REPLIGEN CORPORATION
Information pertaining to fiscal year 2018 was included in the Company's Annual
Report on Form
10-K
("Form
10-K")
for the year ended December 31, 2019 on pages 35 through 51 under Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which was filed with the SEC on February 26, 2020 .
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 ("mAbs"), recombinant proteins, vaccines and gene
therapies - that are improving human health worldwide. For more information
regarding our business, products and acquisitions, see above sections in Part I
entitled "Overview", "Our Products", "2020 Acquisitions", "2019 Acquisition" and
"Our Market Opportunity".
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 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
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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 of December 31, 2020 .
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.
Allowance for credit losses
We evaluate our global accounts receivable through a continuous process of
assessing our portfolio on an individual customer and overall basis. This
process consists of a thorough review of historical collection experience,
current aging status of the customer accounts, financial condition of our
customers, and whether the receivables involve retainages. We also consider the
economic environment of our customers, both from a marketplace and geographic
perspective, in evaluating the need for an allowance. Based on our review of
these factors, we establish or adjust allowances for specific customers. Credit
losses can vary substantially over time and the process involves judgment and
estimation that require a number of assumptions about matters that are
uncertain. Accordingly, our results of operations can be affected by adjustments
to the allowance due to actual write-offs that differ from estimated amounts.
See Note 6,
"Credit Losses,"
to our consolidated financial statements included in this report for more
information.
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. 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
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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 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. During the measurement period these changes in the fair value of
contingent consideration are recorded to goodwill. Subsequent to the measurement
period, they will be 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, research and development 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 at December 31, 2020 .
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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 of December 31
st
of each year, or more frequently as warranted 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 of December 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 has operated as one reporting unit since this
reorganization. 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 our December 31, 2019
goodwill impairment valuation noted above, except that cash flows from the
entire business enterprise were used for the reporting unit valuation. Our
market approach model estimated 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 was not impaired as of
December 31, 2019 . During the qualitative assessment of the Company's one
reporting unit during the 2020 goodwill impairment testing, it was determined
that it was not more likely than not that its fair value was less than its
carrying amount. As such, a quantitative impairment assessment was not required
as of December 31, 2020 . If an event occurs or circumstances change that would
more likely than not reduce the fair value of its reporting unit below its
carrying value, the Company will evaluate its goodwill for impairment between
annual tests.
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
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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 short-term debt balance is related to our 0.375% Convertible Senior Notes
due 2024 (the "2019 Notes"), which were issued in July 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. 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.
During the fourth quarter of 2020, the closing price of the Company's common
stock exceeded 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. As a
result, the 2019 Notes are convertible at the option of the holders of the 2019
Notes during the first quarter of 2021, the quarter immediately following the
quarter when the conditions are met, as stated in the terms of the 2019 Notes.
Expecting to continue meeting these terms, the Company reclassified the carrying
value of the 2019 Notes from long-term liabilities to current liabilities on the
Company's balance sheet as of December 31, 2020 . This classification is
reassessed each quarter.
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 on U.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.
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The fair value for stock units, which include restricted stock units and
performance stock units, was 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 ended December 31, 2020 , 2019 and 2018, we recorded stock-based
compensation expense of $17.0 million , $12.8 million and $10.2 million ,
respectively, for share-based awards granted under all of the Company's stock
plans.
As of December 31, 2020 , there was $46.7 million of total unrecognized
compensation cost related to unvested share-based awards. This cost is expected
to be recognized over a weighted average remaining requisite service period of
3.55 years. We expect 1,853,028 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 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 the U.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.
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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 ended December 31, 2020 , 2019, and 2018 were comprised
of the following:
For the Years Ended December 31, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
(Amounts in thousands, except for percentage data)
Revenue:
Product $ 366,136 $ 270,097 $ 193,891 $ 96,039 35.6 % $ 76,206 39.3 %
Royalty and other 124 148 141 (24 ) (16.2 %) 7 5.0 %
Total revenue $ 366,260 $ 270,245 $ 194,032 $ 96,015 35.5 % $ 76,213 39.3 %
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 78.0% of our product revenue
during 2020. We expect that direct sales will continue to account for an
increasing percentage of our product revenues, as the largest customer of our
protein products diversified its supply chain 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.
Product revenues were comprised of the following:
For the Years Ended December 31,
2020 2019
(1) (2) 2018
(Amounts in thousands)
Filtration products $ 174,896 $ 119,534 $ 90,586
Chromatography products 73,551 64,635 45,326
Process analytics products 33,346 16,405 -
Proteins products 80,732 65,124 54,375
Other 3,611 4,399 3,604
Total product revenue $ 366,136 $ 270,097 $ 193,891 (1) 2020 revenue for filtration products includes revenue related to EMT from
through
(2) 2019 revenue includes process analytics revenue related to C Technologies
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, SIUS filtration products, the silicone-molded products offered by EMT, which we acquired onJuly 13, 2020 and the products offered by NMS and ARTeSYN, which were both acquired during the fourth quarter of 2020. 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, consumables and 45 -------------------------------------------------------------------------------- Table of Contents service. Other revenue primarily consists of revenue from the sale of our operating room products to hospitals as well as freight revenue. For 2020, product revenue increased by$96.0 million , or 35.6%, as compared to 2019. The increase is due to the continued adoption of our products by key bioprocessing customers across all our key product lines. Beginning in the second quarter of 2020, we experienced an increase in overall sales as a result of accelerated demand, which was from broad-based covering mAb, gene therapy and COVID-19 customers working on vaccines and therapeutics. We expect there will be a continued increase in direct sales during 2021, especially from COVID-19 customers as they scale-up and move vaccine and therapy drug candidates through clinical trial processes. In 2020, we also had good performance from our acquisitions executed in 2019 and through 2020. C Technologies revenue increased by$16.9 million in 2020, compared to 2019, as 2020 represented twelve months of ownership of C Technologies, which was acquired inMay 2019 , compared to only seven months of ownership in 2019. Finally, as a result of our acquisitions of EMT, NMS and ARTeSYN in the second half of 2020, revenue from our filtration products includes$6.2 million of additional revenue. 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. For 2019, product revenue increased by$76.2 million , or 39.3%, as compared to 2018. The increase was due to the continued adoption of our products by our key bioprocessing customers, particularly our chromatography and filtration products. Sales of our bioprocessing products were impacted by the timing of orders, development efforts targeted at our customers or end-users and regulatory approvals for biologics that incorporated our products, which may result in significant quarterly fluctuations. Such quarterly fluctuations were expected. Additionally, there was a$16.4 million increase in the 2019 revenue compared to the 2018 revenue due to revenues generated by C Technologies, which was acquired inMay 2019 . Royalty revenues Royalty revenues in 2020 and 2019 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. Costs and operating expenses Total costs and operating expenses for years endedDecember 31, 2020 , 2019 and 2018 were comprised of the following: For the Years Ended December 31, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change (Amounts in thousands, except for percentage data) Cost of product revenue$ 156,634 $ 119,099 $ 86,531 $ 37,535 31.5 %$ 32,568 37.6 % Research and development 20,182 19,450 15,821 732 3.8 % 3,629 22.9 % Selling, general and administrative 119,621 95,613 65,692 24,008 25.1 % 29,921 45.5 % Total costs and operating expenses$ 296,437 $ 234,162 $ 168,044 $ 62,275 26.6 %$ 66,118 39.3 % 46
-------------------------------------------------------------------------------- Table of Contents Cost of product revenue For 2020, cost of product revenue increased$37.5 million , or 31.5%, as compared to 2019, due primarily to the increase in product revenue mentioned above and costs associated with higher product volume. An increase in manufacturing headcount resulted in higher employee-related costs in 2020, compared to 2019. Additional facility costs, including personal protection equipment purchased for essential manufacturing personnel on site to protect against COVID-19, were also incurred during 2020 for which there were no comparable amounts in 2019. Gross margin was 57.2% in 2020, compared to 55.9% in 2019. The gross margin in 2020 includes$0.7 million of amortization of inventory step-up associated with the EMT and ARTeSYN Acquisitions and the gross margin for 2019 included$1.5 million of amortization of inventory step-up associated with the C Technologies Acquisition inMay 2019 . Excluding the step-up amortization, gross margins in 2020 and 2019 were 57.4% and 56.5%, respectively. The increase in gross margins, excluding the inventory step-up amortization, in 2020, as compared to 2019, is due primarily to the increase in revenue mentioned above, and favorable product mix, partially offset by an increase in manufacturing headcount subsequent toDecember 31, 2019 . Gross margins may fluctuate in future years based on expected production volume and product mix. For 2019, cost of product revenue increased$32.6 million , or 37.6%, as compared to 2018, due primarily to the increase in revenue mentioned above. Gross margin was 55.9% and 55.4%, in 2019 and 2018, respectively. The gross margin in 2019 includes$1.5 million of amortization of inventory step-up associated with C Technologies Acquisition inMay 2019 . 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 years based on expected production volume and product mix. Research and development expenses Research and development ("R&D") expenses are related to bioprocessing products, which include 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. R&D expenses increased$0.7 million , or 3.8% in 2020, compared to 2019. The increase is primarily due to a$1.1 million increase in C Technologies R&D expenses. C Technologies was acquired onMay 31, 2019 . Therefore, only seven months of expenses were recognized in 2019, compared to a full 12 months in 2020. The increase is partially offset by a decrease in R&D spending on external projects, as certain R&D process development laboratories were not fully functional for most of 2020 due to COVID-19. R&D expense also includes investments made to expand our proteins product offering through our development agreement withNavigo Proteins GmbH ("Navigo"). The Company invested$0.9 million in 2020 and$1.0 million in 2019 in the form of milestone payments to Navigo. We expect our R&D expenses in 2021 to modestly increase to support new product development. During 2019 and 2018, R&D expenses were related to bioprocessing products, including personnel, supplies and product development 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. 47 -------------------------------------------------------------------------------- Table of Contents R&D expenses increased$3.6 million in 2019, or 22.9%, as compared to 2018. The increase is primarily due to an increase in costs associated with an increase in R&D headcount costs and 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 Navigo. The Company invested$1.0 million in 2019 compared to$2.4 million in 2018. 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 2020, SG&A costs increased by$24.0 million , or 25.1%, as compared to 2019. The increase is partially due to the continued expansion of our customer-facing activities to drive sales of our bioprocessing products, and the continued buildout of our administrative infrastructure, primarily through increased headcount, to support expected future growth. Stock-based compensation expense and other employee-related costs increased in 2020, as compared to 2019, resulting from an increase in headcount and higher share prices period over period. In addition,$4.2 million of the increase in SG&A costs for 2020 was related to the C Technologies operations, which was acquired inMay 2019 . C Technologies' SG&A costs for 2020 include a full year of costs, compared to only seven months in 2019. With the acquisitions of EMT, NMS and ARTeSYN in 2020, an additional$2.2 million of SG&A costs were included in the consolidated results. For 2019, SG&A costs increased by$29.9 million , or 45.5%, 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. Other expenses, net The table below provides detail regarding our other expenses, net: For the Years Ended December 31, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change (Amounts in thousands, except for percentage data) Investment income$ 1,741 $ 5,324 $ 1,895 $ (3,583 ) (67.3 )%$ 3,429 180.9 % Loss on extinguishment of debt - (5,650 ) - 5,650 (100.0 )% (5,650 ) 100.0 % Interest expense (12,133 ) (9,292 ) (6,709 ) (2,841 ) 30.6 % (2,583 ) 38.5 % Other (expenses) income (214 ) (314 ) 262 100 (31.8 )% (576 ) (219.8 )% Total other expenses, net$ (10,606 ) $ (9,932 ) $ (4,552 ) $ (674 ) 6.8 %$ (5,380 ) 118.2 % Investment income Investment income includes income earned on invested cash balances. The decrease of$3.6 million in 2020, as compared to 2019, was attributable to a decrease in interest rates on our invested cash 48 -------------------------------------------------------------------------------- Table of Contents balances. InMarch 2020 , in response to the outbreak of COVID-19 and to stay ahead of disruptions and economic slowdown, theFederal Reserve reduced federal funds rates to a range of 0.0% to 0.25%, which will continue to affect our investment income in future periods. Higher average invested cash balances during 2020, as compared to 2019 due to the completion of a public offering and the issuance of our 2019 Notes during the third quarter of 2019, partially offset the decrease in interest rates mentioned above. 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 We had no loss on extinguishment of debt in 2020. 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 in 2020 is from our 0.375% Convertible Senior Notes due 2024 (the "2019 Notes"), which were issued inJuly 2019 . Interest expense in 2019 is from a combination of our 2016 Notes, which were settled during the third quarter of 2019 and our 2019 Notes. Interest expense increased$2.8 million in 2020, as compared to 2019 based on the increase in debt issued from$115.0 million for the 2016 Notes to$287.5 million for the 2019 Notes. The amortization of debt issuance costs on the 2019 Notes was$11.0 million in 2020. Amortization of debt issuance costs on the 2019 Notes was$4.7 million in 2019. The amortization of the debt issuance costs on the 2016 Notes was$2.8 million in 2019. Contractual coupon interest incurred on the 2019 Notes in 2020 was$1.1 million . Interest calculated based on the carrying value related to the 2019 Notes for 2019 was$0.5 million . Contractual coupon interest incurred on the 2016 Notes was$1.3 million in 2019. Since the 2016 Notes were settled duringJuly 2019 , interest no longer accrued on the 2016 Notes subsequent to their settlement. Other (expenses) income The change in other expenses during 2020, as compared to 2019, is primarily attributable to realized foreign currency losses related to amounts due from non-Swedish krona-based customers and vendors. In addition,$0.5 million was included in other expenses in 2019, which represents a bridge loan commitment fee incurred as part of the C Technologies Acquisition. Income tax (benefit) provision Income tax (benefit) provision for the years endedDecember 31, 2020 , 2019 and 2018 was as follows: For the Years Ended December 31, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change (Amounts in
thousands, except for percentage data)
Income tax (benefit) provision
(1.2 )% 18.1 % 22.5 %
49-------------------------------------------------------------------------------- Table of Contents For the year endedDecember 31, 2020 , we recorded an income tax benefit of$0.7 million . The effective tax rate was (1.2%) and is based upon the estimated taxable income for the year endingDecember 31, 2020 and the composition of income in different jurisdictions. The effective tax rate for 2020 was lower than theU.S. statutory rate of 21% primarily due to windfall benefits on stock option exercises and the vesting of stock units, an increase in business tax credits and tax benefits related to a change inU.S. tax law. 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. 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. 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 and intangible amortization 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, 2020 and 2019: For the Years Ended December 31, 2020 2019 (Amounts in thousands) GAAP income from operations$ 69,823 $ 36,083 Non-GAAP adjustments to income from operations: Acquisition and integration costs 11,465 12,508 Inventory step-up charges 734 1,483 Intangible amortization 16,032 13,441 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, intangible amortization and related tax effects, loss on extinguishment
of debt and
non-cash
interest expense booked through our consolidated statements of comprehensive
income. The following is a
50
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Table of Contents
reconciliation of net income in accordance with GAAP to
non-GAAP
adjusted net income for the years ended December 31, 2020 and 2019:
For the Years Ended December 31,
2020 2019
Fully Diluted Fully Diluted
Earnings per Earnings per
Amount Share* Amount Share*
(Amounts in thousands, except per share data)
GAAP net income $ 59,926 $ 1.11 $ 21,411 $ 0.44
Non-GAAP
adjustments to net income:
Acquisition and integration
costs 10,479 0.19 13,008 0.26
Inventory
step-up
charges 734 0.01 1,483 0.03
Intangible amortization 16,032 0.30 13,441 0.27
Loss on extinguishment of
debt - - 5,650 0.11
Non-cash
interest expense 10,970 0.20 7,536 0.15
Tax effect of intangible
amortization and
acquisition costs (9,050 ) (0.17 ) (10,003 ) (0.20 )
Non-GAAP
adjusted net income $ 89,091 $ 1.65 $ 52,526 $ 1.07
* Note that earnings per share amounts may not add due to rounding.
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 loss on extinguishment of debt 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 endedDecember 31, 2020 and 2019: For the Years Ended December 31, 2020 2019 (Amounts in thousands) GAAP net income $ 59,926$ 21,411 Non-GAAP EBITDA adjustments to net income: Investment income (1,741 ) (5,324 ) Interest expense 12,133 9,292 Tax (benefit) provision (709 ) 4,740 Depreciation 10,888 7,317 Intangible amortization 16,143 13,551 EBITDA 96,640 50,987 Other non-GAAP adjustments: Acquisition and integration costs 10,479
13,008
Loss on extinguishment of debt - 5,650 Inventory step-up charges 734 1,483 Adjusted EBITDA $ 107,853$ 71,128 51
-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We have financed our operations primarily through revenues derived from product sales, the issuance of the 2016 Notes inMay 2016 and our 2019 Notes (defined below) inJuly 2019 and the issuance of common stock in ourDecember 2020 ,July 2019 andMay 2019 public offerings. Our revenue for the foreseeable future will primarily be limited to our bioprocessing product revenue. AtDecember 31, 2020 , we had cash and cash equivalents of$717.3 million compared to cash and cash equivalents of$528.4 million atDecember 31, 2019 . There were no restrictions on cash as ofDecember 31, 2020 . OnDecember 8, 2020 , the Company completed a public offering in which 1,725,000 shares of its common stock, including the underwriters' full exercise of an option to purchase up to an additional 225,000 shares, were sold to the public at a price of$181.00 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, were approximately$297.8 million . In 2020, we acquired three companies for an aggregate of$175.0 million in cash, net of cash acquired. We acquired C Technologies onMay 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 issuance of 779,221 unregistered shares of the Company's common stock totaling$53.9 million . OnJuly 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"). OnJuly 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 12, "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. OnJuly 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"). OnJuly 19, 2019 andJuly 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 ofDecember 31, 2019 . OnMay 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 52 -------------------------------------------------------------------------------- Table of Contents 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 onMay 31, 2019 . During the fourth quarter of 2020, the closing price of the Company's common stock exceeded 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. As a result, the 2019 Notes are convertible at the option of the holders of the 2019 Notes during the first quarter of 2021 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$243.7 million . The Company expects to continue meeting these terms and has reclassified the carrying value of the 2019 Notes from long-term liabilities to current liabilities on the Company's balance sheet as ofDecember 31, 2020 . As of the date of this filing, the Company received a request to convert$1,000 aggregate principal amount of 2019 Notes and we intend to pay or deliver, as the case may be, the settlement amount to be determined - paying the amount in excess of the aggregate principal portion of the converted notes in shares of our common stock. Cash flows For the Years Ended December 31, FY20 vs FY19 FY19 vs FY18 2020 2019 2018 $ Change $ Change (Amounts in thousands) Cash provided by (used in): Operating activities$ 62,625 $ 67,216 $ 32,770 $ (4,591 ) $ 34,446 Investing activities (201,385 ) (205,308 ) (14,037 ) 3,923 (191,271 ) Financing activities 305,916 484,867 3,407 (178,951 ) 481,460 Effect of exchange rate changes on cash, cash equivalents and restricted cash 12,729 (3,190 ) (2,077 ) 15,919 (1,113 ) Net increase in cash, cash equivalents and restricted cash$ 179,885 $ 343,585 $ 20,063 $ (163,700 ) $ 323,522 Operating activities For 2020, our operating activities provided cash of$62.6 million reflecting net income of$59.9 million and non-cash charges totaling$51.3 million primarily related to depreciation, amortization, non-cash interest expense, deferred taxes and stock-based compensation charges. An increase in accounts receivable consumed$21.0 million of cash and was primarily driven by the 35.5% year-to-date increase in total revenues and an increase in inventory manufactured of$29.3 million to support expected continued growth in future revenues. In addition,$4.9 million was consumed for increases in prepaid expenses for annual software and network contracts, as well as the renewal of the Company's global insurance policies. These were offset by an increase in accounts payable and accrued liabilities of$3.5 million due primarily to increased inventory purchases to support customer orders and year-end tax adjustments, offset by payment of acquisition-related bonuses for C Technologies during the second quarter of 2020. The remaining cash source of operating activities resulted from favorable changes in various other working capital accounts. 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. 53 -------------------------------------------------------------------------------- Table of Contents An increase in accounts receivable consumed$7.7 million of cash and was primarily driven by the 39% year-to-date increase in revenues and an increase in inventory consumed$9.3 million to support future revenue, due to the addition of C Technologies onMay 31, 2019 . These were offset by 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. Investing activities Our investing activities consumed$201.4 million of cash during 2020. We used$175.0 million in cash (net of cash received) for the EMT, NMS and ARTeSYN Acquisitions. Capital expenditures consumed$26.3 million as we continue to increase our manufacturing capacity worldwide. Of these expenditures,$3.9 million represented capitalized costs related to our internal-use software. 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 onMay 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. Financing activities In 2020, cash provided by financing activities of$305.9 million included$297.8 million from the issuance of our common stock resulting from our public offerings completed inDecember 2020 . Proceeds from stock option exercises during 2020 were$8.2 million . In 2019, cash provided by financing activities of$484.9 million included$320.7 million from the issuance of our common stock resulting from our public offerings completed in May andJuly 2019 . In addition, inJuly 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 inJuly 2019 to settle the 2016 Notes. In 2018, our financing activities provided$3.4 million of cash from proceeds received from stock option exercises. 54 -------------------------------------------------------------------------------- Table of Contents Effect of exchange rate changes on cash, cash equivalents and restricted cash The effect of exchange rate changes on cash during 2020 is a result of the strengthening of the Swedish krona against theU.S. dollar by 12% and the strengthening of the Euro against theU.S. dollar by 9%. Off-Balance Sheet Arrangements We do not have any special purpose entities or off-balance sheet financing arrangements. Contractual Obligations As ofDecember 31, 2020 , we had the following fixed obligations and commitments: Less than One to Three to Over five Total one year three years five years years (Amounts in
thousands)
Convertible senior notes (1)$ 287,500 $ 287,500 $ - $ - $ - Interest payments related to convertible senior notes 1,078 1,078 - - - Operating lease obligations 44,840 7,196 12,252 9,865 15,527 Purchase obligations (2) 55,253 55,253 - - - Total$ 388,671 $ 351,027 $ 12,252 $ 9,865 $ 15,527
(1) During the fourth quarter of 2020, the closing price of the Company's common
stock exceeded 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. As a
result, the 2019 Notes are convertible at the option of the holders of the
2019 Notes during the first quarter of 2021, the quarter immediately
following the quarter when the conditions are met, as stated in the terms of
the 2019 Notes. Expecting to continue meeting these terms, the Company
reclassified the carrying value of the 2019 Notes from long-term liabilities
to current liabilities on the Company's balance sheet as of
2020.
(2) 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$3.2 million since we cannot currently make a reliable estimate of the period in which the liability will be payable, if ever. See Note 9, "Income Taxes," to our consolidated financial statements included in this report for more information. For additional information on our operating lease obligations and convertible senior notes, see Note 4, "Leases" and Note 12, "Convertible Senior Notes," in our notes to consolidated financial statements included in this report. 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.
55-------------------------------------------------------------------------------- Table of Contents 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 2021 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 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, 2020 , we had net operating loss carryforwards of$6.4 million remaining. We had business tax credits carryforwards of$9.4 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, 2020 , the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately$113.1 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, 2020 , 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 56
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Table of Contents 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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