REPLIGEN CORPORATION
Information pertaining to fiscal year 2017 was included in the Company's Annual
Report on Form
10-K
("Form
10-K")
for the year ended December 31, 2018 on pages 30 through 43 under Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which was filed with the SEC on March 1, 2019 .
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
technology 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 helping 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, recombinant proteins, vaccines and gene therapies - that
are improving human health worldwide.
Our Chromatography products feature
pre-packed
chromatography columns under our OPUS
®
brand. OPUS columns, which we deliver to our customers
pre-packed
with their choice of chromatography resin, are single-campaign
("single-use")
disposable columns that replace the use of traditional (more permanent) glass
columns used in downstream purification and quality control of biological drugs.
By designing OPUS columns as an advanced and flexible option for the
purification of biologics from process development through clinical-scale and
some commercial manufacturing, Repligen has become a leader in
pre-packed
columns ("PPC").
Our Filtration products offer a number of advantages to manufacturers of
biologic drugs at volumes that span from pilot studies to clinical and
commercial-scale production. XCell ATF
™
systems are alternating tangential flow ("ATF") and used primarily in upstream
perfusion (continuous manufacturing) processes to increase cell concentration
and significantly improve biologic product yield from a bioreactor. To address
increasing industry demand for
"plug-and-play"
technology, we developed and launched
single-use
formats of the original stainless steel XCell ATF device. In December 2016 , we
acquired TangenX Technology Corporation ("TangenX"), balancing our upstream
XCell ATF offering with a downstream portfolio of TangenX
™
Flat Sheet Cassettes used in biologic drug purification and formulation
processes. The TangenX portfolio includes the
single-use
SIUS
™
TFF cassettes, providing customers with a high-performance,
low-cost
alternative to reusable TFF cassettes. 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 Spectrum
®
Hollow Fibers. Spectrum brands include the KrosFlo
®
TFF systems with Konduit monitor and ProConnex
®
single-use,
flow-path assemblies. We also gained the Spectra/Por
®
portfolio of laboratory and process dialysis products and in 2019, we launched
the SpectraFlo
™
Dynamic Dialysis Systems, and the KrosFlo
®
TFDF
™
(Tangential Flow Depth Filtration) Systems, which we believe has the potential
to disrupt and displace transitional harvest clarification operations. With the
acquisition of Spectrum, we substantially increased our direct sales presence in
Europe and Asia , and we diversified our end markets beyond monoclonal antibodies
("mAb") to include vaccines, recombinant proteins and gene therapies.
We are a leading supplier of Protein A affinity ligands to life sciences
companies. Protein A affinity ligands are an essential "binding" component of
Protein A chromatography resins used in the purification of virtually all
mAb-based
drugs on the market or in development. We manufacture multiple forms of Protein
A affinity ligands under long-term supply agreements with major life sciences
companies who in turn sell their Protein A chromatography resins to end users
(mAb manufacturers).
Customers use our products to produce initial quantities of drug for clinical
studies and then
scale-up
to larger volumes as the drug progresses to commercial production following
regulatory approval. Detailed specifications
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for a drug's manufacturing process are included in the applications that
biopharmaceutical companies file for marketing approval with regulators, such as
the U.S. Food and Drug Administration and the European Medicines Agency ,
throughout the clinical trial process and prior to final commercial approval. As
a result, products that become part of the manufacturing specifications of a
late-stage clinical or commercial process can be very sensitive given the costs
and uncertainties associated with displacing them.
C Technologies, Inc. Acquisition
On April 25, 2019 , we entered into a Stock Purchase Agreement ("Purchase
Agreement") with C Technologies, Inc. ("C Technologies"), a New Jersey
corporation, and Craig Harrison , an individual and sole stockholder of C
Technologies. The deal was consummated on May 31, 2019 (the "C Technologies
Acquisition").
C Technologies sells instruments, consumables and accessories that are designed
to allow bioprocessing technicians to measure the protein concentration of a
liquid sample using C Technologies' Slope Spectroscopy
®
method, which eliminates the need for manual sample dilution. C Technologies'
lead product, the SoloVPE
®
Device, was launched in 2008 for
off-line
and
at-line
protein concentration measurements conducted in quality control, process
development and manufacturing labs in the production of biological therapeutics.
C Technologies' FlowVPE
®
Device, an extension of the SoloVPE technology, was designed to 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.
The C Technologies Acquisition was accounted for as a purchase of a business
under Accounting Standard Codification No. ("ASC") 805,
"Business Combinations."
The cash paid for the C Technologies Acquisition was $195.0 million ,
$186.0 million of which will be consideration transferred pursuant to ASC 805,
and $9.0 million of which will be compensation expense for future employment,
and 779,221 of unregistered common shares totaling $53.9 million (based on a per
share price of $69.22 ), for a total purchase price of $239.9 million .
Critical Accounting Policies and Estimates
While our significant accounting policies are more fully described in the notes
to our consolidated financial statements, we have identified the policies and
estimates below as being critical to our business operations and the
understanding of our results of operations. These policies require management's
most difficult, subjective or complex judgements, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain. The
impact of and any associated risks related to these policies on our business
operations are discussed throughout "Management's Discussion and Analysis of
Financial Condition," including in the "Results of Operations" section, where
such policies affect our reported and expected financial results. Although we
believe that our estimates, assumptions, and judgements are reasonable, they are
based upon information presently available. Actual results may differ
significantly from these estimates under different assumptions, judgments, or
conditions.
Revenue recognition
We generate 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. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring products or services to
a customer ("transaction price"). To the extent the transaction price includes
variable consideration, the Company estimates the amount of variable
consideration that should be included in the transaction price utilizing the
expected value method or the most likely amount method, depending on the facts
and circumstances relative to the contract. Variable consideration is included
in the transaction price if, in the Company's judgment, it is probable that a
significant future reversal of cumulative revenue under the contract
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will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company's anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company's contracts contained a significant financing component as ofDecember 31, 2019 . Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The Company recognizes product revenue under the terms of each customer agreement upon transfer of control to the customer, which occurs at a point in time. Inventories We value inventory at cost or, if lower, net realizable value, using the first-in, first-out method. We review our inventory at least quarterly and record a provision for excess and obsolete inventory based on our estimates of expected sales volume, production capacity and expiration dates of raw materials, work-in-process and finished products. Expected sales volumes are determined based on supply forecasts provided by key customers for the next three to 12 months. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements to cost of product revenue. Manufacturing of bioprocessing finished goods is done to order and tested for quality specifications prior to shipment. A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying consolidated financial statements, there have been no material adjustments related to a revised estimate of inventory valuations. Business combinations Amounts paid for acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon 37 -------------------------------------------------------------------------------- Table of Contents conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of comprehensive income. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made, the extent of royalties to be earned in excess of the defined minimum royalties, etc. Management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments. To the extent our estimates change in the future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration. Changes in the fair value of contingent consideration are recorded in our consolidated statements of comprehensive income. We use the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. We base our assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, etc. We base the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. We believe the estimated purchased customer relationships, developed technologies, trademark / tradename, patents, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. Intangible assets and goodwill Intangible assets Intangible assets with a definite 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 expense in the consolidated statements of comprehensive income. 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 the Company's products or changes in the size of the market for the Company's products. If impairment indicators are present, the Company determines whether the underlying intangible asset is recoverable through estimated future undiscounted cash flows. If the asset is not found to be recoverable, it is written down to the estimated fair value of the asset based on the sum of the future discounted cash flows expected to result from the use and disposition 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 definite-lived intangible assets are recoverable atDecember 31, 2019 . Indefinite-lived intangible assets are tested for impairment at least annually. There has been no impairment of our intangible assets for the periods presented.Goodwill We test goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator.Goodwill is tested for impairment as ofDecember 31 st of each year, or more frequently as warranted 38 -------------------------------------------------------------------------------- Table of Contents by events or changes in circumstances mentioned above. Accounting guidance also permits an optional qualitative assessment for goodwill to determine whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further quantitative testing would be necessary. A quantitative assessment is performed if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit's carrying value exceeds its fair value. As ofDecember 31, 2018 , the Company concluded that it operated as two reporting units and performed the 2018 goodwill impairment test using two reporting units. In 2019, the Company reorganized its reporting structure and changed the way the Chief Operating Decision Maker ("CODM") views the Company's operations and allocates its resources. As a result of the change in reporting structure in 2019, the CODM reviews consolidated results to assist with decision making. Accordingly, the Company operates as one reporting unit as of the goodwill impairment measurement date ofDecember 31, 2019 . The fair value of the reporting unit is determined using both an income approach and market approach. Our income approach model used for our reporting unit valuation is consistent with that used for ourDecember 31, 2018 goodwill impairment valuation noted above except that cash flows from the entire business enterprise are used for the reporting unit valuation. Our market approach model estimates the fair value of the reporting unit based on market prices paid in actual precedent transactions of similar businesses and market multiples of guideline public companies. As a result of our 2019 quantitative assessment, we concluded that goodwill is not impaired as ofDecember 31, 2019 . Accrued liabilities We estimate accrued liabilities by identifying services performed on our behalf, estimating the level of service performed and determining the associated cost incurred for such service as of each balance sheet date. For example, we would accrue for professional and consulting fees incurred with law firms, audit and accounting service providers and other third-party consultants. These expenses are determined by either requesting those service providers to estimate unbilled services at each reporting date for services incurred or tracking costs incurred by service providers under fixed fee arrangements. We have processes in place to estimate the appropriate amounts to record for accrued liabilities, which principally involve the applicable personnel reviewing the services provided. In the event that we do not identify certain costs that have begun to be incurred or we under or over-estimate the level of services performed or the costs of such services, the reported expenses for that period may be too low or too high. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services often require the exercise of judgment. We make these judgments based upon the facts and circumstances known at the date of the financial statements. A change in the estimated cost or volume of services provided could result in additional accrued liabilities. Any significant unanticipated changes in such estimates could have a significant impact on our accrued liabilities and reported operating results. There have been no material adjustments to our accrued liabilities in any of the periods presented in the accompanying consolidated financial statements. Debt accounting Our long-term debt balance is related to our 0.375% Convertible Senior Notes due 2024 (the "2019 Notes"), which were issued inJuly 2019 and are carried at their principal amount less unamortized debt discount. We account for our convertible notes as separate liability and equity components. We estimate the carrying amount of the liability component by estimating the fair value of a similar liability that does not have an associated conversion feature. The Company allocates transaction costs related to the issuance of convertible notes to the liability and equity components using the same proportions as the initial carrying value of the convertible notes. 39 -------------------------------------------------------------------------------- Table of Contents The carrying value of the equity component is calculated by deducting the carrying value of the liability component from the principal amount of the convertible notes as a whole. The difference represents a debt discount that is amortized to interest expense in our consolidated statement of comprehensive income over the term of the convertible notes using the effective interest rate method. We assess the equity classification of the cash conversion feature quarterly. We allocated 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. Stock-based compensation We use the Black-Scholes option pricing model to calculate the fair value of stock option awards on the grant date. The expected term of options granted represents the period of time for which the options are expected to be outstanding and is derived from our historical stock option exercise experience and option expiration data. For purposes of estimating the expected term, we have aggregated all individual option awards into one group, as we do not expect substantial differences in exercise behavior among our employees. The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of options granted. We determined the expected volatility based upon the historical volatility of our common stock over a period commensurate with the option's expected term. The risk-free interest rate is the implied yield available onU.S. Treasury zero-coupon issues with a remaining term equal to the option's expected term on the grant date. We have never declared or paid any cash dividends on any of our capital stock and do not expect to do so in the foreseeable future. Accordingly, we use an expected dividend yield of zero to calculate the grant-date fair value of a stock option. The fair value of stock units, which includes restricted stock units and performance stock units, is calculated using the closing price of the Company's common stock on the date of grant. We recognize compensation expense on awards that vest based on service conditions on a straight-line basis over the requisite service period based upon the number of options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted by an amount of estimated forfeitures. We recognize compensation expense on awards that vest based on performance conditions following our assessment of the probability that the performance condition will be achieved over the service period. Forfeitures represent only the unvested portion of a surrendered option. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on an analysis of historical data, we have calculated an 8% annual forfeiture rate for non-executive level employees, a 3% annual forfeiture rate for executive level employees, and a 0% forfeiture rate for non-employee members of the Board of Directors, which we believe are reasonable assumptions to estimate forfeitures. However, the estimation of forfeitures requires significant judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. For the years endedDecember 31, 2019 , 2018 and 2017, we recorded stock-based compensation expense of$12.8 million ,$10.2 million and$6.7 million , respectively, for share-based awards granted under all of the Company's stock plans. As ofDecember 31, 2019 , there was$36.4 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 4.09 years. We expect 1,688,497 unvested options and stock units to vest over the next five years. Income taxes Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We account for uncertain tax positions using a "more-likely- than-not" threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax 40 -------------------------------------------------------------------------------- Table of Contents positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate our tax position on a quarterly basis. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense. In addition, we are subject to the continual examination of our income tax returns by theU.S. Internal Revenue Service ("IRS") and other domestic and foreign tax authorities. We expect future examinations to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from such examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our consolidated financial statements. Recent accounting standards update See Note 2, "Summary of Significant Accounting Policies - Recent Accounting Standards Updates," to our consolidated financial statements included in this report for more information. Results of Operations The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto. Revenues Total revenues for years endedDecember 31, 2019 , 2018, and 2017 were comprised of the following: For the Years Ended December 31, 2019 vs. 2018 2018 vs. 2017 2019 2018 2017 $ Change % Change $ Change % Change (Amounts in thousands, except for percentage data) Revenue: Product$ 270,097 $ 193,891 $ 141,089 $ 76,206 39.3 %$ 52,802 37.4 % Royalty and other 148 141 147 7 5.0 % (6 ) (4.1 %) Total revenue$ 270,245 $ 194,032 $ 141,236 $ 76,213 39.3 %$ 52,796 37.4 % Product revenues Since 2016, we have been increasingly focused on selling our products directly to customers in the pharmaceutical industry and to our contract manufacturers. These direct sales have increased to approximately 76% of our product revenue during 2019. We expect that direct sales will continue to account for an increasing percentage of our product revenues, as the largest customer of our OEM products diversifies its supply chain starting in 2020. Sales of our bioprocessing products can be impacted by the timing of large-scale production orders and the regulatory approvals for such antibodies, which may result in significant quarterly fluctuations. 41 -------------------------------------------------------------------------------- Table of Contents Product revenues were comprised of the following: For the Years Ended December 31, 2019 2017 (1) 2018 (2) (Amounts in thousands) Chromatography products$ 64,635 $ 45,326 $ 36,309 Filtration products 119,534 90,586 49,050 Process analytics products 16,405 - - Proteins products 65,124 54,375 53,969 Other 4,399 3,604 1,761 Total product revenue$ 270,097 $ 193,891 $ 141,089
(1) 2019 revenue includes process analytics revenue related to C Technologies
from
(2) 2017 revenue for filtration, chromatography and other products includes
revenue related to Spectrum from
Revenue from our chromatography products includes the sale of our OPUS chromatography columns, chromatography resins and ELISA test kits. Revenue from our filtration products includes the sale of our XCell ATF systems and consumables, KrosFlo filtration products and SIUS filtration products. Revenue from protein products includes the sale of our Protein A ligands and cell culture growth factors. Revenue from our Process Analytics products includes the sale of our SoloVPE and FlowVPE systems and consumables. Other revenue primarily consists of revenue from the sale of our operating room products to hospitals as well as freight revenue. For 2019, product revenue increased by$76.2 million , or 39%, as compared to 2018. The increase is due to the continued adoption of our products by our key bioprocessing customers, particularly our chromatography and filtration products. Sales of our bioprocessing products are impacted by the timing of orders, development efforts at our customers or end-users and regulatory approvals for biologics that incorporate our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations are expected, but they may not be predictive of future revenue or otherwise indicate a trend. Additionally, there was a$16.4 million increase in the 2019 revenue compared to the 2018 revenue due to revenues generated by C Technologies. For 2018, product revenue increased by$52.8 million , or 37%, as compared to 2017. The increase is due to the continued adoption of our products by our key bioprocessing customers and a full year of revenues derived from our acquisition of Spectrum inAugust 2017 . Royalty revenues Royalty revenues in 2019 and 2018 relate to royalties received from a third-party systems manufacturer associated with our OPUS chromatography columns. Royalty revenues are variable and are dependent on sales generated by our partner. 42 -------------------------------------------------------------------------------- Table of Contents Costs and operating expenses Total costs and operating expenses for years endedDecember 31, 2019 , 2018 and 2017 were comprised of the following: For the Years Ended December 31, 2019 vs. 2018 2018 vs. 2017 2019 2018 2017 $ Change % Change $ Change % Change (Amounts in thousands, except for percentage data) Cost of product revenue$ 119,099 $ 86,531 $ 67,050 $ 32,568 37.6 %$ 19,481 29.1 % Research and development 19,450 15,821 8,672 3,629 22.9 % 7,149 82.4 % Selling, general and administrative 95,613 65,692 51,509 29,921 45.5 % 14,183 27.5 % Total costs and operating expenses$ 234,162 $ 168,044 $ 127,231 $ 66,118 39.3 %$ 40,813 32.1 % Cost of product revenue For 2019 and 2018, cost of product revenue increased$32.6 million , or 38%, and$19.5 million , or 29%, respectively, as compared to 2018 and 2017, due primarily to the increase in revenue mentioned above. Gross margins may fluctuate in future quarters based on expected production volume and product mix. Gross margins were 56%, 55%, and 53% for 2019, 2018 and 2017, respectively. The gross margin in 2019 includes$1.5 million of amortization on an inventory step-up recorded in purchase accounting related to the C Technologies Acquisition. The increase in gross margins is a result of higher product revenue mentioned above offset by an increase in costs associated with additional manufacturing headcount in 2019, as compared to 2018. Gross margins may fluctuate in future quarters based on expected production volume and product mix. During 2018, gross margins increased compared to 2017 primarily due to higher product revenue. Research and development expenses During 2019, 2018 and 2017, research and development ("R&D") expenses were related to bioprocessing products, including personnel, supplies and other research expenses. Due to the size of the Company and the fact that these various programs share personnel and fixed costs, we do not track all of our expenses or allocate any fixed costs by program, and therefore, have not provided historical costs incurred by project. In addition to the legacy product research and development, the current single-use XCell ATF technology incurs expenses related to product development, sterilization, validation testing, and other research related expenses. R&D expenses increased$3.6 million in 2019, or 23%, compared to 2018. The increase is primarily due to an increase in costs associated with an increase in R&D headcount, an increase in stock-based compensation expense resulting from the increased headcount and the higher share price period over period, and to the addition of$1.7 million of R&D expenses related to C Technologies, which was acquired inMay 2019 . The increase in 2019 was partially offset by a$1.4 million decrease in R&D expense for investments made to expand our proteins product offering through our development agreement withNavigo Proteins GmbH ("Navigo"). The Company invested$1.0 million in 2019 compared to$2.4 million in 2018. For 2018, R&D expenses increased by$7.1 million , or 82%, as compared to 2017. This increase is primarily driven by investments made during 2018 to expand our proteins product offerings through our development agreement with Navigo. Additionally, the increase is related to product development activities acquired as part of the Spectrum acquisition and increased activity in our various bioprocessing development projects. We expect our R&D expenses in the year endingDecember 31, 2020 to increase in order to support new product development. 43 -------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses Selling, general and administrative ("SG&A") expenses include the costs associated with selling our commercial products and costs required to support our marketing efforts, including legal, accounting, patent, shareholder services, amortization of intangible assets and other administrative functions. For 2019, SG&A costs increased by$29.9 million , or 46%, as compared to 2018. The increase is due to the addition of$10.9 million of SG&A costs from the acquisition of C Technologies inMay 2019 , as well as the continued expansion of our customer-facing activities to drive sales of our bioprocessing products, and to the continued buildout of our administrative infrastructure, primarily through increased headcount, to support expected future growth. In addition, during 2019, transaction fees related to the C Technologies Acquisition of$4.0 million were included in SG&A, for which there were no comparable costs for 2018. Sales commissions were higher in 2019 due to the increase in revenue. Stock compensation expense increased as compared to 2018 resulting from the increase in headcount and higher share prices period over period. For 2018, SG&A costs increased by$14.2 million , or 28%, as compared to 2017. The increase is due to selling and administrative activities incurred following the Spectrum acquisition, as well as the continued buildout of our administrative infrastructure to support expected future growth and continued expansion of our customer-facing activities to drive sales of our bioprocessing products. Other expenses, net The table below provides detail regarding our other expenses, net: For the Years Ended December 31, 2019 vs. 2018 2018 vs. 2017 2019 2018 2017 $ Change % Change $ Change % Change (Amounts in thousands, except for percentage data) Investment income$ 5,324 $ 1,895 $
371
- - (5,650 ) 100.0 % - N/A
Interest expense (9,292 ) (6,709 ) (6,441 ) (2,583 ) 38.5 % (268 ) 4.2 %
Other (expenses) income (314 ) 262 (687 ) (576 ) (219.8 %) 949 (138.1 %)
Total other expenses, net$ (9,932 ) $ (4,552 ) $ (6,757 ) $ (5,380 ) 118.2. %$ 2,205 (32.6 %) Investment income Investment income includes income earned on invested cash balances. The increase of$3.4 million for 2019 and$1.5 million for 2018, as compared to 2018 and 2017 was attributable to higher average invested cash balances and higher interest rates on such invested cash balances. We expect investment income to vary based on changes in the amount of funds invested and fluctuation of interest rates. Loss on extinguishment of debt The$5.7 million loss on extinguishment of debt for the year endedDecember 31, 2019 resulted from the settlement of our outstanding 2.125% Convertible Senior Notes due 2021 (the "2016 Notes") in the third quarter of 2019. The loss represents the difference between (i) the fair value of the liability component and (ii) the sum of the carrying value of the debt component and any unamortized debt issuance costs at the time of settlement. Interest expense Interest expense primarily includes interest related to our issuance of the 2016 Notes inMay 2016 , which were settled during the third quarter of 2019, and our issuance of 0.375% Convertible Senior Notes due 2024 (the "2019 Notes"), which were issued inJuly 2019 . Interest expense increased$2.6 million in 2019, as compared to 44 -------------------------------------------------------------------------------- Table of Contents 2018. Interest calculated based on the carrying value related to the 2016 Notes was$1.3 million in 2019, compared to$2.4 million in 2018. As aforementioned, the 2016 Notes were settled duringJuly 2019 . As a result, interest was no longer accrued on the 2016 Notes subsequent to their settlement. Interest calculated based on the carrying value related to the 2019 Notes for 2019 was$0.5 million and there was no comparable amount for 2018. The amortization of the debt issuance costs on the 2016 Notes was$2.8 million for 2019, compared to$4.5 million for 2018. The decrease in this amortization is a result of the settlement of the 2016 Notes and subsequent write-off of the remaining debt issuance costs inJuly 2019 . Amortization of debt issuance costs on the 2019 Notes was$4.7 million in 2019. There were no comparable amounts in 2018 as the 2019 Notes were issued inJuly 2019 . Other (expenses) income Changes in other (expenses) income during 2019, compared to 2018, are primarily attributable to foreign currency losses related to amounts due from non-Swedish krona-based customers and cash balance denominated inU.S. dollars and British pounds held byRepligen Sweden AB . In addition,$0.5 million was included in other (expenses) income in 2019, which represents a bridge loan commitment fee incurred as part of the C Technologies Acquisition. Provision for income taxes Income tax provision for the years endedDecember 31, 2019 , 2018 and 2017 was as follows: For the Years Ended December 31, 2019 vs. 2018 2018 vs. 2017 2019 2018 2017 $ Change % Change $ Change % Change (Amounts in thousands, except for percentage data) Income tax provision$ 4,740 $ 4,819 $(21,105 ) $(79 ) (1.6 %)$ 25,924 (122.8 %) Effective tax rate 18.1 % 22.5 % (291.2 %) For the year endedDecember 31, 2019 , we recorded an income tax provision of approximately$4.7 million . The effective tax rate was an income tax provision of 18.1% and is based upon the estimated taxable income for the year endingDecember 31, 2019 and the composition of the taxable income in different jurisdictions. The effective tax rate was lower than theU.S. statutory rate of 21% due primarily to windfall benefits on stock option exercises and the vesting of restricted stock units and to deductions related to debt extinguishment. For the year endedDecember 31, 2018 , we recorded an income tax provision of$4.8 million . The effective tax rate was 22.5% in 2018 and is based upon the estimated income from the year and the composition of the income in different jurisdictions. The effective tax rate was higher than theU.S. statutory rate of 21% due to state tax effects and the impact of the Global Intangible Low-Taxed Income tax enacted as part of the Tax Cuts and Jobs Act (the "2017 Tax Act") enacted inDecember 2017 . Non-GAAP Financial Measures We provide non-GAAP adjusted income from operations, non-GAAP adjusted net income and adjusted EBITDA as supplemental measures to GAAP measures regarding our operating performance. These financial measures exclude the impact of certain acquisition related items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation and a reconciliation of each non-GAAP financial measures to its most comparable GAAP financial measures are described below. We include this financial information because we believe these measures provide a more accurate comparison of our financial results between periods and more accurately reflect how management reviews its financial results. 45 -------------------------------------------------------------------------------- Table of Contents We excluded the impact of certain acquisition related items because we believe that the resulting charges do not accurately reflect the performance of our ongoing operations for the period in which such charges are incurred. Non-GAAP adjusted income from operations Non-GAAP adjusted income from operations is measured by taking income from operations as reported in accordance with GAAP and excluding acquisition and integration costs, inventory step-up charges, intangible amortization and contingent consideration expenses booked through our consolidated statements of comprehensive income. The following is a reconciliation of income from operations in accordance with GAAP to non-GAAP adjusted income from operations for the years endedDecember 31, 2019 and 2018: For the Years Ended December 31, 2019 2018 (Amounts in thousands) GAAP income from operations$ 36,083 $ 25,988 Non-GAAP adjustments to income from operations: Acquisition and integration costs 12,508 2,928 Inventory step-up charges 1,483 - Intangible amortization 13,441 10,518 Non-GAAP
adjusted income from operations
Non-GAAP adjusted net income Non-GAAP adjusted net income is measured by taking net income as reported in accordance with GAAP and excluding acquisition and integration costs and related tax effects, inventory step-up charges, contingent consideration expenses, intangible amortization and related tax effects, non-cash interest expense, the partial release of the valuation allowance on our deferred tax assets and the net impact of tax reform legislation booked through our consolidated statements of comprehensive income. The following is a reconciliation of net income in accordance with GAAP to non-GAAP adjusted net income for the years endedDecember 31, 2019 and 2018: For the Years Ended December 31, 2019 2018 Fully Diluted Fully Diluted Earnings per Earnings per Amount Share* Amount Share* (Amounts in thousands, except per share data) GAAP net income$ 21,411 $ 0.44$ 16,617 $ 0.37 Non-GAAP adjustments to net income: Acquisition and integration costs 13,008 0.26 2,928 0.06 Inventory step-up charges 1,483 0.03 - - Intangible amortization 13,441 0.27 10,518 0.23 Loss on extinguishment of debt 5,650 0.11 - -
Non-cash
interest expense 7,536 0.15 4,248 0.09 Tax effect of intangible amortization and acquisition costs (10,003 ) (0.20 ) (4,204 ) (0.09 ) Non-GAAP adjusted net income$ 52,526 $ 1.07$ 30,107 $ 0.66
* Note that earnings per share amounts may not add due to rounding.
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Adjusted EBITDA
Adjusted EBITDA is measured by taking net income as reported in accordance with
GAAP, excluding investment income, interest expense, taxes, depreciation and
intangible amortization, and excluding acquisition and integration costs,
inventory
step-up
charges and contingent consideration expenses booked through our consolidated
statements of comprehensive income. The following is a reconciliation of net
income in accordance with GAAP to adjusted EBITDA for years ended December 31,
2019 and 2018:
For the Years Ended December 31,
2019 2018
(Amounts in thousands)
GAAP net income $ 21,411 $ 16,617
Non-GAAP EBITDA adjustments to net
income:
Investment income (5,324 ) (1,895 )
Interest expense 9,292 6,709
Tax provision 4,740 4,819
Depreciation 7,317 5,213
Intangible amortization 13,551 10,565
EBITDA 50,987 42,028
Other non-GAAP adjustments:
Acquisition and integration costs 13,008 2,928
Loss on extinguishment of debt 5,650 -
Inventory step-up charges 1,483 -
Adjusted EBITDA $ 71,128 $ 44,956
Liquidity and Capital Resources
We have financed our operations primarily through revenues derived from product
sales, the issuance of the 2016 Notes in May 2016 and our 2019 Notes (defined
below) in July 2019 and the issuance of common stock in our July 2019 , May 2019
and July 2017 public offerings. Our revenue for the foreseeable future will
primarily be limited to our bioprocessing product revenue.
At December 31, 2019 , we had cash and cash equivalents of $528.4 million
compared to cash and cash equivalents of $193.8 million at December 31, 2018 . As
a result of our acquisition of C Technologies in May 2019 , we are holding
$9.0 million in restricted cash for compensation expense for future employment
of C Technologies employees as of December 31, 2019 . There were no restrictions
on cash for December 31, 2018 .
We acquired C Technologies on May 31, 2019 for $239.9 million in cash and shares
of our common stock. The C Technologies Acquisition was funded through payment
of approximately $195.0 million in cash and 779,221 unregistered shares of the
Company's common stock totaling $53.9 million .
On May 3, 2019 , the Company completed a public offering in which 3,144,531
shares of its common stock, including the underwriters' full exercise 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 .
Proceeds from this public offering were partially used to fund the C
Technologies Acquisition on May 31, 2019 .
On July 19, 2019 , the Company completed a public offering in which 1,587,000
shares of its common stock, including the underwriters' full exercise of an
option to purchase an additional 207,000 shares, were sold to the public at a
price of $87.00 per share for $131.1 million in net proceeds to the Company,
after deducting underwriting discounts and commissions and other estimated
offering expenses payable by the Company (the "July Stock Offering").
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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"
and, together with the July Stock Offering, the "Offerings"). The net proceeds
of the Notes Offering, after deducting underwriting discounts and commissions
and other offering expenses payable by the Company, were $278.5 million . See
Note 11,
"Convertible Senior Notes,"
included in this report
for more information on this transaction. The Company utilized a portion of the
proceeds from the Offerings to settle its outstanding 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 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 as of December 31, 2019 .
During the fourth quarter of 2019, the closing price of the Company's common
stock did not exceed 130% of the conversion price of the 2019 Notes for more
than 20 trading days of the last 30 consecutive trading days of the quarter.
Therefore, the 2019 Notes are not convertible at the option of the holders of
the 2019 Notes during the first quarter of 2020 per the First Supplemental
Indenture underlying the 2019 Notes. The 2019 Notes have a face value of
$287.5 million and a carrying value of $232.8 million and are classified as
long-term liabilities on the Company's consolidated balance sheet as of
December 31, 2019 .
In July 2017 , we completed a public offering in which 2,807,017 shares of our
common stock were sold to the public at a price of $42.75 per share. The
underwriters were granted an option, which they exercised in full, to purchase
an additional 421,052 shares of our common stock. The total proceeds from this
offering, net of underwriting discounts, commissions and other offering
expenses, totaled $129.3 million .
On August 1, 2017 , we completed our acquisition of Spectrum for $112.8 million
in cash (net of cash received) and 6,153,995 unregistered shares of the
Company's common stock.
Cash flows
For the Years Ended December 31, FY19 vs FY18 FY18 vs FY17
2019 2018 2017 $ Change $ Change
(Amounts in thousands)
Operating activities $ 67,216 $ 32,770 $ 17,451 $ 34,446 $ 15,319
Investing activities (205,308 ) (14,037 ) (98,696 ) (191,271 ) 84,659
Financing activities 484,867 3,407 129,945 481,460 (126,538 )
Effect of exchange rate
changes on cash, cash
equivalents and restricted
cash (3,190 ) (2,077 ) 2,376 (1,113 ) (4,453 )
Net increase in cash, cash
equivalents and restricted
cash $ 343,585 $ 20,063 $ 51,076 $ 323,522 $ (31,013 )
Operating activities
For 2019, our operating activities provided cash of $67.2 million reflecting net
income of $21.4 million and
non-cash
charges totaling $46.9 million primarily related to depreciation, amortization,
non-cash
interest expense, deferred taxes, loss on extinguishment of debt and stock-based
compensation charges. An increase in accounts receivable consumed $7.7 million
of cash and was primarily driven by the 39%
year-to-date
increase in
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revenues and an increase in inventory consumed $9.3 million to support future
revenue, due to the addition of C Technologies on May 31, 2019 . These cash items
provided by operating activities were offset by cash items used for operating
activities that included an increase in accounts payable and accrued liabilities
of $13.8 million due to the addition of C Technologies and a decrease in
unbilled receivables of $2.1 million . The remaining cash used in operating
activities resulted from unfavorable changes in various other working capital
accounts.
For 2018, our operating activities provided cash of $32.8 million reflecting net
income of $16.6 million and
non-cash
charges totaling $30.3 million primarily related to depreciation, amortization,
non-cash
interest expense, deferred tax expense and stock-based compensation charges. An
increase in receivables consumed $8.7 million of cash and was primarily driven
by the 37%
year-to-date
increase in revenues. An increase in inventory levels to accommodate future
revenue growth consumed $4.0 million of cash, payment of accrued liabilities
consumed $1.4 million of cash and an increase in other assets used $1.8 million .
This utilization of cash is partially offset by $2.3 million of cash provided by
an increase in accounts payable due to the timing of payments to vendors. The
remaining cash flow used in operations resulted from net unfavorable changes in
various other working capital accounts.
For 2017, our operating activities provided cash of $17.5 million , reflecting
net income of $28.4 million offset by net
non-cash
charges totaling $3.4 million comprised mainly of depreciation, amortization,
stock-based compensation charges and deferred tax benefits. Increases in
accounts receivable consumed $6.9 million of cash, which is based on timing of
revenues billed to and payments from customers. Decreases in accounts payable
and accrued liabilities consumed $1.2 million of cash due to timing of payments
to vendors.
Investing activities
Our investing activities consumed $205.3 million of cash during 2019. We used
$182.2 million in cash (net of cash received) for the C Technologies Acquisition
on May 31, 2019 . Capital expenditures consumed $23.2 million as we continue to
increase our manufacturing capacity worldwide. Of these expenditures,
$4.7 million represented capitalized costs related to our
internal-use
software.
For 2018, our investing activities consumed $14.0 million of cash, including
$12.8 million for capital expenditures. Of those expenditures, $2.1 million
represented capitalized costs related to our
internal-use
software. In addition, a capitalized payment for developed technology of
$1.3 million was paid to Navigo in 2018 to assist in expanding our proteins
product offerings through a development agreement.
For 2017, our investing activities consumed $98.7 million of cash. We used
$112.8 million in cash (net of cash received) for our acquisition of Spectrum.
Fixed asset additions consumed $5.5 million , as we continued to increase our
manufacturing capacity. Net redemptions of marketable securities provided
$19.6 million of cash in 2017.
Financing activities
In 2019, cash provided by financing activities of $487.1 million included
$320.7 million from the issuance of our common stock resulting from our public
offerings completed in May and July 2019 . In addition, in July 2019 the Company
issued $287.5 million aggregate principal amount of the 2019 Notes for net
proceeds of $278.5 million . Proceeds from stock option exercises during 2019
were $1.2 million . Offsetting these activities was $115.0 million of cash
utilized by the Company in July 2019 to settle the 2016 Notes.
In 2018, our financing activities provided $3.4 million of cash. We received
proceeds of $3.4 million from stock option exercises, partially offset by cash
outlays of $11,000 related to the partial conversion of the 2016 Notes in the
first quarter of 2018.
In July 2017 , we received net proceeds of $129.3 million from the issuance of
common stock. In May 2016 , we received net proceeds of $111.1 million from the
issuance of the 2016 Notes. Exercises of stock options provided
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cash receipts of $2.4 million and $1.8 million in 2017 and 2016, respectively.
Cash payments to Atoll and Refine in 2017 totaled $5.1 million , of which
$1.7 million related to the fair value of these liabilities as of the respective
acquisition dates and is included as part of financing activities. Cash payments
to Refine and BioFlash in 2016 totaled $4.1 million , of which $0.8 million
related to the fair value of these liabilities as of the respective acquisition
dates and is included as part of financing activities. The remaining amounts are
included as an offset to our cash provided by operating activities.
Off-
Balance Sheet Arrangements
We do not have any special purpose entities or
off-balance
sheet financing arrangements.
Contractual Obligations
As of December 31, 2019 , we had the following fixed obligations and commitments:
Less than One to Three to Over five
Total one year three years five years years
(Amounts in thousands)
Convertible senior notes $ 287,500 $ - $ - $ - $ 287,500
Operating lease obligations 33,469 5,175 10,139 6,939 11,216
Purchase obligations
(1) 40,455 39,055 1,400 - -
Total $ 361,424 $ 44,230 $ 11,539 $ 6,939 $ 298,716 (1) Primarily represents purchase commitments with certain vendors and open
purchase orders for the procurement of raw materials for manufacturing.
The table excludes a liability for uncertain tax positions totaling $3.4 million
since we cannot currently make a reliable estimate of the period in which the
liability will be payable, if ever. Please see Note 8,
"Income Taxes,"
to our consolidated financial statements included in this report for more
information.
Capital Requirements
Our future capital requirements will depend on many factors, including the
following:
• the expansion of our bioprocessing business;
• the ability to sustain sales and profits of our bioprocessing products;
• our ability to acquire additional bioprocessing products;
• the scope of and progress made in our research and development activities;
• the extent of any share repurchase activity; and • the success of any proposed financing efforts. Absent acquisitions of additional products, product candidates or intellectual property, we believe our current cash balances are adequate to meet our cash needs for at least the next 24 months. We expect operating expenses in the year endingDecember 31, 2020 to increase as we continue to expand our bioprocessing business. We expect to incur continued spending related to the development and expansion of our bioprocessing product lines and expansion of our commercial capabilities for the foreseeable future. Our future capital requirements may include, but are not limited to, purchases of property, plant and equipment, the acquisition of additional bioprocessing products and technologies to complement our existing manufacturing capabilities, and continued investment in our intellectual property portfolio. We plan to continue to invest in our bioprocessing business and in key research and development activities associated with the development of new bioprocessing products. We actively evaluate various strategic 50
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Table of Contents transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses that would complement our existing portfolio. We continue to seek to acquire such potential assets that may offer us the best opportunity to create value for our shareholders. In order to acquire such assets, we may need to seek additional financing to fund these investments. If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of any such acquisition-related financing needs or lower demand for our products, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt funding. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, if at all. Net Operating Loss Carryforwards AtDecember 31, 2019 , we had net operating loss carryforwards of$0.2 million remaining. We had business tax credits carryforwards of$2.1 million available to reduce future federal income taxes, if any. The business tax credits carryforwards will continue to expire at various dates throughDecember 2039 . Net operating loss carryforwards and available tax credits are subject to review and possible adjustment by the Internal Revenue Service, state and foreign jurisdictions and may be limited in the event of certain changes in the ownership interest of significant stockholders. Foreign Earnings As ofDecember 31, 2019 , the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately$93.5 million . Because$58.0 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the 2017 Tax Act, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. AtDecember 31, 2019 , we have not provided for taxes on outside basis differences of our foreign subsidiaries, as we have the ability and intent to indefinitely reinvest the undistributed earnings of our foreign subsidiaries, and there are no needs for such earnings inthe United States that would contradict our plan to indefinitely reinvest. Effects of Inflation Our assets are primarily monetary, consisting of cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. Since we intend to retain and continue to use our equipment, furniture, fixtures and office equipment, computer hardware and software and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.
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