MARAVAI LIFESCIENCES HOLDINGS, INC. You should read the following discussion and analysis of financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSecurities and Exchange Commission . This discussion and analysis reflects our historical results of operations and financial position, and contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Please also see the section titled "Special Note Regarding Forward-Looking Statements." We were incorporated inAugust 2020 and, pursuant to the Organizational Transactions described in Note 1 to our condensed consolidated financial statements, became a holding company whose principal asset is a controlling equity interest inTopco LLC . As the sole managing member ofTopco LLC , we operate and control the business and affairs ofTopco LLC and its subsidiaries. Accordingly, we consolidateTopco LLC in our consolidated financial statements and report a non-controlling interest related to the portion ofTopco LLC not owned by us. Because the Organizational Transactions were considered transactions between entities under common control, the consolidated financial statements for periods prior to the Organizational Transactions and the initial public offering have been adjusted to combine the previously separate entities for presentation purposes. Unless otherwise noted or the context otherwise requires, references in this Quarterly Report on Form 10-Q to "we," "us" or "our" refer toMaravai LifeSciences Holdings, Inc. and its subsidiaries. Overview We are a leading life sciences company providing critical products to enable the development of drug therapies, diagnostics, novel vaccines and support research on human diseases. Our customers include the top global biopharmaceutical companies ranked by research and development expenditures according to industry consultants, and many other emerging biopharmaceutical and life sciences research companies, as well as leading academic research institutions and in vitro diagnostics companies. Our products address the key phases of biopharmaceutical development and include complex nucleic acids for diagnostic and therapeutic applications, antibody-based products to detect impurities during the production of biopharmaceutical products, and products to detect the expression of proteins in tissues of various species. We have and will continue to build a transformative life sciences products company by acquiring businesses and accelerating their growth through capital infusions and industry expertise. Biomedical innovation is dependent on a reliable supply of reagents in the fields of nucleic acid production, biologics safety testing and protein labeling. From inventive startups to the world's leading biopharmaceutical, vaccine, diagnostics and gene and cell therapy companies, these customers turn to us to solve their complex discovery challenges and help them streamline and scale their supply chain needs beginning from research and development through clinical trials to commercialization. Our primary customers are biopharmaceutical companies who are pursuing novel research and product development programs. Our customers also include a range of government, academic and biotechnology institutions. As ofJune 30, 2022 , we employed a team of over 550 employees, approximately 18% of whom have advanced degrees. We primarily utilize a direct sales model for our sales to our customers inNorth America . Our international sales, primarily inEurope andAsia Pacific , are sold through a combination of third-party distributors as well as via a direct sales model. The percentage of our total revenue derived from customers inNorth America was 36.7% and 36.2% for the three and six months endedJune 30, 2022 , respectively. The percentage of our total revenue derived from customers inNorth America was 35.1% and 42.3% for the three and six months endedJune 30, 2021 , respectively. We generated revenue of$242.7 million and$487.0 million for the three and six months endedJune 30, 2022 , respectively, and$217.8 million and$366.0 million for the three and six months endedJune 30, 2021 , respectively. Total revenue by segment was$225.2 million in Nucleic Acid Production and$17.5 million in Biologics Safety Testing for the three months endedJune 30, 2022 . Total revenue by segment was$192.5 million in Nucleic Acid Production,$18.2 million in Biologics Safety Testing and$7.0 million in Protein Detection for the three months endedJune 30, 2021 . We divested our Protein Detection segment inSeptember 2021 , and since then operate two business segments only, Nucleic Acid Production and Biologics Safety Testing. Total revenue by segment was$448.9 million in Nucleic Acid Production and$38.1 million in Biologics Safety Testing for the six months endedJune 30, 2022 . Total revenue by segment was$316.5 million in Nucleic Acid Production,$35.9 million in Biologics Safety Testing and$13.7 million in Protein Detection for the six months endedJune 30, 2021 . 35
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We focus a substantial portion of our resources supporting our core business segments. We are actively pursuing opportunities to expand our customer base both domestically and internationally by fostering strong relationships with both existing and new customers and distributors. Our management team has experience working with biopharmaceutical, vaccine, diagnostics and gene and cell therapy companies as well as academic and research scientists. We also intend to continue making investments in our overall infrastructure and business segments to support our growth. We incurred aggregate selling, general and administrative expenses of$28.1 million and$61.3 million for the three and six months endedJune 30, 2022 , respectively, and$24.5 million and$48.0 million for the three and six months endedJune 30, 2021 , respectively. Our research and development efforts are geared towards supporting our customers' needs. We incurred research and development expenses of$4.3 million and$8.0 million for the three and six months endedJune 30, 2022 , respectively, and$1.9 million and$4.1 million for the three and six months endedJune 30, 2021 , respectively. We intend to continue to invest in research and development and new products and technologies to support our customers' needs for the foreseeable future. Recent Developments Acquisition InJanuary 2022 , we completed the acquisition ofMyChem, LLC ("MyChem"), a privately-heldSan Diego, California -based provider of ultra-pure nucleotides to customers in the diagnostics, pharma, genomics and research markets, for a total purchase consideration of$257.8 million . As a result of the acquisition, we own all the outstanding interest in MyChem. Our consolidated results of operations for the three and six months endedJune 30, 2022 include the operating results of MyChem from the acquisition date. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. Government Assistance InMay 2022 , TriLink entered into a cooperative agreement ("Cooperative Agreement") with theU.S. Department of Defense , as represented by theJoint Program Executive Office for Chemical , Biological, Radiological and Nuclear Defense on behalf of theBiomedical Advanced Research and Development Authority ("BARDA"), within theU.S. Department of Health and Human Services , to advance the development of domestic manufacturing capabilities and to expand TriLink's domestic production capacity for products critical to the development and manufacture of mRNA vaccines and therapeutics, including nucleoside triphosphates and CleanCap®, TriLink's proprietary co-transcriptional mRNA capping reagents. TriLink is expanding itsSan Diego manufacturing campus by making a significant investment in additional cleanroom and small molecule manufacturing space, implementing automation systems and adding support areas to augment production capacity (the "Flanders San Diego Facility"). Pursuant to certain requirements, BARDA awarded TriLink an amount equal to 50% of the construction and validation costs currently budgeted for the Flanders San Diego Facility. See Note 6 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Trends and Uncertainties
COVID-19 Related Revenue Trends and Uncertainties
Since the start of the COVID-19 pandemic in early 2020, our results of operations and cash flows have substantially benefited from the strong demand for COVID-19 related products and services, including our proprietary CleanCap® analogs and highly modified RNA products, particularly mRNA. We estimate that revenue from COVID-19 related products and services represented approximately 73.2% and 71.8%, respectively, of our total revenues for the three and six months endedJune 30, 2022 . However, we expect the second quarter of 2022 to represent the highest revenue quarter for revenue attributable to our COVID-19 related products and services, with substantial declines in COVID-19 related revenue expected in the future. In addition to the general market trend of reduced demand for COVID-19 related products and services as the pandemic subsides, our COVID-19 related revenue for the remainder of 2022 and continuing into 2023 may be negatively impacted by unused inventory of our products that our customers have on hand. We are unable to estimate the impact of this unused inventory on future demand given both binding contractual commitments by our customers for additional purchases and that our customers generally have not provided us with detailed inventory data. Our longer-term revenue prospects for COVID-19 related products are highly uncertain but are expected to be substantially less than pandemic highs. The factors that could influence longer-term COVID-19 related revenue include: the emergence, duration and intensity of new virus variants; competition faced by our customers from other COVID-19 vaccine manufacturers or developers of alternative treatments; the availability and administration of pediatric and booster vaccinations, vaccine supply constraints, vaccine hesitancy and the effectiveness of vaccines against new virus strains; and theU.S. economy and global economy, including impacts resulting from supply chain constraints, labor market shortages and inflationary pressures. This contraction in COVID-19 related demand will significantly 36
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decrease our revenue and cash flow, which in turn could have a material adverse impact on our operating results and financial condition in the future.
Other Trends and Uncertainties
Biopharmaceutical customers are increasingly relying on outside parties to provide important inputs and services for their clinical research and manufacturing, a development driving growth for suppliers with unique capabilities and the ability to manufacture at an appropriate scale to support customer programs. We believe that suppliers like ourselves, with this rare combination of capabilities, proprietary products and the required investment in manufacturing and quality systems, are benefiting from rapid growth as biopharmaceutical customers seek to partner with a small number of trusted suppliers. In addition to the continued trend toward outsourcing, several market developments are driving increased growth, in our addressable market segments, including: (i) pivot toward mRNA vaccines driven in part by COVID-19; (ii) rapid growth in development of cell and gene therapies; (iii) large and growing pipeline of protein-based therapeutics; and (iv) rise in molecular diagnostics driven by COVID-19. How We Assess Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our business is performing are revenue and Adjusted EBITDA.
Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) adjusted for interest expense, provision for income taxes, depreciation, amortization and stock-based compensation expenses. Adjusted EBITDA reflects further adjustments to eliminate the impact of certain items, including certain non-cash and other items, that we do not consider representative of our ongoing operating performance. We also present Adjusted Free Cash Flow, which is a non-GAAP measure that we define as Adjusted EBITDA less capital expenditures. Management uses Adjusted EBITDA to evaluate the financial performance of our business and the effectiveness of our business strategies. We present Adjusted EBITDA and Adjusted Free Cash Flow because we believe they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry and they facilitate comparisons on a consistent basis across reporting periods. Further, we believe they are helpful in highlighting trends in our operating results because they exclude items that are not indicative of our core operating performance. Adjusted EBITDA is also a component of the financial covenant under our credit agreement that governs our ability to access more than$63.0 million in aggregate letters of credit and available borrowings under our revolving credit facility. In addition, if we borrow more than$63.0 million , we are required to maintain a specified net leverage ratio. See "Liquidity and Capital Resources-Sources of Liquidity-Debt Covenants" below for a discussion of this financial covenant. Adjusted EBITDA and Adjusted Free Cash Flow have limitations as analytical tools and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. We may in the future incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. In particular, we expect to incur meaningful share-based compensation expense in the future. Other limitations include that Adjusted EBITDA and Adjusted Free Cash Flow do not reflect:
•all expenditures or future requirements for capital expenditures or contractual commitments;
•changes in our working capital needs;
•provision for income taxes, which may be a necessary element of our costs and ability to operate;
•the costs of replacing the assets being depreciated, which will often have to be replaced in the future;
•the non-cash component of employee compensation expense; and
•the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.
In addition, Adjusted EBITDA and Adjusted Free Cash Flow may not be comparable
to similarly titled measures used by other companies in our industry or across
different industries.
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Components of Results of Operations
Revenue
Our revenue consists primarily of product revenue and, to a much lesser extent, service revenue. We generated total consolidated revenue of$242.7 million and$487.0 million for the three and six months endedJune 30, 2022 , respectively, and$217.8 million and$366.0 million for the three and six months endedJune 30, 2021 , respectively, through the following segments: (i) Nucleic Acid Production, (ii) Biologics Safety Testing and (iii) Protein Detection. We divested our Protein Detection segment inSeptember 2021 , and since then operate two business segments only, Nucleic Acid Production and Biologics Safety Testing.
Nucleic Acid Production Segment
Our Nucleic Acid Production segment focuses on the manufacturing and sale of highly modified nucleic acids products to support the needs of customers' research, therapeutic and vaccine programs. This segment also provides research products for labeling and detecting proteins in cells and tissue samples.
Biologics Safety Testing Segment
Our Biologics Safety Testing segment focuses on manufacturing and selling biologics safety and impurity tests and assay development services that are utilized by our customers in their biologic drug manufacturing activities.
Protein Detection Segment
Our Protein Detection segment products, which included a portfolio of labeling and visual detection reagents, were purchased by our scientific research customers for their tissue-based protein detection and characterization needs. InSeptember 2021 , we completed the divestiture ofVector Laboratories, Inc. and subsidiaries ("Vector"), which made up our Protein Detection segment.
Cost of Revenue
Cost of revenue associated with our products primarily consists of manufacturing related costs incurred in the production process, including personnel and related costs, stock-based compensation expense, inventory write-downs, costs of materials, labor and overhead, packaging and delivery costs and allocated costs, including facilities, information technology, depreciation and amortization of intangibles. Cost of revenue associated with our services primarily consists of personnel and related costs, stock-based compensation expense, cost of materials and allocated costs, including facilities and information technology costs. Costs of services were not material for the three and six months endedJune 30, 2022 and 2021.
We expect cost of revenue to increase in future periods as our revenue grows.
Operating Expenses
Selling, General and Administrative
Our selling, general and administrative expenses primarily consist of salaries, benefits and stock-based compensation expense for our employees in our commercial sales functions, marketing, executive, accounting and finance, legal and human resource functions as well as travel expenses, professional services fees, such as consulting, audit, tax and legal fees, general corporate costs and allocated costs, including facilities, information technology and amortization of intangibles. We expect that our selling, general and administrative expenses will continue to increase, primarily due to increased headcount and expanding facilities footprint to support anticipated growth in the business, costs incurred in increasing our presence globally and increases in marketing activities to drive awareness and adoption of our products and services, and due to incremental costs associated with operating as a public company.
Research and Development
Research and development costs primarily consist of salaries, benefits,
stock-based compensation expense, outside contracted services, cost of supplies,
in-process research and development costs from asset acquisitions and allocated
facilities costs for employees engaged in research and development of products
and services. We expense all research and development costs in the period in
which they are incurred. Payment made prior to the receipt of goods or services
to be used in research and development are recognized as prepaid assets until
the goods are received or services are rendered.
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We expect that our research and development costs will continue to increase to support our research and development efforts, including meeting our customers' needs.
Change in Estimated Fair Value of Contingent Consideration
In the first quarter of 2022, we completed the acquisition of MyChem and recorded a contingent consideration liability of$7.8 million . In the second quarter of 2022, we recorded a fair value adjustment to the liability based on our assessment of the probability of achieving certain revenue thresholds and other probability factors. This was due to a change in estimate associated with MyChem revenue projections reaching thresholds that would trigger a contingent payment per the MyChem Securities Purchase Agreement (the "MyChem SPA").
Other Income (Expense)
Interest Expense
Interest expense consist of interest costs and the related amortization of the debt discount and deferred issuance costs on our outstanding debt.
Loss on Extinguishment of Debt
Loss on extinguishment of debt represent the write-off of remaining unamortized debt discount and deferred issuance costs on previously outstanding debt when we engage in refinancing activities.
Change in Payable to Related Parties Pursuant to a Tax Receivable Agreement
The Tax Receivable Agreement liability adjustment reflects changes in the Tax Receivable Agreement liability recorded in our condensed consolidated balance sheets as a result of change in the tax benefit obligation attributable to a change in the expected tax benefit.
Income Tax Expense
As a result of our ownership of LLC Units inTopco LLC , we are subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofTopco LLC and will be taxed at the prevailing corporate tax rates. Non-Controlling Interests Non-controlling interests represent the portion of profit or loss, net assets and comprehensive income or loss of our consolidated subsidiaries that is not allocable to the Company based on our percentage of ownership of such entities. Income or loss attributed to the non-controlling interests is based on the LLC Units outstanding during the period and is presented on the condensed consolidated statements of income. As ofJune 30, 2022 , we held 51.5% of the outstanding LLC Units ofTopco LLC and 48.5% of the outstanding LLC Units ofTopco LLC were held by MLSH 1.
Results of Operations
The results of operations presented below should be reviewed in conjunction with
the condensed consolidated financial statements and notes included elsewhere in
this Quarterly Report on Form 10-Q. For information with respect to recent
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accounting pronouncements that are of significance or potential significance to
us, see Note 1 to the condensed consolidated financial statements contained in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
Three Months Ended June 30,
2021
2022 (as adjusted)* Change
(in thousands, except per share amounts)
Revenue $ 242,732 $ 217,775 11.5 %
Operating expenses:
Cost of revenue (1) 37,496 37,811 (0.8) %
Selling, general and administrative (1) 28,061 24,500 14.5 %
Research and development (1) 4,274 1,929 121.6 %
Change in estimated fair value of contingent
consideration (7,800) - #
Total operating expenses 62,031 64,240 (3.4) %
Income from operations 180,701 153,535 17.7 %
Other income (expense), net (5,709) (7,652) (25.4) %
Income before income taxes 174,992 145,883 20.0 %
Income tax expense 18,271 11,386 60.5 %
Net income $ 156,721 $ 134,497 16.5 %
Net income attributable to non-controlling
interests 85,481 85,354 0.1 %
Net income attributable to Maravai LifeSciences
Holdings, Inc. $ 71,240 $ 49,143 45.0 %
Net income per Class A common share attributable
to Maravai LifeSciences Holdings, Inc. :
Basic $ 0.54 $ 0.44
Diluted $ 0.53 $ 0.44
Weighted average number of Class A common shares
outstanding:
Basic 131,524 112,203
Diluted 255,361 112,280
Non-GAAP measures:
Adjusted EBITDA $ 188,479 $ 164,378
Adjusted Free Cash Flow $ 175,215 $ 158,810
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a summary of the adjustments.
# Not meaningful
(1)Includes stock-based compensation expense as follows (in thousands, except
percentages):
Three Months Ended June 30,
2022 2021 Change
Cost of revenue $ 1,004 $ 509 97.2 %
Selling, general and administrative 3,063 1,768 73.2 %
Research and development 241 106 127.4 %
Total stock-based compensation expense $ 4,308 $ 2,383 80.8 %
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Six Months Ended June 30,
2021
2022 (as adjusted)* Change
(in thousands, except per share amounts)
Revenue $ 487,025 $ 365,986 33.1 %
Operating expenses:
Cost of revenue (1) 77,528 69,202 12.0 %
Selling, general and administrative (1) 61,261 47,971 27.7 %
Research and development (1) 7,969 4,089 94.9 %
Change in estimated fair value of contingent
consideration (7,800) - #
Total operating expenses 138,958 121,262 14.6 %
Income from operations 348,067 244,724 42.2 %
Other income (expense), net (6,234) (9,667) (35.5) %
Income before income taxes 341,833 235,057 45.4 %
Income tax expense 38,252 25,095 52.4 %
Net income $ 303,581 $ 209,962 44.6 %
Net income attributable to non-controlling
interests 165,479 137,717 20.2 %
Net income attributable to Maravai LifeSciences
Holdings, Inc. $ 138,102 $ 72,245 91.2 %
Net income per Class A common share attributable
to Maravai LifeSciences Holdings, Inc. :
Basic $ 1.05 $ 0.69
Diluted $ 1.03 $ 0.69
Weighted average number of Class A common shares
outstanding:
Basic 131,506 104,468
Diluted 255,324 257,686
Non-GAAP measures:
Adjusted EBITDA $ 375,471 $ 265,274
Adjusted Free Cash Flow $ 359,459 $ 256,374
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a summary of the adjustments.
# Not meaningful
(1)Includes stock-based compensation expense as follows (in thousands, except
percentages):
Six Months Ended June 30,
2022 2021 Change
Cost of revenue $ 1,827 $ 1,019 79.3 %
Selling, general and administrative 5,696 3,449 65.1 %
Research and development 412 193 113.5 %
Total stock-based compensation expense $ 7,935 $ 4,661 70.2 %
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Revenue
Consolidated revenue by segment was as follows for the periods presented (in thousands, except percentages):
Three Months Ended June 30, Percentage of Revenue
2022 2021 Change 2022 2021
Nucleic Acid Production $ 225,248 $ 192,521 17.0 % 92.8 % 88.4 %
Biologics Safety Testing 17,484 18,208 (4.0) % 7.2 % 8.4 %
Protein Detection - 7,046 # - % 3.2 %
Total revenue $ 242,732 $ 217,775 11.5 % 100.0 % 100.0 %
____________________
# Not meaningful
Six Months Ended June 30, Percentage of Revenue
2022 2021 Change 2022 2021
Nucleic Acid Production $ 448,898 $ 316,453 41.9 % 92.2 % 86.5 %
Biologics Safety Testing 38,127 35,857 6.3 % 7.8 % 9.8 %
Protein Detection - 13,676 # - % 3.7 %
Total revenue $ 487,025 $ 365,986 33.1 % 100.0 % 100.0 %
____________________
# Not meaningful
Comparison of Three Months Ended
Total revenue was
Nucleic Acid Production revenue increased from$192.5 million for the three months endedJune 30, 2021 to$225.2 million for the three months endedJune 30, 2022 , representing an increase of$32.7 million , or 17.0%. The increase in Nucleic Acid Production revenue was the result of continued strong demand for our proprietary CleanCap analogs as COVID-19 vaccine manufacturers scaled production and increased demand for mRNA products as this technology becomes incorporated into more therapeutic and vaccine development programs for a variety of indications. For the three months endedJune 30, 2022 , we estimate that approximately$177.6 million , or 93.2%, of our$190.6 million CleanCap revenue was a result of customer demand attributable to COVID-19 vaccines or other COVID-19 related commercial products or developmental programs. For the three months endedJune 30, 2021 , we estimate that approximately$155.1 million , or 94.9%, of our$163.5 million CleanCap revenue was a result of customer demand attributable to COVID-19 vaccines or other COVID-19 related commercial products or developmental programs. Biologics Safety Testing revenue decreased from$18.2 million for the three months endedJune 30, 2021 to$17.5 million for the three months endedJune 30, 2022 , representing a decrease of$0.7 million , or 4.0%. The decrease from prior period was not significant. There was no Protein Detection revenue for the three months endedJune 30, 2022 due to the sale of our Protein Detection business segment, which was completed in earlySeptember 2021 .
Comparison of Six Months Ended
Total revenue was
Nucleic Acid Production revenue increased from$316.5 million for the six months endedJune 30, 2021 to$448.9 million for the six months endedJune 30, 2022 , representing an increase of$132.4 million , or 41.9%. The increase in Nucleic Acid Production revenue was driven by continued strong demand for our proprietary CleanCap analogs as COVID-19 vaccine manufacturers scaled production and ongoing demand for highly modified RNA products. For the six months endedJune 30, 2022 , we estimate that approximately$349.6 million , or 93.4%, of our$374.4 million CleanCap revenue was a result of customer demand attributable to COVID-19 vaccines or other COVID-19 related commercial products or developmental programs. For the six months endedJune 30, 2021 , we estimate that approximately$246.3 million , or 95.4%, of our$258.2 42
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million CleanCap revenue was a result of customer demand attributable to COVID-19 vaccines or other COVID-19 related commercial products or developmental programs.
Biologics Safety Testing revenue increased from$35.9 million for the six months endedJune 30, 2021 to$38.1 million for the six months endedJune 30, 2022 , representing an increase of$2.3 million , or 6.3%. The increase was driven by higher demand as the result of growth in the underlying markets supporting cell and gene therapies, biosimilar and other biologic programs. There was no Protein Detection revenue for the six months endedJune 30, 2022 due to the sale of our Protein Detection business segment, which was completed in earlySeptember 2021 . Segment Information Management has determined that adjusted earnings before interest, tax, depreciation and amortization is the profit or loss measure used to make resource allocation decisions and evaluate segment performance. Adjusted EBITDA assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, certain non-cash items and other adjustments that we do not consider in our evaluation of ongoing operating performance from period to period. Corporate costs, net of eliminations are managed on a standalone basis and are not allocated to segments.
We do not allocate assets to our reportable segments as they are not included in the review performed by our Chief Operating Decision Maker for purposes of assessing segment performance and allocating resources.
As of
The following schedule includes revenue and adjusted EBITDA for each of our
reportable operating segments (in thousands). We have revised our presentation
for the prior periods below to remove the presentation of Total Adjusted EBITDA
and reconcile the total of our reportable segments' measure of profit or loss to
income before income taxes, in addition to net income, and removed corporate
costs, net of eliminations from total reportable segments' adjusted EBITDA and
included such amounts in the reconciliation to income before income taxes.
Additionally, we have revised our presentation for the prior
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periods below of our total reportable segments' revenue, in which we removed intersegment eliminations from our total reportable segment's revenue.
Three Months Ended Six Months Ended
June 30, June 30,
2021 2021
2022 (as adjusted)* 2022 (as adjusted)*
Revenue:
Nucleic Acid Production $ 225,255 $ 192,738 $ 448,905 $ 316,907
Biologics Safety Testing 17,484 18,208 38,127 35,857
Protein Detection - 7,046 - 13,676
Total reportable segments' revenue 242,739 217,992 487,032 366,440
Intersegment eliminations (7) (217) (7) (454)
Total $ 242,732 $ 217,775 $ 487,025 $ 365,986
Segment adjusted EBITDA:
Nucleic Acid Production $ 186,291 $ 156,320 $ 369,090 $ 251,352
Biologics Safety Testing 14,102 14,293 30,634 28,580
Protein Detection - 3,375 - 5,334
Total reportable segments' adjusted EBITDA 200,393 173,988 399,724 285,266
Reconciliation of total reportable segments'
adjusted EBITDA to income before income taxes
Amortization (6,252) (5,040) (11,779) (10,081)
Depreciation (1,892) (1,615) (3,747) (2,871)
Interest expense (4,434) (7,649) (7,098) (15,553)
Corporate costs, net of eliminations (11,914) (9,610) (24,253) (19,992)
Other adjustments:
Acquisition contingent consideration 7,800 - 7,800 -
Acquisition integration costs (3,103) (13) (7,882) (17)
Acquired in-process research and development
costs - - - -
Stock-based compensation (4,308) (2,383) (7,935) (4,661)
Merger and acquisition related expenses (7) (943) (1,195) (1,862)
Financing costs (27) (852) (1,064) (1,058)
Acquisition related tax adjustment (1,264) - (1,264) -
Tax Receivable Agreement liability adjustment - - 2,340 5,886
Other - - (1,814) -
Income before income taxes 174,992 145,883 341,833 235,057
Income tax expense (18,271) (11,386) (38,252) (25,095)
Net income $ 156,721 $ 134,497 $ 303,581 $ 209,962
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 for a summary of the adjustments.
During the three and six months endedJune 30, 2022 , intersegment revenue was immaterial between the Nucleic Acid Production and Biologics Safety Testing segments. During the three and six months endedJune 30, 2021 , intersegment revenue was$0.2 million and$0.5 million , respectively, between the Nucleic Acid Production and Protein Detection segments. The intersegment sales and the related gross margin on inventory recorded at the end of the period are eliminated for consolidation purposes. Internal selling prices for intersegment sales are consistent with the segment's normal retail price offered to external parties. There was no commission expense recognized for intersegment sales for the three and six months endedJune 30, 2022 and 2021. 44
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Table of Contents Non-GAAP Financial Measures Adjusted EBITDA
A reconciliation of net income to adjusted EBITDA, which is a non-GAAP measure, is set forth below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2021
2022 (as adjusted)* 2022 (as adjusted)*
Net income $ 156,721 $ 134,497 $ 303,581 $ 209,962
Add:
Amortization 6,252 5,040 11,779 10,081
Depreciation 1,892 1,615 3,747 2,871
Interest expense 4,434 7,649 7,098 15,553
Income tax expense 18,271 11,386 38,252 25,095
EBITDA 187,570 160,187 364,457 263,562
Acquisition contingent consideration (1) (7,800) - (7,800) -
Acquisition integration costs (2) 3,103 13 7,882 17
Stock-based compensation (3) 4,308 2,383 7,935 4,661
Merger and acquisition related expenses (4) 7 943 1,195 1,862
Financing costs (5) 27 852 1,064 1,058
Acquisition related tax adjustment (6) 1,264 - 1,264 -
Tax Receivable Agreement liability adjustment (7) - - (2,340) (5,886)
Other (8) - - 1,814 -
Adjusted EBITDA $ 188,479 $ 164,378 $ 375,471 $ 265,274 ____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of the adjustments.
(1)Refers to the change in fair value of performance payments related to the
acquisition of MyChem, which was completed in
(2)Refers to incremental costs incurred to execute and integrate completed acquisitions, and retention payments in connection with these acquisitions.
(3)Refers to non-cash expense associated with stock-based compensation.
(4)Refers to diligence, legal, accounting, tax and consulting fees incurred associated with acquisitions that were not consummated.
(5)Refers to transaction costs related to the refinancing of our long-term debt and costs from our secondary offering that are not capitalizable or cannot be offset against proceeds from such transactions.
(6)Refers to non-cash expense associated with adjustments to the indemnification asset recorded in connection with the acquisition of MyChem.
(7)Refers to the gain related to the adjustment of our Tax Receivable Agreement liability primarily due to changes in our estimated state apportionment and the corresponding reduction of our estimated state tax rate.
(8)Refers to the loss recognized during the period associated with certain
working capital and other adjustments for the sale of Vector, which was
completed in
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Adjusted Free Cash Flow
Adjusted Free Cash Flow, which is a non-GAAP measure that we define as Adjusted
EBITDA less capital expenditures, is set forth below for the periods presented
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2021
2022 (as adjusted)* 2022 (as adjusted)*
Adjusted EBITDA $ 188,479 $ 164,378 $ 375,471 $ 265,274
Capital expenditures (1) (13,264) (5,568) (16,012) (8,900)
Adjusted Free Cash Flow $ 175,215 $ 158,810 $ 359,459 $ 256,374
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a summary of the adjustments.
(1)We define capital expenditures as: (i) purchases of property and equipment,
which are included in cash flows from investing activities, accounts payable and
accrued expenses; and (ii) construction costs determined to be lessor
improvements, which are recorded as prepaid lease payments; offset by government
funding recognized.
Operating Expenses
Operating expenses included the following for the periods presented (in thousands, except percentages):
Three Months Ended June 30, Percentage of Revenue
2021 2021
2022 (as adjusted)* Change 2022 (as adjusted)*
Cost of revenue $ 37,496 $ 37,811 (0.8) % 15.4 % 17.4 %
Selling, general and administrative 28,061 24,500 14.5 % 11.6 % 11.2 %
Research and development 4,274 1,929 121.6 % 1.8 % 0.9 %
Change in estimated fair value of
contingent consideration (7,800) - # (3.2) % - %
Total operating expenses $ 62,031 $
64,240 (3.4) % 25.6 % 29.5 %
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a summary of the adjustments.
# Not meaningful
Six Months Ended June 30, Percentage of Revenue
2021 2021
2022 (as adjusted)* Change 2022 (as adjusted)*
Cost of revenue $ 77,528 $ 69,202 12.0 % 15.9 % 18.9 %
Selling, general and administrative 61,261 47,971 27.7 % 12.6 % 13.1 %
Research and development 7,969 4,089 94.9 % 1.6 % 1.1 %
Change in estimated fair value of
contingent consideration (7,800) - # (1.6) % - %
Total operating expenses $ 138,958 $ 121,262 14.6 % 28.5 % 33.1 % ____________________ *As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of the adjustments.
# Not meaningful
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Cost of Revenue
Comparison of Three Months Ended
Cost of revenue decreased by$0.3 million from$37.8 million for the three months endedJune 30, 2021 to$37.5 million for the three months endedJune 30, 2022 , or 0.8%. The decrease in cost of revenue compared to the prior period was not significant.
Comparison of Six Months Ended
Cost of revenue increased by$8.3 million from$69.2 million for the six months endedJune 30, 2021 to$77.5 million for the six months endedJune 30, 2022 , or 12.0%. The increase in cost of revenue was primarily attributable to an increase in direct product costs and supplies and materials resulting from higher sales volume. Gross profit increased by$112.7 million from$296.8 million for the six months endedJune 30, 2021 to$409.5 million for the six months endedJune 30, 2022 . The increase in the gross profit margin as a percentage of sales was primarily attributable to favorable product mix shift.
Selling, General and Administrative
Comparison of Three Months Ended
Selling, general and administrative expenses increased by$3.6 million from$24.5 million for the three months endedJune 30, 2021 to$28.1 million for the three months endedJune 30, 2022 , or 14.5%. The increase was primarily driven by a$3.0 million increase in personnel costs and$0.4 million of transaction costs associated with the acquisition of MyChem.
Comparison of Six Months Ended
Selling, general and administrative expenses increased by$13.3 million from$48.0 million for the six months endedJune 30, 2021 to$61.3 million for the six months endedJune 30, 2022 , or 27.7%. The increase was primarily driven by a$4.0 million increase in personnel costs,$3.4 million of transaction costs associated with the acquisition of MyChem, a$1.7 million increase in marketing and consulting services,$1.6 million from working capital adjustments related to the sale of Vector inSeptember 2021 ,$1.2 million of diligence fees associated with merger and acquisition activities and$0.9 million of fees relating to the debt refinancing transaction.
Research and Development
Comparison of Three Months Ended
Research and development expenses increased by$2.3 million from$1.9 million for the three months endedJune 30, 2021 to$4.3 million for the three months endedJune 30, 2022 , or 121.6%. The increase was primarily driven by$2.5 million in personnel costs relating to retention payment accruals associated with the acquisition of MyChem.
Comparison of Six Months Ended
Research and development expenses increased by$3.9 million from$4.1 million for the six months endedJune 30, 2021 to$8.0 million for the six months endedJune 30, 2022 , or 94.9%. The increase was primarily driven by$4.3 million in personnel costs relating to retention payment accruals associated with the acquisition of MyChem.
Change in Estimated Fair Value of Contingent Consideration
Comparison of Three and Six Months Ended
The change in estimated fair value of contingent consideration of$7.8 million for the three and six months endedJune 30, 2022 was due to the decrease in estimated fair value of the liability for the contingent payments associated with the acquisition of MyChem. This was due to a change in estimate associated with MyChem revenue projections reaching thresholds that would trigger a contingent payment per the MyChem SPA. 47
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Other Income (Expense)
Other income (expense) included the following for the periods presented (in thousands, except percentages):
Three Months Ended June 30, Percentage of Revenue
2021 2021
2022 (as adjusted)* Change 2022 (as adjusted)*
Interest expense $ (4,434) $ (7,649) (42.0) % (1.9) % (3.5) %
Other expense (1,275) (3) # (0.5) % 0.0 %
Total other expense $ (5,709) $ (7,652) (25.4) % (2.4) % (3.5) %
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a summary of the adjustments.
# Not meaningful
Six Months Ended June 30, Percentage of Revenue
2021 2021
2022 (as adjusted)* Change 2022 (as adjusted)*
Interest expense $ (7,098) $ (15,553) (54.4) % (1.5) % (4.2) %
Loss on extinguishment of debt (208) - # 0.0 % - %
Change in payable to related parties
pursuant to a Tax Receivable
Agreement 2,340 5,886 (60.2) % 0.5 % 1.6 %
Other expense (1,268) - # (0.3) % - %
Total other expense $ (6,234) $ (9,667) (35.5) % (1.3) % (2.6) %
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a summary of the adjustments.
# Not meaningful
Comparison of Three Months Ended
Other expense was$7.7 million for the three months endedJune 30, 2021 compared to$5.7 million for the three months endedJune 30, 2022 , representing a decrease of$1.9 million , or 25.4%. The decrease in expense was primarily attributable to a$3.2 million decrease in interest expense due to a$1.7 million change in fair value of the interest rate cap and$1.5 million decrease in interest expense driven by the lower interest rates from the debt refinancing transaction. This was partially offset by an increase of$1.3 million in other expense relating to adjustments to the indemnification asset recorded in connection with the acquisition of MyChem.
Comparison of Six Months Ended
Other expense was$9.7 million for the six months endedJune 30, 2021 compared to$6.2 million for the six months endedJune 30, 2022 , representing a decrease of$3.4 million , or 35.5%. The decrease in expense was primarily attributable to a$8.5 million decrease in interest expense due to a$4.7 million change in fair value of the interest rate cap and$3.7 million decrease in interest expense driven by the lower interest rates from the debt refinancing transaction. This was partially offset by a$3.5 million decrease in gain related to the payable to related parties pursuant to a Tax Receivable Agreement as a result of changes in our estimated state income tax apportionment and the corresponding reduction of our estimated state income tax rate, and an increase of$1.3 million in other expense relating to adjustments to the indemnification asset recorded in connection with the acquisition of MyChem.
Relationship with
Prior to our initial public offering ("IPO"), we utilized GTCR for certain
services pursuant to an advisory services agreement. Under this agreement, GTCR
provided us with financial and management consulting services in the areas of
corporate strategy, budgeting for future corporate investments, acquisition and
divestiture strategies, and debt and equity financings. The advisory services
agreement provided that we pay a $0.1 million quarterly management fee to GTCR
for these services. We also reimbursed GTCR for out-of-pocket expenses incurred
while providing these services. The advisory services agreement also
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provided that certain of our subsidiaries pay placement fees to GTCR of 1.0% of the gross amount of debt or equity financings. In connection with our IPO, this advisory services agreement was terminated. As GTCR continues to have representation on our Board of Directors, we will continue to pay GTCR for any direct reimbursable expenses related to their Board activities. We paid GTCR insignificant amounts during the three and six months endedJune 30, 2022 and 2021. We may continue to engage GTCR from time to time, subject to compliance with our related party transactions policy. We made distributions of$42.6 million and$82.5 million during the three and six months endedJune 30, 2022 , respectively, and$33.1 million and$56.2 million during the three and six months endedJune 30, 2021 , respectively, for tax liabilities to MLSH 1, which is primarily owned by GTCR. We are also a party to a Tax Receivable Agreement, or TRA, with MLSH 1, who is primarily owned by GTCR, and MLSH 2 (see Note 10 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q). The TRA provides for the payment by us to MLSH 1 and MLSH 2, collectively, of 85.0% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, from exchanges of LLC Units (together with the corresponding shares of Class B common stock) for Class A common stock, as a result of (i) certain increases in the tax basis of assets ofTopco LLC and its subsidiaries resulting from purchases or exchanges of LLC Units, (ii) certain tax attributes of the entities acquired from MLSH 1 and MLSH 2 in connection with the Organizational Transactions,Topco LLC and subsidiaries ofTopco LLC that existed prior to the IPO, and (iii) certain other tax benefits related to our entering into the TRA, including tax benefits attributable to payments that we make under the TRA (collectively, the "Tax Attributes"). Payment obligations under the TRA are not conditioned upon anyTopco LLC unitholders maintaining a continued ownership interest in us orTopco LLC , and the rights of MLSH 1 and MLSH 2 under the TRA are assignable. There is no stated term for the TRA, and the TRA will continue until all tax benefits have been utilized or expired unless we exercise our right to terminate the TRA for an agreed-upon amount. No payments were made to MLSH 1 or MLSH 2 pursuant to the TRA during the three and six months endedJune 30, 2022 . As ofJune 30, 2022 , our liability under the TRA was$746.0 million .
Liquidity and Capital Resources
Overview
We have financed our operations primarily from cash flow from operations, borrowings under long-term debt agreements and, to a lesser extent, the sale of our Class A common stock.
As ofJune 30, 2022 , we had cash of$550.7 million and retained earnings of$322.7 million . We had net income of$156.7 million and$303.6 million for the three and six months endedJune 30, 2022 , respectively. We also had positive cash flows from operations of$326.6 million for the six months endedJune 30, 2022 .
We have relied on revenue derived from product and services sales, and equity and debt financings to fund our operations to date.
Our principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as make tax distributions to MLSH 1, make TRA payments to MLSH 1 and MLSH 2 as well as make interest payments and mandatory principal payments on our long-term debt.
We plan to utilize our existing cash on hand, together with cash generated from operations, primarily to fund our commercial and marketing activities associated with our products and services, continued research and development initiatives, and ongoing investments into our manufacturing facilities to create efficiencies and build capacity. We believe our cash on hand, cash generated from operations and continued access to our credit facilities, will be sufficient to satisfy our cash requirements over the next 12 months and beyond. To the extent revenue from sales in our two remaining business segments continues to grow, we expect our accounts receivable and inventory balances to increase. Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements. Moreover, we have and will continue to incur additional costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, exchange listing and regulatory compliance matters. As a result of our ownership of LLC Units inTopco LLC , the Company is subject toU.S. federal, state and local income taxes with respect to its allocable share of any taxable income ofTopco LLC and is taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we will be required to make payments under the TRA with MLSH 1 and MLSH 2. Due to the uncertainty of various factors, we cannot precisely quantify the likely tax 49
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benefits we will realize as a result of LLC Unit exchanges and the resulting amounts we are likely to pay out to LLC Unitholders ofTopco LLC pursuant to the TRA; however, we estimate that such payments may be substantial. Assuming no changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect that future payments under the TRA relating to the purchase by the Company of LLC Units from MLSH 1 and the tax attributes to be approximately$746.0 million and to range over the next 15 years from approximately$34.7 million to$63.0 million per year and decline thereafter. Future payments in respect of subsequent exchanges or financings would be in addition to these amounts and are expected to be substantial. The foregoing numbers are estimates and the actual payments could differ materially. We expect to fund these payments using cash on hand and cash generated from operations. As a result of a change of control, material breach, or our election to terminate the TRA early, (1) we could be required to make cash payments to MLSH 1 and MLSH 2 that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the TRA and (2) we will be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the TRA could have a material adverse effect on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to adequately finance our payment obligations under the TRA.
In addition to payments to be made under the TRA, we are also required to make
tax distributions to MLSH 1 pursuant to the LLC Operating Agreement for the
portion of income passing through to them from
Credit Agreement
The Credit Agreement, among Intermediate, Cygnus and TriLink, as the borrowers,Topco LLC , as holdings, the lenders from time-to-time party thereto andMorgan Stanley Senior Funding, Inc. , as administrative and collateral agent (as amended, supplemented or otherwise modified, the "Credit Agreement"), provides us with a term-loan facility (the "Term Loan") totaling$600.0 million and a revolving credit facility (the "Revolving Credit Facility") of$180.0 million for letters of credit and loans to be used for working capital and other general corporate financing purposes. Borrowings under the Credit Agreement are unconditionally guaranteed byTopco LLC , along with the existing and future material domestic subsidiaries ofTopco LLC (subject to certain exceptions) as specified in the respective guaranty agreements, and are secured by a lien and security interest in substantially all of the assets of existing and future material domestic subsidiaries ofTopco LLC that are loan parties. InJanuary 2022 , the Company entered into an amendment (the "Amendment") to the Credit Agreement to: (i) refinance the existing$544.0 million aggregate principal balance on the First Lien Term Loan and replace it with a new Tranche B Term Loan ("Tranche B Term Loan"), (ii) replace the LIBOR-based interest rate with a Term Secured Overnight Financing Rate ("SOFR") based rate, and (iii) reduce the interest rate margins applicable to the Term Loan and Revolving Credit Facilities under the Credit Agreement. The previous interest rate margin on the facilities was, with respect to each LIBOR-based loan, 3.75% to 4.25% and, with respect to each base rate-based loan, 2.75% to 3.25% (depending, in each case, on consolidated first lien leverage). Following the Amendment, the interest rate margin on the facilities is 3.00%, with respect to each Term SOFR-based loan, and 2.00%, with respect to each base rate-based loan. Further, the Amendment reduced the base rate floor for the term loans from 2.00% to 1.50%, sets the floor for Term SOFR-based term loans at 0.50% and sets the floor for Term SOFR-based revolving loans at 0.00%. No other significant terms under the Credit Agreement were changed in connection with the Amendment. The Base Rate is defined in the Credit Agreement as the greatest of (i) the rate last quoted by The Wall Street Journal as the "Prime Rate" inthe United States , (ii) the NYFRB Rate plus 0.50% per annum, (iii) the Term SOFR Rate for a one month interest period plus 1.00% per annum, (iv) solely with respect to the Tranche B term loans, 1.50% per annum and (v) for any loans that are not Tranche B term loans, 1.00% per annum. The "Term SOFR Rate," as defined in the Credit Agreement, means with respect to any Term SOFR Rate Borrowing and for any other tenor comparable to the applicable interest period, the Term SOFR Reference Rate at approximately5:00 a.m. ,Chicago time, twoU.S. Government Securities Business Days prior to the commencement of such tenor comparable to the applicable interest period, as such rate is published by the CME Term SOFR Administrator; provided that in no event shall the Term SOFR Rate for any interest period (i) for Term B Loans be less than 0.50% or (ii) for any other Loans, be less than 0.00%. The Tranche B Term Loan became repayable in quarterly payments of$1.4 million beginning inMarch 2022 , with all remaining outstanding principal due inOctober 2027 . The Tranche B Term Loan includes prepayment provisions that allow us, at our option, to repay all or a portion of the principal amount at any time. The Revolving Credit Facility allows us to repay and borrow from time to time untilOctober 2025 , at which time all amounts borrowed must be repaid. Subject to certain exceptions and limitations, we are required to repay borrowings under the Tranche B Term Loan and Revolving Credit Facility with the proceeds of certain occurrences, such as the incurrence of debt, certain equity contributions and certain asset sales or dispositions. 50
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Commencing with the fiscal year endedDecember 31, 2021 , and each fiscal year thereafter, the Credit Agreement requires that we make mandatory prepayments on the Term Loan principal out of certain excess cash flow, subject to certain step-downs based on the Company's first lien net leverage ratio. The mandatory prepayment shall be reduced to 25% or 0% of the calculated excess cash flow if the first lien net leverage ratio was equal to or less than 4.75:1.00 or 4.25:1.00, respectively; however, no prepayment is required to the extent excess cash flow calculated for the respective period is equal to or less than$10.0 million . As ofJune 30, 2022 , our first lien net leverage ratio was less than 4.25:1.00, thus a prepayment was not required. Accrued interest under the Credit Agreement is payable by us (a) quarterly in arrears with respect to Base Rate loans, (b) at the end of each interest rate period (or at each three-month interval in the case of loans with interest periods greater than three months) with respect to Term SOFR Rate loans, (c) on the date of any repayment or prepayment and (d) at maturity (whether by acceleration or otherwise). An annual commitment fee is applied to the daily unutilized amount under the Revolving Credit Facility at 0.375% per annum, with one stepdown to 0.25% per annum based on Intermediate's first lien net leverage ratio. Debt Covenants The Credit Agreement includes financial covenants. One financial covenant is a consolidated first lien coverage ratio measured as of the last day of each fiscal quarter. Another requires that, if as of the end of any fiscal quarter the aggregate amount of letters of credit obligations and borrowings under the Revolving Credit Facility outstanding as of the end of such fiscal quarter (excluding cash collateralized letters of credit obligations and letter of credit obligations in an aggregate amount not in excess of$5.0 million at any time outstanding and for the first four fiscal quarters ending afterOctober 2020 , borrowings of revolving credit loans made beforeOctober 2020 ) exceeds 35% of the aggregate amount of all Revolving Credit Commitments in effect as of such date, then the net leverage ratio of Intermediate may not be greater than 8.00 to 1.00. For purposes of this covenant, the net leverage ratio is calculated by dividing outstanding first lien indebtedness (net of cash) by Adjusted EBITDA over the preceding four fiscal quarters. As ofJune 30, 2022 , we were in compliance with these covenants. The Credit Agreement also contains negative and affirmative covenants in addition to the financial covenant, including covenants that restrict our ability to, among other things, incur or prepay certain indebtedness, pay dividends or distributions, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, and make changes in the nature of the business. The Credit Agreement contains certain events of default, including, without limitation, nonpayment of principal, interest or other obligations, violation of the covenants, insolvency, court ordered judgments and certain changes of control. The Credit Agreement also requires the Company to provide audited consolidated financial statements to the lenders no later than 120 days after year-end.
As of
Tax Receivable Agreement
We are a party to the TRA with MLSH 1 and MLSH 2. The TRA provides for the payment by us to MLSH 1 and MLSH 2, collectively, of 85% of the amount of certain tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of the Organizational Transactions, IPO and any subsequent purchases or exchanges of LLC Units ofTopco LLC . Based on our current projections of taxable income, and before deduction of any specially allocated depreciation and amortization, we anticipate having enough taxable income to utilize most of these tax benefits. As ofJune 30, 2022 , our liability under the TRA was$746.0 million , representing 85% of the calculated tax savings we anticipated being able to utilize in future years. We may record additional liabilities under the TRA when LLC Units are exchanged in the future and as our estimates of the future utilization of the Tax Attributes, NOLs and other tax benefits change. We expect to make payments under the TRA, to the extent they are required, within 125 days after the extended due date of ourU.S. federal income tax return for such taxable year. Interest on such payment will begin to accrue from the due date (without extensions) of such tax return at a rate of LIBOR plus 100 basis points. Any late payments will continue to accrue interest at LIBOR plus 500 basis points until such payments are made. The payment obligations under the TRA are obligations ofMaravai LifeSciences Holdings, Inc. and not ofTopco LLC . Although the actual timing and amount of any payments that may be made under the TRA will vary, we expect that the aggregate payments that we will be required to make to MLSH 1 and MLSH 2 will be substantial. Any payments made by us under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us or toTopco LLC and, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. We anticipate funding ordinary course payments under the TRA from cash flow from operations ofTopco LLC and its subsidiaries, available cash and/or available borrowings under the Credit Agreement. 51
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Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Six Months Ended June 30,
2021
2022 (as adjusted)*
Net cash provided by (used in):
Operating activities $ 326,583 $ 204,265
Investing activities (243,245) (7,317)
Financing activities (83,934) (58,185)
Effects of exchange rate changes on cash - 13
Net increase in cash classified within current assets held for sale
- (250)
Net (decrease) increase in cash $ (596) $ 138,526
____________________
*As adjusted to reflect the impact of the adoption of ASC 842. See Note 1 to the
condensed consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q for a summary of the adjustments.
Operating Activities
Net cash provided by operating activities for the six months endedJune 30, 2022 was$326.6 million , which was primarily attributable to a net income of$303.6 million , non-cash depreciation and amortization of$15.5 million , non-cash amortization of right-of-use assets of$2.6 million , non-cash amortization of deferred financing costs of$1.4 million , non-cash stock-based compensation of$7.9 million and non-cash decrease in deferred income taxes of$26.1 million . These were partially offset by a non-cash gain on the change in estimated fair value of contingent consideration of$7.8 million , non-cash gain on the revaluation of liabilities under the TRA of$2.3 million and a net cash outflow from the change in our operating assets and liabilities of$19.4 million , of which$9.6 million was driven by an increase in prepaid lease payments for our leased Flanders San Diego Facility and Leland Facility. Net cash provided by operating activities for the six months endedJune 30, 2021 was$204.3 million , which was primarily attributable to a net income of$210.0 million , non-cash depreciation and amortization of$13.0 million , non-cash amortization of right-of-use assets of$3.5 million , non-cash amortization of deferred financing costs of$1.3 million , non-cash stock-based compensation of$4.7 million and non-cash decrease in deferred income taxes of$18.2 million . These were partially offset by a non-cash gain on the revaluation of liabilities under the Tax Receivable Agreement of$5.9 million and a net cash outflow from the change in our operating assets and liabilities of$40.4 million .
Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2022 was$243.2 million , which was primarily comprised of$238.8 million for the net cash consideration paid for the acquisition of MyChem and net cash outflows of$4.4 million for property and equipment purchases. Net cash used in investing activities for the six months endedJune 30, 2021 was$7.3 million , which was primarily attributable to net cash outflows of$7.9 million for property and equipment purchases, partially offset by cash receipts of$0.5 million from the sale of ourUnited Kingdom facility.
Financing Activities
Net cash used in financing activities for the six months endedJune 30, 2022 was$83.9 million , which was primarily attributable to$82.5 million of distributions for tax liabilities to non-controlling interest holders, required pursuant to the terms of the LLC Operating Agreement, and$11.2 million of principal repayments of long-term debt. This was partially offset by proceeds from borrowings of long-term debt of$8.5 million . Net cash used in financing activities for the six months endedJune 30, 2021 was$58.2 million , which was primarily attributable to$56.2 million of distributions for tax liabilities to non-controlling interest holders, required pursuant to the terms of the LLC Operating Agreement, and$3.0 million of principal repayments of long-term debt.
Capital Expenditures
Capital expenditures for the six months endedJune 30, 2022 totaled$16.0 million . Capital expenditures, including costs incurred for lessor improvements, for the year endingDecember 31, 2022 are projected to be in the range of$65.0 million to 52
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$75.0 million , which is net of anticipated government funding of$20.0 million . This primarily includes new facility construction costs recorded as prepaid lease payments, and equipment for our leased FlandersSan Diego, California andLeland, North Carolina locations.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of
Payments due by period
Total 1 year 2 - 3 years 4 - 5 years 5+ years
Operating leases (1) $ 103,271 $ 8,278 $ 22,525 $ 22,837 $ 49,631
Debt obligations (2) 541,280 5,440 10,880 10,880 514,080
TRA payments (3) 745,979 34,747 84,377 86,745 540,110
Unconditional purchase obligations
(4) 7,200 4,200 3,000 - -
Consideration payable (5) 10,000 10,000 - - -
Total $ 1,407,730 $ 62,665 $ 120,782 $ 120,462 $ 1,103,821
____________________
(1)Represents operating lease payments including for our Flanders San Diego Facility and Leland Facility, which are expected to commence in the third and fourth quarter of 2022, respectively.
(2)Represents long-term debt principal maturities, excluding interest. See Note 7 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. (3)Reflects the estimated timing of TRA payments as ofJune 30, 2022 . Such payments could be due later than estimated depending on the timing of our use of the underlying tax attributes. See Note 10 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our liability under the TRA.
(4)Represents firm purchase commitments to our suppliers.
(5)Represents an additional amount we may be required to pay to the sellers of MyChem subject to the completion of certain calculations associated with acquired inventory. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Tax distributions are required under the terms of the Topco LLC Agreement. See Note 9 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding tax distributions. Commencing with the fiscal year endedDecember 31, 2021 , and each fiscal year thereafter, the Credit Agreement requires that we make mandatory prepayments of the Term Loan principal upon certain excess cash flow, subject to certain step-downs based on our first lien net leverage ratio. The mandatory prepayment shall be reduced to 25% or 0% of the calculated excess cash flow if the first lien net leverage ratio was equal to or less than 4.75:1.00 or 4.25:1.00, respectively, however, no prepayment shall be required to the extent excess cash flow calculated for the respective period is equal to or less than$10.0 million . As ofJune 30, 2022 , our first lien net leverage ratio was less than 4.25:1.00. In connection with our acquisition of MyChem, we may be required to make certain payments to its sellers. We may be required to make additional payments of up to$40.0 million to the sellers of MyChem dependent upon meeting or exceeding defined revenue targets during fiscal 2022. We may also be required to make certain payments of$20.0 million to them as of the second anniversary of the closing of the acquisition date as long as the sellers of MyChem continue to be employed by TriLink. We cannot, at this time, determine when or if the related targets will be achieved or whether the events triggering the commencement of payment obligations will occur. Therefore, such payments were not included in the table above. See Notes 2 and 4 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures in the consolidated financial statements. Our estimates are based on historical experience and on various other assumptions that we believe are reasonable under the 53
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circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions and any such difference may be material. For a discussion of how these and other factors may affect our business, financial condition or results of operations, see "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . The critical accounting estimates that we believe affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements presented in this report are described in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2021 . Except as noted below, there have been no material changes to our critical accounting policies or estimates from those set forth in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Recognition of Intangible Assets as Part of a Business Combination
We account for our business combinations using the acquisition method of accounting which requires that the assets acquired and liabilities assumed of acquired businesses be recorded at their respective fair values at the date of acquisition. The purchase price, which includes the fair value of consideration transferred, is attributed to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of the acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill. Determining the fair value of intangible assets acquired requires management to use significant judgment and estimates, including the selection of valuation methodologies, assumptions about future net cashflows, discount rates and market participants. Each of these factors can significantly affect the value attributed to the identifiable intangible asset acquired in a business combination. We generally utilize a discounted cash flow method under the income approach to estimate the fair value of identifiable intangible assets acquired in a business combination. For the acquisition ofMyChem, LLC , the estimated fair value of the developed technology intangible asset was based on the multi-period excess earnings method. The estimated fair value was developed by discounting future net cash flows to their present value at market-based rates of return. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated revenue growth rates, management's plans, and guideline companies. Some of the more significant assumptions inherent in estimating the fair value of this intangible asset included revenue growth rates ranging from 3.0% to 30.6%, technical obsolescent curves ranging from 5.0% to 7.5%, and a discount rate of 16.5%. The use of alternative estimates and assumptions could increase or decrease the estimated fair value and amounts allocated to identifiable intangible assets acquired and future amortization expense as well as goodwill.
Recent Accounting Pronouncements
For a description of the expected impact of recent accounting pronouncements, see Note 1 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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