing OPUS columns to be a technologically advanced and flexible option for the purification of biologics from process development through clinical and commercial-scale manufacturing, Repligen has become a leader in the
pre-packed
column (“PPC”) market. Our biomanufacturing customers value the significant cost savings that OPUS columns deliver by reducing set up time, labor, equipment and facility costs – in addition to delivering product consistency and “plug and play” convenience.
 
28
We launched our first production-scale OPUS columns in 2012 and have since added larger diameter options that scale up to use with 2,000 liter bioreactors. Our OPUS 80R column is the largest available PPC on the market for use in late-stage clinical or commercial purification processes. We have also introduced next-generation features such as a resin recovery port on our larger columns, which allows our customers to remove and reuse the recovered resin in other applications. We believe the OPUS
5-80R
product line is the most flexible and platformable PPC product offered in the marketplace today, and is serving the purification needs of customers manufacturing monoclonal antibodies (“mAb”) and other biologics such as vaccines and cell and gene therapies (“C&GT”).
In addition to our larger scale OPUS columns, our portfolio includes our smaller-scale OPUS columns, including specifically RoboColumn
®
, MiniChrom
™
and ValiChrom
™
columns for process development and validation. These columns are used in high-throughput process development screening, viral clearance validation studies and scale down validation of chromatography processes.
We maintain customer-facing centers in both the United States and Europe for OPUS columns, and offer our customers an unmatched ability to pack any of over 100 resins in our OPUS
5-80R
range and any of over 300 resin choices in our small-scale OPUS columns.
Other Chromatography
Our Chromatography portfolio also includes ELISA kits, which are analytical test kits to quantitate the proteins and growth factors, and chromatography resins, including our CaptivA brand.
Filtration
XCell ATF
®
Cell Retention Systems
Our Filtration products offer a number of advantages to manufacturers of biologic drugs and are used in development, clinical and commercial-scale production. Our XCell Alternating Tangential Flow (“ATF”) systems are used primarily in upstream perfusion (continuous) cell culture processing.
XCell ATF is a cell retention technology. The system is comprised of an advanced hollow fiber (“HF”) filtration device, a low shear pump and a controller. The XCell ATF system is connected to a bioreactor and enables the cell culture to be run continuously, with cells being retained in the bioreactor, fresh nutrients (cell culture media) being fed into the reactor continuously and clarified biological product and cell waste being removed continuously. The cells are maintained in a consistent nutrient-rich environment and can reach cell densities
two-
and three-times higher than those achieved by standard
fed-batch
culture. By continuously removing waste products from the fermenter, the XCell ATF systems routinely increases cell densities to
two-
or three-times the levels achieved by standard
fed-batch
culture. As a result, product yield is increased, which improves facility utilization and can reduce the size of a bioreactor required to manufacture a given volume of biologic drug product. XCell ATF systems are available in a wide range of sizes that can easily scale from laboratory use through full production with bioreactors as large as 5,000 liters.
Through internal innovation, we developed and launched
single-use
formats of the original stainless steel XCell ATF devices to address increasing industry demand for
single-use
sterile systems with
“plug-and-play”
technology. The XCell ATF device is now available to customers in both its original configuration (steel housing and
single-use
filters) in all sizes (2, 4, 6 and 10), and/or as a
single-use
device (disposable housing/filter combination) in most sizes (2, 6, and 10). The availability of XCell ATF technology in a
single-use
format eliminates the time intensive workflow associated with autoclaving, leading to an 80% reduction in implementation speed. The
single-use
format also enables our customers to accelerate evaluations of the product with a lower initial overall cost of ownership.
In September 2018, we entered into a collaboration agreement with industry leader Sartorius Stedim Biotech (“SSB”) to integrate our XCell ATF controller technology into SSB’s BIOSTAT
®
STR large-scale,
single-use
bioreactors, to create novel perfusion-enabled bioreactors.
TangenX
®
Flat Sheet Cassettes
In December 2016, we acquired TangenX
™
Technology Corporation (“TangenX”), balancing our upstream XCell ATF systems with a portfolio of flat-sheet tangential flow filtration (“TFF”) cassettes used in downstream biologic drug concentration and formulation processes. The TangenX product portfolio includes our
single-use
SIUS
™
brand, providing customers with a high-performance, cost saving alternative to reusable TFF cassettes.
 
29
TFF is a rapid and efficient method for the concentration and formulation of biomolecules that is widely used in many applications in biopharmaceutical development and manufacturing. SIUS cassettes are the only purpose built
single-use
TFF cassettes on the market. The cassette features a high performing membrane and unique cartridge construction that enables a lower price point. Each disposable cassette is delivered
pre-sanitized
and ready to be equilibrated and used for tangential flow, ultrafiltration and diafiltration applications. Use of SIUS TFF cassettes eliminates
non-value-added
steps of cleaning, testing between uses, storage and flushing required in reusable TFF products, providing cost and time savings. The cassettes are interchangeable with filter hardware from multiple manufacturers, simplifying customer trial and adoption of SIUS products.
Spectrum
®
Hollow Fibers
We acquired Spectrum Life Sciences LLC (“Spectrum”) and its subsidiaries in August 2017 to strengthen our filtration business with the addition of a leading portfolio of HF filtration solutions, including fully integrated KrosFlo