UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): November 15, 2018

BROOKS AUTOMATION, INC.

 

(Exact Name of Registrant as Specified in Charter)

Delaware

 

0-25434

 

04-3040660

(State or Other Jurisdiction of Incorporation)

 

(Commission File Number)

 

(IRS Employer Identification No.)

 

15 Elizabeth Drive, Chelmsford, MA

 

01824

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (978) 262-2400

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions :

☐    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

☐    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

☐    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

☐    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

 

 


 

 

Explanatory Note

 

As previously reported, on November 15, 2018, Brooks Automation, Inc. (the “Company”) completed its previously announced acquisition of GENEWIZ Group, an exempted company with limited liability incorporated under the Laws of the Cayman Islands (“GENEWIZ”). This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on November 15, 2018 to include the financial statements of GENEWIZ and the pro forma information required by Items 9.01(a) and 9.01(b), respectively.

 

Item 9.01. Financial Statements and Exhibits

 

(a)

Financial Statements of Businesses Acquired.

 

The audited consolidated financial statements of GENEWIZ Group as of December 31, 2017 and 2016 and for each of three years in the period ended December 31, 2017 together with the accompanying Report of Independent Auditors, are set forth in Exhibit 99.1.

 

The unaudited consolidated financial statements of GENEWIZ Group as of September 30, 2018 and for the nine months ended September 30, 2018 and 2017, are set forth in Exhibit 99.2.

  

(b)

Unaudited Pro Forma Financial Information

 

The unaudited pro forma condensed combined financial statements for the Company and GENEWIZ as of and for the year ended September 30, 2018, are set forth in Exhibit 99.3.

   

(d) Exhibits

 

The following exhibits are filed with this Current Report on Form 8-K/A.

 

 

 

 

 

 


 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

/s/

 

 

 

BROOKS AUTOMATION, INC.

 

 

 

 

Date:  January 29, 2019

/s/ Jason W. Joseph

 

Jason W. Joseph

 

Senior Vice President, General Counsel and Secretary

 

 


Exhibit 23.1

Consent of Independent Auditors

We consent to the use of our report dated November 13, 2018 with respect to the consolidated financial statements of GENEWIZ Group. as of December 31, 2017 and 2016 and for each of the three years ended December 31, 2017 included in the Brooks Automation, Inc. Current Report on Form 8-K/A, filed with the Securities and Exchange Commission.

 

/s/ Ernst & Young LLP

Iselin, New Jersey

January 25, 2019

 

 


Exhibit 99.1

 

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

GENEWIZ Group

 

Years Ended December 31, 2017, 2016 and 2015

 

With Report of Independent Auditors

 

 

 

 


 

GENEWIZ Group

Audited Consolidated Financial Statements

Years Ended December 31, 2017, 2016 and 2015

Contents

Report of Independent Auditors  

3

 

 

Audited Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets  

4

Consolidated Statements of Operations  

5

Consolidated Statements of Comprehensive Income  

6

Consolidated Statements of Changes in Stockholders’ Equity  

7

Consolidated Statements of Cash Flows  

8

Notes to Consolidated Financial Statements  

9

 

 

 

 


 

 

 

PICTURE 1

 

 

Ernst & Young LLP
99 Wood Avenue South
Metropark
P.O. Box 751
Iselin, NJ 08830‑0471

 

 

Tel: +1 732 516 4200
Fax: +1 732 516 4429
ey.com

 

Report of Independent Auditors

The Board of Directors and Stockholders’ of
GENEWIZ Group

We have audited the accompanying consolidated financial statements of GENEWIZ Group, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GENEWIZ Group at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years ended December 31, 2017 in conformity with U.S. generally accepted accounting principles.

Restatement of 2017 and 2016 Financial Statements

As discussed in Note 1 to the consolidated financial statements, the 2017 and 2016 financial statements have been restated to correct various income tax accounts. Our opinion is not modified with respect to this matter.

 

PICTURE 2

 

November 13, 2018

 

 

A member firm of Ernst & Young Global Limitd


 

GENEWIZ Group

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

 

 

 

 

 

 

 

 

 

December 31,

 

 

2017

 

2016

 

 

(Restated)

 

(Restated)

Assets

    

 

  

    

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

40,448

 

$

14,439

Accounts receivable, net of $2,426 and $1,657 of allowance for doubtful accounts at December 31, 2017 and 2016, respectively

 

 

30,161

 

 

19,126

Amount due from a related-party

 

 

740

 

 

100

Inventories

 

 

4,278

 

 

2,615

Prepaid expenses and other current assets

 

 

4,665

 

 

3,872

Total current assets

 

 

80,292

 

 

40,152

Non-current assets:

 

 

  

 

 

  

Property and equipment, net

 

 

32,773

 

 

25,884

Advance payments for property, plant, and equipment

 

 

1,216

 

 

1,377

Deferred income taxes assets, net

 

 

12,130

 

 

17,830

Other assets, net

 

 

613

 

 

510

Total non-current assets

 

 

46,732

 

 

45,601

Total assets

 

$

127,024

 

$

85,753

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

7,745

 

$

4,131

Amount due to a related-party

 

 

1,774

 

 

 —

Unearned revenue

 

 

5,863

 

 

3,407

Short-term debt and current portion of long-term debt

 

 

11,252

 

 

8,392

Accrued expenses and other current liabilities

 

 

5,666

 

 

3,793

Total current liabilities

 

 

32,300

 

 

19,723

 

 

 

 

 

 

 

Non-current liabilities:

 

 

  

 

 

  

Long-term debt, less current portion, and other debts

 

 

14,740

 

 

12,904

Deferred income

 

 

1,000

 

 

1,046

Warrant liabilities

 

 

 —

 

 

563

Other non-current liabilities

 

 

758

 

 

667

Long term tax payable

 

 

14,179

 

 

12,962

Total non-current liabilities

 

 

30,677

 

 

28,142

Total liabilities

 

$

62,977

 

$

47,865

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Mezzanine equity:

    

 

  

    

 

  

Series B convertible redeemable preferred shares ($0.0001 par value; 4,496,667 shares authorized, 4,496,667 and 3,372,500 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively; Liquidation value of $28,742 and $19,756 as of December 31, 2017 and 2016, respectively)

 

$

28,742

 

$

19,756

 

 

 

 

 

 

 

Equity:

 

 

  

 

 

  

Series A convertible preferred shares ($0.0001 par value; 23,753,859 and 23,927,900 shares authorized, issued and outstanding as of December 31, 2017 and December 31, 2016, respectively; Liquidation value of $50,401 and $49,281 as of December 31, 2017 and 2016, respectively)

 

 

 3

 

 

 3

Series A‑1 convertible preferred shares ($0.0001 par value; 667,000 shares authorized, issued and outstanding as of December 31, 2017; Liquidation value of $3,758 as of December 31, 2017)

 

 

3,740

 

 

 —

Series A‑2 convertible preferred shares ($0.0001 par value; 1,665,818 shares authorized, issued and outstanding as of December 31, 2017; Liquidation value of $16,750 as of December 31, 2017)

 

 

16,720

 

 

 —

Ordinary A Shares ($0.0001 par value; 466,683,656 and 468,175,433 shares authorized at December 31, 2017 and 2016, respectively; zero issued and outstanding as of December 31, 2017 and 2016, respectively)

 

 

 —

 

 

 —

Ordinary B Shares $0.0001 par value; 2,733,000 and 3,400,000 shares authorized at December 31, 2017 and 2016, respectively; 193,250 and 192,000 issued and outstanding as of December 31, 2017 and 2016, respectively)

 

 

 —

 

 

 —

Additional paid-in capital

 

 

2,522

 

 

2,052

Statutory reserves

 

 

2,307

 

 

1,776

Retained earnings

 

 

10,068

 

 

15,661

Accumulated other comprehensive loss

 

 

(55)

 

 

(1,360)

Total liabilities and stockholders’ equity

 

$

127,024

 

$

85,753

 

See accompanying notes to the consolidated financial statements.

4


 

GENEWIZ Group

Consolidated Statements of Operations

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2017

 

2016

 

2015

 

    

(Restated)

    

(Restated)

    

 

 

Revenues

 

$

98,011

 

$

82,850

 

$

65,813

Cost of revenue

 

 

51,543

 

 

40,893

 

 

29,283

Gross profit

 

 

46,468

 

 

41,957

 

 

36,530

Operating expenses:

 

 

  

 

 

  

 

 

  

Research and development

 

 

4,617

 

 

3,341

 

 

1,786

Selling and marketing expense

 

 

10,719

 

 

9,252

 

 

6,763

General and administrative

 

 

23,895

 

 

21,307

 

 

14,037

Total operating expenses

 

 

39,231

 

 

33,900

 

 

22,586

Income from operations

 

 

7,237

 

 

8,057

 

 

13,944

Other income (expense):

 

 

  

 

 

  

 

 

  

Interest expense, net

 

 

(1,513)

 

 

(605)

 

 

(550)

Other income, net

 

 

1,930

 

 

993

 

 

3,222

Earnings before income tax

 

 

7,654

 

 

8,445

 

 

16,616

Provision (benefit) for income taxes

 

 

8,041

 

 

(17,413)

 

 

3,489

Net income (loss)

 

$

(387)

 

$

25,858

 

$

13,127

 

See accompanying notes to the consolidated financial statements.

5


 

GENEWIZ Group

Consolidated Statements of Comprehensive Income

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

2017

    

2016

    

2015

 

 

(Restated)

 

(Restated)

 

 

 

Net income (loss)

 

$

(387)

 

$

25,858

 

$

13,127

Foreign currency translation adjustments, net of nil tax

 

 

1,305

 

 

(1,051)

 

 

(535)

Comprehensive income

 

$

918

 

$

24,807

 

$

12,592

 

See accompanying notes to the consolidated financial statements.

 

 

6


 

GENEWIZ Group

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands, except shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

Ordinary Shares/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

 

 

 

Series A‑1

 

 

 

 

Series A‑2

 

 

 

 

Class B

 

 

 

 

 

 

 

Retained

 

Statutory

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

APIC

    

AOCI

    

Earnings

    

Reserves

    

Total

Balance at December 31, 2015

 

25,000,000

 

 

 3

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,448

 

 

(309)

 

 

6,747

 

 

1,146

 

 

9,035

Conversation of Series A to Series B preferred stock

 

(1,072,100)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,040)

 

 

 —

 

 

(6,040)

Stock options exercised

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

340,200

 

 

 —

 

 

313

 

 

 —

 

 

 —

 

 

 —

 

 

313

Repurchase of exercised options

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

(148,200)

 

 

 —

 

 

(236)

 

 

 —

 

 

 —

 

 

 —

 

 

(236)

Share based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

527

 

 

 —

 

 

 —

 

 

 —

 

 

527

Dividends paid

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,755)

 

 

 —

 

 

(8,755)

Accrued dividend

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,519)

 

 

 —

 

 

(1,519)

Foreign exchange differences

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,051)

 

 

 —

 

 

 —

 

 

(1,051)

Statutory reserve

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(630)

 

 

630

 

 

 —

Net Income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

25,858

 

 

 —

 

 

25,858

Balance at December 31, 2016 (As restated)

 

23,927,900

 

 

 3

 

 —

 

 

 —

 

 —

 

 

 —

 

192,000

 

 

 —

 

 

2,052

 

 

(1,360)

 

 

15,661

 

 

1,776

 

 

18,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series A‑2 preferred shares

 

 —

 

 

 —

 

 —

 

 

 —

 

(1,665,818)

 

 

16,720

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16,720

Stock options exercised

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

695,970

 

 

 —

 

 

665

 

 

 —

 

 

 —

 

 

 —

 

 

665

Repurchase of exercised options

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

(502,720)

 

 

 —

 

 

(915)

 

 

 —

 

 

 —

 

 

 —

 

 

(915)

Repurchase Class B ordinary shares

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

(192,000)

 

 

 —

 

 

 —

 

 

 —

 

 

(831)

 

 

 —

 

 

(831)

Issuance of Series A‑1

 

 —

 

 

 —

 

667,000

 

 

3,740

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,740

Redemption and retirement of Series A preferred stock

 

(174,041)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,750)

 

 

 —

 

 

(1,750)

Accrued dividend

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,094)

 

 

 —

 

 

(2,094)

Share based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

600

 

 

 —

 

 

 —

 

 

 —

 

 

600

Foreign exchange differences

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,305

 

 

 —

 

 

 —

 

 

1,305

Statutory reserve

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(531)

 

 

531

 

 

 —

Capital contribution from founder

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

120

 

 

 —

 

 

 —

 

 

 —

 

 

120

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(387)

 

 

 —

 

 

(387)

Balance at December 31, 2017 (As restated)

 

23,753,859

 

$

 3

 

667,000

 

$

3,740

 

1,665,818

 

$

16,720

 

193,250

 

$

 —

 

$

2,522

 

$

(55)

 

$

10,068

 

$

2,307

 

$

35,305

 

See accompanying notes to the consolidated financial statements .

 

 

7


 

GENEWIZ Group

Consolidated Statements of Cash Flows

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2017

 

2016

 

2015

 

 

(Restated)

 

(Restated)

 

 

 

Operating activities

    

 

  

    

 

  

    

 

  

Net loss

 

$

(387)

 

$

25,858

 

$

13,127

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

  

 

 

  

 

 

  

Depreciation and amortization

 

 

5,820

 

 

4,462

 

 

2,527

Share based compensation expense

 

 

193

 

 

955

 

 

240

Loss on sale of assets

 

 

27

 

 

209

 

 

89

Foreign exchange gain (loss), net

 

 

(286)

 

 

268

 

 

 —

Allowance for doubtful accounts

 

 

753

 

 

1,626

 

 

(10)

Accretion of debt discount and issuance cost

 

 

276

 

 

199

 

 

80

Loss on debt extinguishment

 

 

262

 

 

 —

 

 

22

Fair value change of derivative

 

 

 —

 

 

85

 

 

 —

Deferred income taxes

 

 

5,703

 

 

(17,794)

 

 

(61)

Change in assets and liabilities (net of effects of acquisition):

 

 

  

 

 

  

 

 

  

Increase in accounts receivable, net

 

 

(11,022)

 

 

(5,003)

 

 

(1,282)

(Increase) decrease in account receivable – related party, net

 

 

(639)

 

 

1,263

 

 

(262)

Increase in inventories

 

 

(1,122)

 

 

(295)

 

 

(285)

(Increase) decrease in prepaid expenses and other current assets

 

 

(557)

 

 

(2,097)

 

 

1,075

(Increase) decrease in other non-current assets

 

 

(103)

 

 

42

 

 

(369)

Increase in accounts payable

 

 

3,564

 

 

847

 

 

222

Increase in unearned revenue

 

 

2,151

 

 

986

 

 

820

Increase (decrease) in deferred income

 

 

(113)

 

 

244

 

 

881

Increase (decrease) in other non-current liabilities

 

 

(404)

 

 

(169)

 

 

2,843

Increase (decrease) in accrued expenses and other current liabilities

 

 

4,889

 

 

(7,706)

 

 

(1,200)

Net cash provided by operating activities

 

 

9,005

 

 

3,980

 

 

18,457

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

  

 

 

  

 

 

  

Capital expenditures

 

 

(9,781)

 

 

(15,378)

 

 

(5,804)

Proceeds from sale of assets

 

 

51

 

 

653

 

 

19

Acquisition of business, net of cash

 

 

 —

 

 

 —

 

 

(5,935)

Net cash used in investing activities

 

 

(9,730)

 

 

(14,725)

 

 

(11,720)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

  

 

 

  

 

 

  

Proceeds from bank loan, net of issuance costs

 

 

18,490

 

 

10,049

 

 

10,325

Proceeds from revolver loan

 

 

2,500

 

 

3,000

 

 

5,000

Payments on bank loan

 

 

(8,088)

 

 

(8,424)

 

 

(8,195)

Repayment of revolver loan

 

 

(10,500)

 

 

 —

 

 

 —

Payments on capital lease obligations

 

 

(1,000)

 

 

(317)

 

 

(43)

Proceeds from exercise of series B convertible redeemable preferred shares warrants

 

 

6,329

 

 

 —

 

 

 —

Proceeds from issuance of series B convertible redeemable preferred shares and warrants, net of issuance cost

 

 

 —

 

 

12,674

 

 

 —

Proceeds from issuance of Series A‑1 convertible preferred shares, net of issuance costs

 

 

3,740

 

 

 —

 

 

 —

Proceeds from issuance of Series A‑2 convertible preferred shares, net of issuance costs

 

 

16,720

 

 

 —

 

 

 —

Proceeds from exercise of options from employees

 

 

665

 

 

313

 

 

39

Dividend payment

 

 

 —

 

 

(8,755)

 

 

(1,537)

Capital contribution from Founder

 

 

120

 

 

 —

 

 

 —

Purchase of ordinary shares from employees

 

 

(2,934)

 

 

(236)

 

 

(42)

Net cash provided by financing activities

 

 

26,042

 

 

8,304

 

 

5,547

Effect of exchange rate changes on cash and cash equivalents

 

 

692

 

 

(670)

 

 

132

Net increase (decrease) in cash and cash equivalents

 

 

26,009

 

 

(3,111)

 

 

12,416

Cash and cash equivalents at beginning of year

 

 

14,439

 

 

17,550

 

 

5,134

Cash and cash equivalents at end of year

 

$

40,448

 

$

14,439

 

$

17,550

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

772

 

$

1,140

 

$

732

Cash paid for interest expenses

 

$

1,302

 

$

681

 

$

751

 

See accompanying notes to the consolidated financial statements.

 

 

8


 

GENEWIZ Group

Notes to Consolidated Financial Statements

(In Thousands, Except where otherwise stated)

December 31, 2017

1. Organization, Principal Activities and Currency

Organization:

GENEWIZ, Inc., a New Jersey, corporation ("GENEWIZ NJ") was formed in 1998, and in 2014 underwent a legal corporate restructuring through which it segregated its US operations to form two new operating subsidiaries, in particular, GENEWIZ LLC and Admera Health LLC ("Admera") to provide genomic services and molecular diagnostics testing services, respectively. After this segregation, GENEWIZ LLC and Admera Health LLC were directly and wholly owned by their holding parent entity, GENEWIZ Holdings LLC, which is in turn owned by GENEWIZ NJ that is also a holding entity.

In June 2015, GENEWIZ Holdings LLC completed the separation of Admera through the pro rata distribution of 100% of its equity interest in Admera to its owners (principally the Founders of GENEWIZ NJ). As a result, Admera became an independent company and GENEWIZ Holdings LLC retained no ownership interest in Admera. Admera has been de-consolidated from the financial statements effective June 30, 2014.

Also in June 2015, after the separation of Admera, GENEWIZ Holdings LLC transferred all of its interests in GENEWIZ LLC to GENEWIZ NJ, followed by merging itself with and into GENEWIZ NJ with GENEWIZ NJ as a surviving company.

GENEWIZ Group (the "Company" or "GENEWIZ") was incorporated on September 22, 2015, as an exempted company in the Cayman Islands with limited liability under the Companies Law of the Cayman Islands. On December 29, 2015, the Company formed a new entity, GENEWIZ Inc, incorporating in Delaware, USA ("GENEWIZ DE"). On January 4, 2016, GENEWIZ NJ merged with and into GENEWIZ DE with GENEWIZ DE as a surviving company. In January 2016, the owners of GENEWIZ NJ exchanged their ownership interests for ownership interests in GENEWIZ Group, and GENEWIZ Group became the parent company of GENEWIZ NJ.

Principal Activities:

The Company is a holding company and conducts all of its operations through its subsidiaries which are located in United States ("US"), China ("PRC"), United Kingdom ("UK"), France, Germany and Japan. The Company and its subsidiaries (collectively, the Group) provides contract research in Sanger DNA sequencing, high throughput/next generation sequencing, gene synthesis, molecular biology, bioinformatics, and GLP regulatory services.

The Company offers its service to pharmaceutical companies, universities, research institutions, government agencies, and biotechnology companies. GENEWIZ is also an institutional outsourcing partner for leading academic and research institutions.

Currency:

Items included in the financial statements of each entity comprising the Company are measured using the currency of the primary economic environment in which the  entity operates (the "functional currency"). The functional currency for Group, GENEWIZ Inc., and GENEWIZ LLC. is the US Dollar ("USD"), the functional currency for Suzhou GENEWIZ Biological Technology Co., Ltd (GENEWIZ Suzhou), GENEWIZ (Guangzhou) Biological Technology Co., Ltd (GENEWIZ Guangzhou), and Nanjing GENEWIZ Biological Technology Co., Ltd (GENEWIZ Nanjing) is the Renminbi (RMB), the functional currency for GENEWIZ Japan Corp is the Japanese Yen (JPY), GENEWIZ UK Limited is the British Pound (GBP), and for GENEWIZ France Ltd and GENEWIZ Germany GMBH the functional currency is the Euro (EUR). The Company consolidates its financial statements in USD.

9


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

Foreign currency transactions in each entity comprising the Company are translated into the functional currency of the entity using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within other income, net in the consolidated statement of operations.

The results and financial position of the Company and its subsidiaries that have a functional currency different from the USD are translated into USD as follows:

a.

assets and liabilities are translated at the closing exchange rate as of December 31 st , of each respective year;

b.

income and expenses are translated at average monthly exchange rates that are relevant for the respective periods for which the income and expenses occurred;

c.

significant transactions use the exchange rate on the date of the transaction; and

d.

all resulting exchange rate differences arising from such translation are recognized directly in other comprehensive income and the cumulative impact is presented in accumulated other comprehensive income (AOCI) as a separate component of equity.

Restatement:

During 2018, the Company recognized that an error had occurred with respect to the recognition of an uncertain tax position liability and related income tax expense (benefit) that should have been recognized as of January 1, 2014 and a deferred tax asset and related income tax expense (benefit) that should have been recognized as of January 1, 2016 (see Note 10). No previous US GAAP financial statements were issued for the annual period ended December 31, 2015, and

10


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

therefore 2015 is not shown in the below restatement table. The summary of the adjustments for the years presented in this report are as follows:

 

 

 

 

 

 

 

 

    

As originally

    

 

 

 

 

reported

 

As restated

Balance sheet as of December 31, 2016

 

 

 

 

 

 

Deferred tax asset

 

$

1,561

 

$

17,830

Total assets

 

 

69,484

 

 

85,753

Long term tax payable

 

 

 0

 

 

12,962

Total liabilities

 

 

34,930

 

 

47,865

Retained earnings

 

 

12,327

 

 

15,661

Total liabilities and stockholders’ equity

 

$

69,484

 

$

85,753

 

 

 

 

 

 

 

Balance sheet as of December 31, 2017

 

 

 

 

 

 

Deferred tax asset

 

$

1,341

 

$

12,130

Total assets

 

 

116,235

 

 

127,024

Long term tax payable

 

 

1,722

 

 

14,178

Total liabilities

 

 

50,520

 

 

62,977

Retained earnings

 

 

11,736

 

 

10,068

Total liabilities and stockholders’ equity

 

$

116,235

 

$

127,024

 

 

 

 

 

 

 

Statement of operations for the year ended December 31, 2016

 

 

 

 

 

 

Income tax expense (benefit)

 

$

(619)

 

$

(17,413)

Net income

 

$

9,064

 

$

25,858

 

 

 

 

 

 

 

Statement of operations for the year ended December 31, 2017

 

 

 

 

 

 

Income tax expense

 

$

3,039

 

$

8,041

Net income (loss)

 

$

4,615

 

$

(387)

 

 

 

 

 

 

 

Statement of cash flows for the year ended December 31, 2016

 

 

 

 

 

 

Net income

 

$

9,064

 

$

25,858

Deferred taxes

 

$

(1,494)

 

$

(17,794)

 

 

 

 

 

 

 

Statement of cash flows for the year ended December 31, 2017

 

 

 

 

 

 

Net income (loss)

 

$

4,615

 

$

(387)

Deferred income taxes

 

$

193

 

$

5,703

 

 

 

 

 

 

 

Statement of operations and comprehensive income for the year ended December 31, 2016

 

 

 

 

 

 

Comprehensive income

 

$

8,013

 

$

24,807

 

 

 

 

 

 

 

Statement of operations and comprehensive income for the year ended December 31, 2017

 

 

 

 

 

 

Comprehensive income

 

$

5,920

 

$

918

 

 

2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation:

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("US GAAP"). Any reference in these notes to applicable guidance is meant to refer to the

11


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

authoritative US GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

The accompanying consolidated financial statements include the accounts of the Group and its direct or indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities revenue and expense, and the related disclosure of contingent assets and liabilities. Specific accounts that require management estimates include, but are not limited to, assumptions impacting share-based compensation, warrant liabilities, preferred shares, deferred tax assets, useful life of property and equipment and allowance for doubtful accounts. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates, and such differences may be material to the accompanying consolidated financial statements.

Fair Value of Financial Instruments:

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, advances from customers, and accrued expenses and other current liabilities approximate fair value due to the short-term maturity of these instruments.

Warrants to purchase shares of the Company’s convertible preferred stock are stated at fair value. The convertible preferred stock warrant liabilities are re-measured at the end of each reporting period, and changes to the fair value of the instruments are reported as other income, net in the accompanying consolidated statements of operations.

Revenue Recognition:

The Company enters into contracts or pricing agreements with pharmaceutical companies, universities, research institutions, government agencies and biotech companies for the processing or generation of DNA and related samples.

The Company recognizes revenue when there is persuasive evidence of an arrangement, products have been delivered to the customer and/or services have been rendered, the title and risk of loss have passed, the fee for the goods are fixed or determinable, and collectability is reasonably assured.

In certain instances, all revenue recognition criteria have been met, however billing has not yet occurred. In these instances, the Company records unbilled receivables and revenue. As of December 31, 2017 and 2016, unbilled receivables were $230 and $230, respectively, and were included in accounts receivable in the accompanying consolidated balance sheet.

Cost of Revenue:

Cost of revenue includes direct labor and related benefit charges, direct materials, shipping and handling fees, and an allocation of facility charges and other direct costs.

12


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

Research and Development Costs:

Research and development costs are expensed as incurred and consist primarily of supplies, salaries and benefits, depreciation expense, and other expenses incurred by the Company to develop and improve the Company’s service offering, technologies and processes, and are recorded as incurred.

Cash and Cash Equivalents:

The Company considers all investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. The Company invests its cash and cash equivalents with highly rated financial institutions. Management believes that the financial risks associated with its cash equivalents are minimal. Cash and cash equivalents consist of cash, bank deposits, term deposits, which are not restricted in use, and investments in money market funds as of December 31, 2017 and 2016.

Accounts Receivable:

The accounts receivable balance primarily includes amounts due from clients and third parties. The Company provides an allowance for doubtful accounts equal to estimated uncollectible receivables. This estimate is based on the current status of each customer’s receivable balance as well as current economic and market conditions. Our estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, the Company may be required to increase or decrease the allowances. Receivables are written off against the allowance only upon determination that such amounts are not recoverable and all collection attempts have failed. During the years ended December 31, 2017, 2016 and 2015, we recognized expenses (benefit) of $753, $1,626 and $(10), respectively, within general and administrative expenses in our consolidated statements of operations, associated with our allowances for doubtful accounts.

Inventories:

Inventories are goods that will be used in the production of services or goods. Inventory is stated at the lower of cost or net realizable value. Cost is determined by the first-in first-out method.

Concentration of Credit Risk and Off-Balance-Sheet Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Company maintains cash and cash equivalents with various major financial institutions. The total cash balances on deposit that exceeded the balances insured by the Federal Deposit Insurance Commission, were approximately $38,944 and $13,129 at December 31, 2017 and 2016, respectively.

Substantially all of the Company’s accounts receivable are with companies in the healthcare or biopharmaceutical industry, institutions and universities. However, concentrations of credit risk are limited due to the number of the Company’s customers as well as their dispersion across many different geographic regions.

There were no customers with more than 10% of consolidated revenues or accounts receivable as of, or for, the years ended December 31, 2017, 2016 and 2015.

13


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

Long-Lived Assets:

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In such instances, the recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset group to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, an impairment loss would be recognized if the carrying amount of the asset exceeds the fair value of the asset.

The Company did not recognize any impairment of long-lived assets in 2017 or 2015, and recognized an impairment of $46 in 2016.

Property and Equipment:

Property and equipment consists of computer equipment, machinery and equipment, furniture and fixtures, leasehold improvements, and equipment used in the Company’s research and development activities and is recorded at cost less accumulated depreciation.

Depreciation is calculated using the straight-line method based on estimated useful lives and in the case of leasehold improvements, the shorter of the useful life or the remaining term of the lease, as set forth below:

 

 

 

 

    

Years

Buildings and building improvements

 

39

Machinery and equipment

 

3‑10

Software

 

5

Leasehold improvements

 

7

Furniture and fixtures

 

7

Automobiles

 

5

 

Capitalized Software Costs:

The Company capitalizes internal use software which is ready for service and capitalizes software development costs incurred on significant projects starting from the time that the preliminary project stage is completed until the project is substantially complete and the software is ready for its intended use. Capitalized costs include payroll and payroll-related costs. Research and development phase costs and other computer software maintenance costs related to software are expensed as incurred. Capitalized software costs are amortized using the straight-line method over the estimated useful life of the underlying system, generally five years.

Leases:

A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified as an operating lease. When a lease contains rent holidays or requires fixed escalations of the minimum lease payments, the Company records the total rental expense on a straight-line basis over the lease term and the difference, if any, between the straight-line rental expense and cash payment under the lease is recorded as deferred rent liabilities, which is included in accrued expenses or other non-current liabilities in the consolidated balance sheet.

Leases that transfer substantially all the rewards and risks of ownership of assets to the Company, other than legal title, are accounted for as capital leases. At the inception of a capital lease, the cost of the leased asset is capitalized at the lower of the net present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing at the fair value of the lease property at the inception of the lease. Assets held under capital leases are included in property, plant and equipment, and depreciated over the shorter of the lease terms

14


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

or the estimated useful lives of the assets. The finance costs of such leases are charged to the consolidated statement of operations, so as to provide a constant periodic rate of charge over the lease terms.

Government Grants:

The Company qualifies for grants from the Chinese government for achieving certain research and development milestones. Government grants related to assets are recorded as deferred income when received, and are then recognized as other income on a straight-line basis over the useful life of the associated asset. Government grants which were unrestricted in use and not refundable, are recorded in other income when received.

Convertible Preferred Stock Warrants:

Freestanding warrants to purchase the Company’s convertible preferred stock are classified as a liability on the accompanying balance sheets. The convertible preferred stock warrants are recorded as liabilities because the underlying shares of convertible preferred stock are contingently redeemable, which, therefore, may obligate the Company to transfer assets at some point in the future to settle these warrants. The warrants are recorded at estimated fair value and are subject to remeasurement at each balance sheet date. During the year ended December 31, 2017, all of the 1,124,167 warrants outstanding as of December 31, 2016 were exercised and the related liability was extinguished. As such, no warrants were outstanding as of December 31, 2017.

Profit Appropriation to Statutory Reserves:

In accordance with current Chinese laws and regulations, our subsidiaries in China are required to allocate to their general reserves at least 10% of their respective after-tax profits for the year determined in accordance with Chinese accounting standards and regulations. Each of our subsidiaries and affiliated entities in China may stop allocations to its general reserve if such reserve has reached 50% of its registered capital. Allocations to these statutory reserves can only be used for specific purposes and are not transferable to use in the form of loans, advances, or cash dividends.

Stock-Based Compensation:

The Company maintains stock compensation plans as a long-term incentive for employees, and members of the Company’s Board of Directors and advisors. The 2012 Plan and the 2016 Plan allows for the issuance of non-statutory and incentive stock options to employees, non-statutory stock options to non-employees, and restricted stock awards to employees and non-employees.

Per the terms of the Company’s 2016 option plan, the Company has the right, but not the obligation, to repurchase exercised options upon employment termination of the holder for any reason within the later of (a) 180 days from termination or (b) 180 days from exercise. Given this provision the Company assesses the probability that the Company will repurchase immature shares on a grantee by grantee basis. The Company has determined that on the date in which an employee is terminated or leaves the Company for any reason, it is probably that the Company will repurchase the shares exercised for cash. Therefore, upon termination, the vested but unexercised stock options are reclassed from equity to liability and marked to market, with any change in fair value recorded through the consolidated statement of operations.

The Company has determined that it is not probable that they will repurchase exercised options of employees and thus are accounted for as equity awards.

The Company measures stock-based compensation at the grant date based on the fair value of the award and recognize stock-based compensation expense over the requisite service period. The fair value of the Company’s stock options has been determined using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including (i) the expected stock price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and

15


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

(iv) expected dividends. Due to the lack of historical and implied volatility data of the Company’s Ordinary Shares, the expected stock price volatility has been estimated based on the historical volatilities of a specified group of companies in the Company’s industry for a period equal to the expected life of the option. The Company selected companies that it considers to have comparable characteristics to the Company, including enterprise value, risk profiles and position within the industry and with historical share price information sufficient to meet the expected term of the stock options. The historical volatility data has been computed using the daily closing prices for the selected companies.

The expected life of the options granted represents the period of time that options granted are expected to be outstanding and is calculated using the simplified method, which is the mid-point between the vesting date and the end of the contractual term for each option. The risk-free interest rate is based on a zero coupon, United States Treasury instrument whose term is consistent with the expected life of the stock option. The Company has not paid, and does not anticipate paying, cash dividends on its shares of Ordinary Shares; therefore, the expected dividend yield is zero. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

The Company’s share-based awards are subject service-based or service and performance-based vesting conditions. The Company records compensation expense for service-based awards over the vesting period of the award on a straight-line basis. For awards with service and performance based conditions, compensation related to the performance-based vesting conditions is recognized when achievement of the performance condition is considered probable and the compensation expense related to the service condition is recorded using the accelerated method.

Certain weighted-average information and assumptions used in the option-pricing model for options granted to employees, directors, and non-employees are as follows:

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2017

    

2016

    

2015

 

Expected life (in years)

 

5.7‑5.8

 

5.0‑5.9

 

5.4‑6.1

 

Risk-free interest rate

 

2.3

%  

2.1

%  

1.74

%

Volatility

 

22.6

%  

22.5

%  

32.2

%

Dividend yield

 

 —

 

 —

 

 —

 

 

Income Taxes:

The Company accounts for income taxes in accordance with FASB ASC Topic 740, Income Taxes (ASC 740). Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and tax credits, if any. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of the relevant taxing authorities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in which temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the consolidated statement of income in the period of the enactment of the change. The Company has early adopted ASU 2015‑17 and has reported deferred tax assets and liabilities as noncurrent on the consolidated balance sheet.

The Company considers positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Company has considered possible sources of taxable income including

16


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

(i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected for a company operating in the genomic services industry.

The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return regarding uncertainties in income tax positions. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability. The Company has recorded a liability for uncertain tax positions at December 31, 2017 and 2016, see Note 10.

The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax expense for the year ended December 31, 2017. The Company expects to meaningfully benefit from its enactment in future periods. See Note 10 to the consolidated financial statements for further detail.

Fair Value Measurements:

The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in the accounting standards. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 - Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs which are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. Management believes that the Company’s debt (see Note 6) bears interest at the prevailing market rate for instruments with similar characteristics and accordingly, the carrying value approximates its fair value.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017 - Fair Value Measured Using

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

 

  

 

 

  

 

 

  

 

 

  

Cash equivalents

 

$

4,154

 

$

 —

 

$

 —

 

$

4,154

 

17


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016 - Fair Value Measured Using

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Liabilities

 

 

  

 

 

  

 

 

  

 

 

  

Warrant liabilities

 

$

 —

 

$

 —

 

$

563

 

$

563

 

The estimated fair values of the convertible preferred stock warrant liabilities were determined using Level 3, or significant unobservable inputs. Changes to the estimated fair value of the warrants are recorded in other income, net in the consolidated statements of operations. The following table provides the changes in the estimated fair value of the warrants during the years ended December 31, 2017 and 2016:

 

 

 

 

Convertible preferred stock warrants

    

 

  

Balance as of December 31, 2015

 

$

 —

Issuance of warrants

 

 

478

Loss on change in estimated fair value

 

 

85

Balance as of December 31, 2016

 

 

563

Exercise of warrants

 

 

(563)

Balance as of December 31, 2017

 

$

 —

 

During the years ended December 31, 2017, 2016 and 2015, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis.

Recent Accounting Pronouncements:

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU  2014‑09, Revenue from Contracts with Customers . This update supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for fiscal years and interim periods beginning after December 15, 2018, for non-public entities (i.e., fiscal year 2019 for the Company). Early adoption is allowed but no earlier than the original effective date for public entities of December 15, 2017. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016‑02, Leases . The primary difference between current GAAP and Topic 842 is the required recognition of lease assets and lease liabilities by lessees for leases classified as operating leases. The FASB issued this update to increase transparency and comparability among organizations that engage in operating leases, as lessees. This is effective for the Company in fiscal 2020 and the Company is currently assessing the impact on our consolidated financial statements.

In May 2016, the FASB issued ASU 2016‑09, Improvements to Employee Share-Based Payment Accounting . The amended guidance focuses on how companies record taxes on vested or settled awards, shares repurchased to cover taxes upon employee exercise and the ability for companies to elect to account for forfeitures as they occur. Additionally, the guidance includes items specific to non-public entities related to an award’s expected term and liability classified awards. For non-public companies, the guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is still assessing the impact on the consolidated financial statements.

18


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

In May 2017, the FASB issued ASU 2017‑09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. Under the new guidance companies that make non-substantive changes to its awards will not be subject to modification accounting guidance. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

Accounting Policies Adopted in the Current Year:

In September 2014, the FASB issued ASU  No. 2014‑15, Presentation of  Financial Statements - Going Concern (ASU No. 2014‑15). The guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company has adopted the guidance, which did not have any impact on the consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015‑03, Simplifying the Presentation of Debt Issuance Costs , which updated guidance to clarify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be reported as interest expense. The update requires retrospective application and represents a change in accounting principles. The adoption had no impact on the company’s consolidated financial statements as the Company had already accounted for the debt issuance costs in this manner.

In November 2015, the FASB issued ASU No. 2015‑17, Balance Sheet Classification of Deferred Taxes (ASU 2015‑17), which amends the accounting guidance related to balance sheet classification of deferred taxes. The amendment requires that deferred tax assets and liabilities be classified as noncurrent in the statement of financial position, thereby simplifying the current guidance that requires an entity to separate deferred tax assets and liabilities into current and noncurrent amounts. ASU 2015‑17 will be effective beginning in the first quarter of fiscal year 2018. Early adoption is permitted. The amendment can be adopted either prospectively or retrospectively. The Company has early adopted ASU 2015‑17 and has reported deferred tax assets and liabilities as noncurrent on the consolidated balance sheets.

3. Acquisition

In December 2015, the Company acquired the net assets of BeckmanCoulter Group ("BCG") in the UK and US for approximately $5.9 million. BCG was substantially in the same business as the Company. The transaction was accounted for as a business combination. The fair value of net assets acquired consisted principally of machinery and equipment of $4.9 million and net current assets of approximately $1 million.

19


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

4. Property and Equipment, Net

Property and equipment at December 31, 2017 and 2016 consists of the following:

 

 

 

 

 

 

 

 

    

2017

    

2016

Land

 

$

165

 

$

165

Buildings and building improvements

 

 

130

 

 

130

Machinery and equipment

 

 

28,880

 

 

23,099

Software

 

 

4,410

 

 

1,599

Leasehold improvements

 

 

6,354

 

 

6,133

Furniture and fixtures

 

 

385

 

 

373

Automobiles

 

 

505

 

 

517

Construction in progress

 

 

5,262

 

 

3,687

Equipment under capital leases

 

 

6,642

 

 

3,612

Subtotal

 

 

52,733

 

 

39,315

Less accumulated depreciation and amortization

 

 

(19,960)

 

 

(13,431)

Total

 

$

32,773

 

$

25,884

 

Depreciation and amortization expense related to property, plant and equipment was $5,820, $4,462 and $2,527 for the years ended December 31, 2017, 2016 and 2015, respectively. Depreciation and amortization expense included $448, $102 and $64 related to capitalized software and $1,122, $400 and $101 related to capital leases for the years ended December 31, 2017, 2016 and 2015, respectively.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities at December 31, 2017 and 2016 consist of the following:

 

 

 

 

 

 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

Accrued payroll and related expenses

 

$

2,726

 

$

1,752

Taxes payable

 

 

1,221

 

 

337

Other payable

 

 

1,719

 

 

1,704

Total accrued expenses and other current liabilities

 

$

5,666

 

$

3,793

 

 

6. Debt

Debt at December 31, 2017 and 2016 consists of the following:

 

 

 

 

 

 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

Term loan – US

 

$

10,331

 

$

3,108

Revolving line of credit – US

 

 

 —

 

 

8,000

Bank loans -China

 

 

10,999

 

 

7,350

Unamortized discount/issuance costs

 

 

(321)

 

 

 —

Capital lease obligation

 

 

4,983

 

 

2,838

Total debt outstanding

 

 

25,992

 

 

21,296

Less current debt

 

 

(11,252)

 

 

(8,392)

Long-term debt outstanding

 

$

14,740

 

$

12,904

 

20


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

In February 2015, the Company entered into a term loan facility ("Term Loan") in the amount of $7,000, from GECC (and later assigned to Capital One) to fund its working capital and other general corporate needs. Additionally, the Company had a revolving credit line with GECC of $10,000. The interest rate respect to the term loan is a Libor benchmarked loan. The Company used these fund to pay off its previous debt facility with CitiBank, N.A. This pay off was accounted for as a debt extinguishment which resulted in the recognition of $22 of expense, which is included in interest expense in the consolidated statement of operations.

In June 2017, the Company entered into a new term loan facility ("June 2017 Term Loan") in the amount of $10,700, with CitiBank N.A, to fund its working capital and other general corporate needs. The Company also obtained a new Revolving Credit line of $10,000 as part of this Term Loan agreement. The Company drew down the entire term loan available under the agreement in June 2017 and repaid the outstanding obligation under the February 2015 term and revolving loan of $9,800.

Upon repayment of the GECC term loan in 2017, the Company recognized a $262 debt extinguishment loss for the write-off of unamortized debt discount recorded in interest expense, net in the consolidated statement of operations.

The June 2017 Term Loan carries an interest rate equal to the LIBOR rate plus 2.75% and the Company may at their option prepay such loans, in whole or in part, at any time and from time to time without premium or penalty. At December 31, 2017 the interest rate in effect was 4.10%. The revolving credit facility bears interest at the prime rate plus an applicable margin as defined in the loan agreements, and matures in June 2020.

The Term Loan is senior to all other debt and has a first priority lien on all of the Company’s assets, excluding intellectual property; however, intellectual property is subject to a negative pledge. The Term Loan contains customary conditions related to borrowing, events of default, and covenants, including covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire stock, and make investments, in each case subject to certain exceptions. The June 2017 Term Loan requires that the Company comply with a Consolidated Leverage ratio and a debt service ratio financial covenants. As of December 31, 2017, there have been no events of default.

Total interest expense recorded on the debt was $1,563, $681 and $605 for the years ended December 31, 2017, 2016 and 2015, respectively. Total interest expense included $54, $110 and $91 interest expense related to the amortization of the debt issuance costs for the years ended December 31, 2017, 2016 and 2015, respectively.

The bank loans in China included short term loans of $8,103 and $4,665 as of December 31, 2017 and 2016, respectively. The interest rates of these loans were from 3.80% to 4.35%, and from 3.83% to 5.0% during 2017 and 2016 and 3.13% to 6.72% during 2015. The Company also has long term loans outstanding of $2,896 and $2,685 as of December 31, 2017 and 2016. As of December 31, 2017, $832 of the long term loan was due within one year and was recorded in the current portion of long-term debt. As of December 31, 2016, $413 of the long term loan that was due within one year and was recorded in the current portion of long-term debt. The interest rate was equal to the LIBOR rate plus 3.1%. There are no covenants with respect to these loans.

Future minimum payments with regards to the total debt outstanding other than the capital lease as of December 31, 2017 is as follows:

 

 

 

 

Year ending December 31:

    

 

 

2018

 

$

9,889

2019

 

 

2,623

2020

 

 

2,933

2021

 

 

2,140

2022 and thereafter

 

 

3,745

Total minimum loan payments

 

$

21,330

 

21


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

 

7. Convertible Preferred Stock

Series B Preferred Shares:

Activity in the Series B Preferred shares is summarized as follows:

 

 

 

 

 

 

 

    

Shares

    

Amount

Balance December 31, 2015

 

 —

 

$

 —

Issuance of shares, net of issuance costs of $287

 

3,372,500

 

 

18,713

Less: allocated to warrants

 

 —

 

 

(478)

Accretion of dividend

 

 —

 

 

1,521

Balance at December 31, 2016

 

3,372,500

 

 

19,756

Issuance of shares upon exercise of warrants

 

1,124,167

 

 

6,329

Reclass of warrant liability to Series B preferred shares

 

 —

 

 

563

Accretion of dividend

 

 —

 

 

2,094

Balance at December 31, 2017

 

4,496,667

 

$

28,742

 

On January 7, 2016, the Company issued 3,372,500 Redeemable Convertible Series B Preferred Shares (Series B Preferred Shares) at a price of $5.634 per share and 1,124,167 Series B Warrants, convertible into 1,124,167 Series B Preferred Shares with an exercise price of $5.634 per share.

Pursuant to the Series B Preferred Shares agreements, the Company converted 1,072,100 Series A preferred shares from the founders for no consideration. The fair value of the Series B Shares received by the Founders was $6,000, based on the fair value of $5.634 per share. The differences between:

(i)

The carrying amount of the underlying Series A Preferred Shares and fair value of Series A Preferred Shares; and

(ii)

The fair value of the underlying Series A Preferred Shares and Series B Preferred Shares, at the purchase date,

of $6,040 was charged to retained earnings. The total value of the Series B Shares was $19,000. As part of the transaction, the Company received gross proceeds of $12,900 (2,300,400 shares times $5.634 per share). The Founders sold their shares directly to the investors and therefore, cash proceeds were not received by the Company for the 1,072,100 Series B Preferred shares.

The Series B Warrants were convertible into Series B Preferred Shares at exercise price of $5.634 per share until January 7, 2018. The warrants were considered to be freestanding instruments that required bifurcation from the Series B Preferred Shares and was therefore accounted for as liability. On January 7, 2016, the fair value of the warrant was determined to be $478, net of issuance costs of $7. As such, the Series B Preferred Share redemption value as of the transaction date was $18,500 million ($19,000 less $478). As of December 31, 2016, the fair value of the warrant increased by $85, which was recorded through other income, net on the consolidated statement of operations. The warrants were exercised in January 2017.

No beneficial conversion feature charge was recognized for the issuance of Series B Preferred Shares as the estimated fair value of the Ordinary Shares does not exceed the effective conversion price on the date of issuance.

The Series B Preferred Shareholders can obtain creditor rights as promissory note holders if the Series B Preferred Share are redeemed and the Company has insufficient funds to pay the redemption price. The Company has evaluated this feature and has determined that this feature would not impact the treatment of the Series B Preferred Share.

22


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

The Series B Preferred Shares is classified as liabilities because at issuance, this feature does not currently grant the preferred shareholders creditor rights. Furthermore, the Company has evaluated the redemption features and has determined that, given redemption is at the holder’s option and therefore outside the control of the Company, such securities should not be classified as permanent shareholders’ equity. Accordingly, such securities are classified as mezzanine equity on the balance sheet.

The Company records the difference between the initial carrying value and the ultimate redemption value to the earliest possible redemption date at each reporting date. The difference each period relates to the 8% per annum compounded accrued dividends whether or not declared entitled to by the Series B Preferred Shareholders. The accrued dividend is recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-in-capital. Once additional paid-in-capital has been exhausted, additional charges are recorded by increasing the accumulated deficit.

The cumulative accrued dividend and resulting redemption value of the Series B Preferred Shares as of December 31, 2017 and 2016 are $3,615 and $28,742; and $1,521 and $19,756, respectively.

Series A Preferred Shares:

At December 31, 2014, there were 25 million shares of Series A Preferred Shares outstanding, principally held by the Founders. During 2016, the Founders exchanged 1,072,100 shares of Series A preferred shares into Series B Preferred Shares, as described below. During 2017, the Company redeemed and retired 174,041 shares of Series A Preferred Stock from the Founders for $1,750.

Series A‑1 Preferred Shares:

On January 9, 2017, the Company executed an agreement with related parties to issue 667,000 Convertible Series A‑1 Preferred Shares (Series A‑1 Preferred Shares) at a price of $5.634 per share. Total cash proceeds received by the Company was $3,740, which was net of issuance cost incurred of $17.

Additionally, pursuant to the Shareholder resolution, the Company redeemed 667,000 Class B ordinary shares from the shareholders at a price per share of $4.33, or $2,900 and 475,000 of the 667,000 shares were redeemed from employees. The difference of $1,231 between the fair value of $869 (at $1.83 per share) on the date of redemption and the $2,100 paid (at $4.33 per share) was recorded as compensation expense through the consolidated statement of operations in 2017. The remaining 192,000 shares were redeemed from a former employee and as such the difference of $831 between the par value and the cash consideration was recorded as a deemed dividend through retained earnings in 2017. All preferred shares repurchased were retired by the Company.

Series A‑2 Preferred Shares:

On November 10, 2017, the Company executed an agreement with new investors to issue 1,665,818 Convertible Series A‑2 Preferred Shares (Series A‑2 Preferred Shares) at a price of $10.0551 per share.  The total value of the Series A‑2 Shares and cash proceeds received was $16,720, which is net of issuance costs of $30. Pursuant to the Shareholder resolutions, the Company repurchased and retired 174,041 Series A Preferred Shares from the Founders with total consideration of $1,750, based on the price of $10.0551 per share, which was charged to retained earnings as a deemed dividend.

As of December 31, 2017 and 2016, the holders of the Series B Preferred Shares and Series A, A‑1 and A‑2 Preferred Shares (together the "Preferred Shares") had the following rights and preferences, unless stated otherwise.

23


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

Dividends:

The holders of the Series B Preferred Shares shall be entitled to receive cumulative dividends in preference to any dividend on the Company’s Ordinary Shares at the rate of 8% compounded per annum, whether or not declared by the Board of Directors. The holders of Preferred Shares also shall be entitled to participate pro rata in any dividends paid on the Ordinary Shares on an as-if- converted basis.

The holders of the Series A and A‑1 Preferred Shares shall be entitled to receive cumulative dividends in preference to any dividend on the Company’s Ordinary Shares at the rate of 3% compounded per annum, whether or not declared by the Board of Directors. The holders of Preferred Shares also shall be entitled to participate pro rata in any dividends paid on the Ordinary Shares on an as-if-converted basis.

The holders of the Series A‑2 Preferred Shares shall be entitled to receive declared and unpaid dividends in preference to any dividend on the Company’s Ordinary Shares at the rate of 3% per annum, on non-compounded basis, subject to declaration by the Board of Directors. The holders of Preferred Shares also shall be entitled to participate pro rata in any dividends paid on the Ordinary Shares on an as-if-converted basis.

Conversion:

Holders of Series A and B Preferred Shares shall have the right to convert their units into Class A Ordinary Shares at any time at a conversion price equal to the Original Issue Price, subject to adjustments under certain circumstances. The Series A and B Preferred Shares will be automatically converted into Ordinary Shares upon (i) the closing of a Qualified IPO, or (ii) the conversion date specified by written consent or agreement of the holders of at least 50% of all then outstanding Series B Preferred Shares (Preferred Majority).

A Qualified Public Offering is defined as upon the closing of a firm commitment underwritten public offering of the Class A Ordinary Shares, with a pre-offering valuation of the Company of no less than Three Hundred Million US dollars ($300,000) and gross proceeds to the Company of no less than Thirty Million US dollars ($30,000).

With regard to the Series B Preferred Shares only, if the Company shall issue or deemed to have issued any additional equity or any instrument or securities convertible or exercisable into equity (Convertible Securities) or any additional Ordinary Shares (New Ordinary Shares), under certain circumstances, at a price per Ordinary Share (on an as-converted basis) less than the applicable conversion prices then of corresponding Redeemable Convertible Preferred Shares, then the relevant conversion price, shall be reduced per the Series B agreement, concurrently with such issue.

Redemption:

Holders of Series B Preferred Shares shall have the right to redeem up to (a) 1/3 of Series B Preferred Shares at any time commencing from the 5th anniversary of the Closing, (b) additional 1/3 at any time commencing from the 6th anniversary of the Closing, and (c) the final 1/3 at any time commencing from the 7th anniversary of the Closing at the price per share equal to the initial issuance price, and a return thereon at a 8% compounded annual rate. There is no redemption feature for any Class of Series A Preferred.

Voting Rights:

Holders of Series A and B Preferred Shares shall have the same voting rights as Class A Ordinary Shares on an as-if-converted basis.

24


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

Liquidation Preference:

Upon any liquidation, dissolution or winding up of the Company, holders of Series B Preferred Shares shall be entitled to receive, prior to any distribution to the holders of Ordinary Shares or any other class or series of shares then outstanding, an amount per preferred share equal to the Original Issue Price of their preferred shares plus any accrued and unpaid dividends. Additional distributions to holders of Series B Preferred Shares are subject to certain restrictions.

8. Commitments and Contingencies

Operating Leases:

The Company leases various facilities and equipment under non-cancelable lease arrangements. Future minimum rental commitments for leases with non-cancelable terms of one year or more at December 31, 2017, are as follows:

 

 

 

 

2018

    

$

3,176

2019

 

 

2,770

2020

 

 

2,543

2021

 

 

1,927

2022

 

 

795

Thereafter

 

 

1,644

Total minimum lease payments

 

$

12,855

 

Rent expense for the years ended December 31, 2017, 2016 and 2015 was $4,000, $2,600, and $1,743, respectively.

Capital Leases:

The Company leases certain machines that are classified as capital leases and have remaining lease terms ranging from two to five years.

At December 31, 2017, the total future minimum lease payments under these capital leases and their present value are as follows:

 

 

 

 

2018

    

$

1,564

2019

 

 

1,391

2020

 

 

1,277

2021

 

 

1,044

2022

 

 

170

Total

 

 

5,446

Less amount representing interest

 

 

(463)

Capital lease obligations

 

$

4,983

 

Capital Commitment:

At December 31, 2017, the Company had commitments of $3,000 (2016: $4,040) relating to purchase of plant and machinery. 

Legal Proceedings:

The Company is a party to claims and lawsuits arising in the normal course of business. While the ultimate resolution of these matters has yet to be determined, and although the results of litigation and claims cannot be predicted with certainty,

25


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

the Company does not believe that their outcome will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

The Company recorded an accrual related to an unfavorable verdict for $10 million, which was recorded in 2014. In 2015, the Company reached a settlement with the plaintiff for $8.5 million (the reduction of $1.5 million is recorded in other income, net in the accompanying consolidated statement of operations), which was paid in 2016.

9. Stockholders’ Equity

Ordinary Shares:

The Ordinary Shares confers upon its holders the right to receive dividends out of any assets legally available, when and as declared by the Board of Directors, but subject to the prior right of the holders of Series A Preferred Shares and Series B Preferred Shares as described above.

Ordinary Shares reserved for future issuance as of December 31, 2017 consisted of the following:

 

 

 

Preferred shares

    

26,279,927

Shares available for grant under stock option plan

 

426,240

Options issued and outstanding under stock option plan

 

2,113,510

Total ordinary shares reserved for future issuance

 

28,819,677

 

Stock Incentive Plan:

The Company and many of its subsidiaries adopted various stock option and unit appreciation rights plans. Full time, active employees of each company are eligible to receive stock option grants and/or unit appreciation rights on a selective basis at the management’s discretion, when and if issued. The fair value of each company’s common stock is valued by a third party on an annual basis. Each incentive stock option or unit appreciation right is granted at the fair value of the underlying common stock on the date of the grant.

Total number of options authorized in GENEWIZ, Inc. 2012 stock option plan (the 2012 Plan) is 3,400,000 shares. The following terms of the options are expected: The vesting period for the stock option is 4 years, when the majority of the grants have a ratable vesting schedules (25% of the granted shares are vested at the 1st anniversary from the hire date and the rest vested evenly over the next 36 months). The life of the options is 10 years. Upon adoption of the 2016 Plan described below, the 2012 Plan was terminated and the option grants still outstanding under the 2012 Plan were assigned to the 2016 Plan.

Under the Company’s 2016 Equity Incentive Plan (the 2016 Plan), options and other stock awards to purchase shares of Ordinary Shares may be granted to employees, directors, and consultants. Incentive stock options are granted to employees and non-statutory stock options are granted to consultants and directors at an exercise price not less than 100% of the fair value (as determined by the Company’s Board of Directors) of the Company’s Ordinary Shares on the date of grant. The exercise price of options granted to stockholders who hold 10% or more of the Company’s Ordinary Shares on the option grant date shall not be less than 110% of the fair value of the Company’s Ordinary Shares on the date of grant for both incentive and non-qualified stock option grants. These options generally vest over four years and expire ten years from the date of grant. There were no unvested shares subject to repurchase as of December 31, 2017 and 2016.

The 2016 Plan can be terminated by the Company’s Board of Directors at any time.

26


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

Stock Option Activity:

A summary of the Company’s stock option activity is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

Number of

 

Exercise

 

contractual

 

Intrinsic

 

    

Shares

    

Price

    

term (years)

    

value

Balance at December 31, 2015

 

2,886,320

 

$

1.03

 

7.33

 

$

1,623

Options granted

 

84,080

 

 

1.59

 

 —

 

 

 —

Options exercised

 

(342,720)

 

 

0.94

 

 —

 

 

 —

Options forfeited

 

(64,620)

 

 

0.99

 

 —

 

 

 —

Balance at December 31, 2016

 

2,563,060

 

 

1.20

 

6.99

 

 

1,964

Retired the repurchased exercised vested options

 

(475,000)

 

 

0.94

 

 —

 

 

 —

Options granted

 

266,400

 

 

1.73

 

 —

 

 

 —

Options exercised

 

(218,450)

 

 

 1.00

 

 —

 

 

 —

Options forfeited

 

(22,500)

 

 

1.01

 

 —

 

 

 —

Balance at December 31, 2017

 

2,113,510

 

 

1.18

 

6.76

 

 

6,551

Exercisable as of December 31, 2017

 

1,475,896

 

 

1.05

 

5.89

 

 

4,766

Vested or expected to vest at December 31, 2017

 

1,973,318

 

$

1.48

 

6.57

 

$

5,228

 

Options to purchase 140,192 shares of ordinary shares are performance based and vest upon a successful Initial Public Offering or change in control. This unvested performance-based option is excluded from the "vested or expected to vest" balance of options as of December 31, 2017.

The Company has recognized $1,380, $955 and $240 of stock compensation expense for the years ended December 31, 2017, 2016 and 2015, respectively.

Stock Incentive Plan:

The following table summarizes stock-based compensation expense for employees for the years ended December 31, 2017, 2016 and 2015, which was included in the consolidated statement of operations as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

2017

    

2016

    

2015

Cost of revenue

 

$

76

 

$

198

 

$

91

General and administrative

 

 

1,279

 

 

430

 

 

112

Research and development

 

 

 2

 

 

 5

 

 

 —

Selling and marketing expenses

 

 

23

 

 

322

 

 

37

 

 

$

1,380

 

$

955

 

$

240

 

At December 31, 2017, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plan but not yet recognized was approximately $665. This cost will be amortized on a straight-line basis over the remaining vesting period and will be adjusted for subsequent changes in estimated forfeitures. The weighted-average remaining recognition period is approximately four years.

27


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

10. Income Taxes

Through December 31, 2013, GENEWIZ NJ was taxed as a C-corporation. Effective January 1, 2014, GENEWIZ NJ elected to be treated as a S corporation for both federal and state purposes, thus passing corporate income, losses, deductions and credits through to its shareholders for federal and state tax purposes.

Effective January 4, 2016, GENEWIZ NJ merged into GENEWIZ DE and reverted to a C-corporation for both federal and state purposes, thus subject to corporate income tax and deferred income tax in the US. The effect of re-establishing the deferred tax balances in the US resulted in an income tax benefit of $20,089. The Company is incorporated as an exempt company in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain in the Cayman Islands. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.

In December 2017, a law commonly known as the Tax Cuts and Jobs Act (TCJA) was enacted in the United States. Among other things, the TCJA reduces the US corporate income tax rate to 21% and implements a new system of taxation for non-US earnings, including imposing a one-time tax on the deemed repatriation of undistributed earnings of non-US subsidiaries. As the FASB staff previously determined they would not object to private companies applying SEC Staff Accounting Bulletin (SAB) 118, the Company has prepared and recorded preliminary estimates of accounting for the tax effects of the TCJA based on SAB 118 estimate principles.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the TCJA and refining its calculations, which could potentially affect the measurement of these balances. The provisional amount recorded related to the re-measurement of the Company’s deferred tax balance was a tax expense of $4,965.

The one-time transition tax is based on the Company’s total post‑1986 earnings and profits ("E&P") that the Company previously deferred from US income taxes. The Company recorded a provisional amount for its one-time transition tax liability for all of its foreign subsidiaries, resulting in an increase in income tax expense of $1,882. The remaining unpaid balance of this tax liability (included in long term tax payable) was $1,722 at December 31, 2017, which was to be paid over 8 years. The liability was reversed in 2018 as the Company elected to utilize net operating losses and credits against the one-time transition tax on its 2017 income tax return.

No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable.

China

All of the Group’s subsidiaries registered in the PRC and only having operations in Mainland China are subject to PRC enterprise income tax on the taxable income as reported in their PRC statutory accounts adjusted in accordance with relevant PRC income tax laws, which unifies an income tax rate of 25%.

On March 16, 2007, the National People’s Congress of PRC enacted an Enterprise Income Tax Law (EIT Law), under which Foreign Investment Enterprises (FIEs) and domestic companies would be subject to EIT at a uniform rate of 25%. The EIT law became effective on January 1, 2008.

GENEWIZ Suzhou has obtained a high and new technology enterprise ("HNTE") certificate effective from January 1, 2013 and renewed in 2016, with a valid period of three years. Therefore, the entity is eligible to enjoy a preferential tax

28


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

rate of 15% when it has taxable income under the EIT Law, as long as it maintains the HNTE qualification and duly conducts filing procedures with relevant tax authority regarding the tax incentive.

Summary:

GENEWIZ sources of income before taxes, classified between domestic and foreign entities for the years ended December 31, 2017, 2016 and 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

    

2015

Pre-tax income

 

 

  

 

 

  

 

 

  

Domestic

 

$

1,109

 

$

2,338

 

$

10,302

Foreign

 

 

6,545

 

 

6,107

 

 

6,314

Total pre-tax income

 

$

7,654

 

$

8,445

 

$

16,616

 

The provisions (benefits) for income taxes in the accompanying consolidated statements of operations consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

    

2017

    

2016

    

2015

 

 

(Restated)

 

(Restated)

 

 

 

Current:

 

 

  

 

 

  

 

 

  

Federal

 

$

1,356

 

$

(569)

 

$

1,918

State

 

 

81

 

 

88

 

 

750

Foreign

 

 

901

 

 

862

 

 

882

 

 

 

2,338

 

 

381

 

 

3,550

Deferred:

 

 

  

 

 

  

 

 

  

Federal

 

 

6,077

 

 

(15,322)

 

 

 —

State

 

 

(283)

 

 

(2,539)

 

 

 —

Foreign

 

 

(91)

 

 

67

 

 

(61)

 

 

 

5,703

 

 

(17,794)

 

 

(61)

 

 

$

8,041

 

$

(17,413)

 

$

3,489

 

The effective rate for 2017 was unfavorably impacted primarily by US tax reform for the transition tax on the undistributed earnings and profit of the Company’s foreign subsidiaries and the remeasurement of deferred tax accounts, partially offset by foreign earnings taxed at rates lower than the US statutory rate.

The 2016 rate was favorably impacted primarily by the tax effect of the conversion from S- corporation status to C-corporation status, and foreign earnings taxed at rates lower than the US statutory rate.

The 2015 effective tax rate was favorably impacted because the US entity was an S-corporation during 2015, which was partially offset by accrued interest and penalties on the unrecognized tax benefits.

29


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

    

2017

    

2016

 

 

(Restated)

 

(Restated)

Deferred tax assets:

 

 

  

 

 

  

Accounts receivable

 

$

646

 

$

660

Accrued expenses

 

 

310

 

 

402

Government grants

 

 

140

 

 

155

R&D credits

 

 

326

 

 

162

Depreciation

 

 

202

 

 

188

Amortization

 

 

9,870

 

 

15,160

Tax reserves

 

 

920

 

 

1,140

Tax loss carryforwards

 

 

1,943

 

 

2,205

Other

 

 

 3

 

 

 2

 

 

 

14,360

 

 

20,074

Less: valuation allowance

 

 

(106)

 

 

(169)

Deferred tax assets, net of valuation allowance

 

 

14,254

 

 

19,905

Deferred tax liabilities:

 

 

  

 

 

  

Depreciation

 

 

(2,124)

 

 

(2,075)

Total deferred tax liabilities

 

$

(2,124)

 

$

(2,075)

Net deferred tax asset

 

$

12,130

 

$

17,830

 

At December 31, 2017, the Company has US federal tax loss carryforwards of approximately $8,616, which expire in 2036 and 2037. The Company has no US state tax loss carryforwards at December 31, 2017. At December 31, 2017, the Company has foreign tax loss carryforwards of $492. Most of the foreign losses have an indefinite carryover period.

The Company had recorded a liability for an unrecognized income tax benefits in 2014 of approximately $10,823, which is included in long term taxes payable in the consolidated balance sheet. Including accrued interest and penalties, the balance of such liability, offset by the change in deferred tax assets related to such matter, at December 31, 2017 and 2016, was $12,459 and $12,965, respectively. The annual incremental charge is recorded as a component of income tax expense in the accompanying consolidated statement of operations.

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction, various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2014 in the US and China, its major jurisdictions.

11. 401(k) Plan

The Company makes available a 401(k) defined contribution plan for its US employees. Under the 401(k) plan, employees may make contributions which are eligible for a discretionary percentage match, in cash, as defined in the 401(k) plan and determined by the Board of Directors. The Company recognized $560, $480 and $407 of related compensation expense for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company’s PRC subsidiaries are required to accrue for pension benefit based on certain percentages of the employees’ salaries in accordance with the relevant PRC regulations and make contributions to the state-sponsored pension plans out of such accrued amounts. The PRC government is responsible for the ultimate pension liability to these employees. The Company recognized $816, $716 and $573 of related compensation expense for the years ended December 31, 2017, 2016 and 2015, respectively.

30


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

12. Related Party Transactions

a)

Name and relationship

 

 

 

Name of Related Party

    

Relationship With the GROUP

The Founders

 

Controlling Shareholders of the Company

Admera Health LLC

 

An entity under significant influence of the Founders

Admera Health (HK) Limited

 

An entity under significant influence of the Founders

Admera Health Suzhou Ltd.

 

An entity controlled by Admera Health (HK) Limited

Admera Health Tianjin Ltd.

 

An entity controlled by Admera Health Suzhou Ltd.

 

b)

Related party transactions

The Group had the following transactions with related parties during the years ended December 31, 2017, 2016 and 2015 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2017

 

2016

 

2015

1) Purchase of services from

    

 

  

    

 

  

    

 

  

 Admera Health LLC (i)

 

$

24

 

$

20

 

$

95

 

 

 

 

 

 

 

 

 

 

2) Rendering of services to

 

 

  

 

 

  

 

 

  

 Admera Health Suzhou Ltd (i)

 

 

27

 

 

 7

 

 

276

 Admera Health LLC (i)

 

 

167

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

3) Collection of loan repayment from

 

 

  

 

 

  

 

 

  

 Admera Health LLC (ii)

 

 

 —

 

 

1,000

 

 

 —

 

 

 

 

 

 

 

 

 

 

4) Expenses paid on behalf of

 

 

  

 

 

  

 

 

  

 Admera Health LLC

 

 

1,477

 

 

1,122

 

 

 —

 Admera Health Suzhou Ltd

 

 

187

 

 

28

 

 

 —

 

 

 

 

 

 

 

 

 

 

5) Sale of fixed assets to

 

 

  

 

 

  

 

 

  

 Admera Health Suzhou Ltd

 

 

 —

 

 

57

 

 

 —

 

Notes:

(i)

The prices are mutually agreed according to the published prices.

(ii)

In 2014, GENEWIZ LLC funded a total of $1,000 to Admera Health LLC in the form of promissory notes, due and payable at December 31, 2016. In November 2016, Admera Health LLC fully repaid the promissory notes to GENEWIZ LLC.

31


 

GENEWIZ Group

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

December 31, 2017

The Group had the following balances with its related parties at December 31, 2017 and 2016:

 

 

 

 

 

 

 

 

    

2017

    

2016

Amounts due from related parties

 

 

  

 

 

  

 Admera Health LLC

 

$

729

 

$

97

 Admera Health Suzhou Ltd

 

 

11

 

 

 3

Total

 

$

740

 

$

100

 

 

 

 

 

 

 

 

 

2017

 

2016

Amounts due to related parties

 

 

  

 

 

  

 Admera Health LLC

 

$

24

 

$

 —

 The Founders

 

 

1,750

 

 

 —

Total

 

$

1,774

 

$

 —

 

 

13. Subsequent Events

The Company has evaluated subsequent events through the date the financial statements were available to be issued which is November 13, 2018.

In September 2018, Brooks Automation, Inc. (BRKS) entered into a definitive agreement to acquire GENEWIZ Group. The total cash purchase price for the acquisition will be approximately $450 million, subject to working capital and other adjustments. The transaction is expected to close by the end of 2018 upon satisfaction of customary closing conditions and regulatory approvals.

In March 2018, The Company amended the Memorandum of Association. As a result of the amendment and effective March 15, 2018, the holders of Series A and A‑1 Preferred Shares shall be entitled to receive non-cumulative non-compounding cash dividends at the rate of three percent (3%) of the applicable Preferred Share Issue Price, if and when declared by the Board (including the affirmative vote of the Investor Director), on each outstanding Preferred Share, which changed from the previous cumulative compounding cash dividends of the same rate, under the original agreement. Also, effective March 15, 2018, the holders of Series B Preferred Shares shall be entitled to receive non-cumulative non-compounding cash dividends at the rate of three percent (3%) of the applicable Preferred Share Issue Price, if and when declared by the Board (including the affirmative vote of the Investor Director), on each outstanding Preferred Share, which changed from the previous cumulative compounding cash dividends at the rate of eight percent (8%), under the original agreement. Additionally, if and when dividends are declared, the Company has the right to choose to pay those dividends either in cash or in shares of the Company at the then-current fair market value. In addition, the Company declared the accumulated dividends due to the Series B Preferred Shares and Series A‑1 Preferred Shares as of March 15, 2018 and paid the $4,206 to the shareholders in April 2018. Further, the Series A Preferred Shareholders waived their right to the dividend of $3,200.

32


Exhibit 99.2

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

GENEWIZ Group

Nine months ended September 30, 2018 and 2017

 


 

GENEWIZ Group

Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2018 and 2017

Contents

 

 

Unaudited Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets  

3

Consolidated Statements of Income  

5

Consolidated Statements of Comprehensive Income  

6

Consolidated Statement of Changes in Stockholders’ Equity  

7

Consolidated Statements of Cash Flows  

8

Notes to Consolidated Financial Statements  

9

 

 

 

 

 


 

GENEWIZ Group

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

 

 

 

 

 

 

 

 

    

September 30,

    

 

 

 

 

2018

 

December 31,

 

 

(Unaudited)

 

2017

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

31,440

 

$

40,448

Accounts receivable, net of $1,584 and $2,426 of allowance for doubtful accounts at September 30, 2018 and December 31, 2017, respectively

 

 

30,445

 

 

30,161

Amount due from related parties

 

 

2,167

 

 

740

Inventories

 

 

4,619

 

 

4,278

Prepaid expenses and other current assets

 

 

7,036

 

 

4,665

Total current assets

 

 

75,707

 

 

80,292

 

 

 

 

 

 

 

Non-current assets:

 

 

  

 

 

  

Property and equipment, net

 

 

32,467

 

 

32,773

Advance payments for property, plant, and equipment

 

 

411

 

 

1,216

Deferred income tax assets, net

 

 

10,543

 

 

12,130

Other assets, net

 

 

658

 

 

613

Total non-current assets

 

 

44,079

 

 

46,732

Total assets

 

$

119,786

 

$

127,024

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

6,962

 

$

7,745

Amount due to related parties

 

 

28

 

 

1,774

Unearned revenue

 

 

3,226

 

 

5,863

Short-term debt and current portion of long-term debt

 

 

6,732

 

 

11,252

Accrued expenses and other current liabilities

 

 

7,564

 

 

5,666

Total current liabilities

 

 

24,512

 

 

32,300

 

 

 

 

 

 

 

Non-current liabilities:

 

 

  

 

 

  

Long-term debt, less current portion

 

 

12,616

 

 

14,740

Deferred income

 

 

873

 

 

1,000

Other non-current liabilities

 

 

1,032

 

 

759

Long term tax payable

 

 

12,403

 

 

14,178

Total non-current liabilities

 

 

26,924

 

 

30,677

Total liabilities

 

$

51,436

 

$

62,977

 

 

 

 

 

 

 

Commitments and contingencies (see Note 7)

 

 

  

 

 

  

 

3


 

GENEWIZ Group

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

 

 

 

 

 

 

 

 

    

September 30,

 

 

 

 

 

2018

 

December 31,

 

    

(Unaudited)

    

2017

Mezzanine equity:

 

 

  

 

 

  

Series B convertible redeemable preferred shares ($0.0001 par value; 4,496,667 shares authorized, 4,496,667 shares issued and outstanding as of September 30, 2018 and December 31, 2017; Liquidation value of $25,129 and $28,742 as of September 30, 2018 and December 31, 2017, respectively)

 

$

25,129

 

$

28,742

 

 

 

 

 

 

 

Equity:

 

 

  

 

 

  

Series A convertible preferred shares ($0.0001 par value; 23,753,859 shares authorized, issued and outstanding as of September 30, 2018 and December 31, 2017, respectively; Liquidation value of $47,507 and $50,401 as of September 30, 2018 and December 31, 2017, respectively)

 

 

 3

 

 

 3

 

 

 

 

 

 

 

Series A-1 convertible preferred shares ($0.0001 par value; 667,000 shares authorized, issued and outstanding as of September 30, 2018 and December 31, 2017; Liquidation value of $3,758 as of September 30, 2018 and December 31, 2017)

 

 

3,740

 

 

3,740

 

 

 

 

 

 

 

Series A-2 convertible preferred shares ($0.0001 par value; 1,680,736 and, 1,665,818 shares authorized, issued and outstanding as of September 30, 2018 and December 31, 2017, respectively; Liquidation value of $16,900 and $16,750 as of September 30, 2018 and December 31, 2017, respectively)

 

 

16,870

 

 

16,720

 

 

 

 

 

 

 

Ordinary A Shares ($0.0001 par value; 466,683,656 shares authorized at September 30, 2018 and December 31, 2017; zero issued and outstanding as of September 30, 2018 and December 31, 2017, respectively)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Ordinary B Shares $0.0001 par value; 2,733,000 shares authorized at September 30, 2018 and December 31, 2017; 207,650 and 193,250 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively)

 

 

 —

 

 

 —

Additional paid-in capital

 

 

3,146

 

 

2,522

Statutory reserves

 

 

2,872

 

 

2,307

Retained earnings

 

 

18,214

 

 

10,068

Accumulated other comprehensive loss

 

 

(1,624)

 

 

(55)

Total liabilities and stockholders' equity

 

$

119,786

 

$

127,024

 

See accompanying notes to the consolidated financial statements.

 

4


 

GENEWIZ Group

Consolidated Statements of Income

(In Thousands)

(unaudited)

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

September 30,

 

    

2018

    

2017

Revenues

 

$

93,067

 

$

70,577

Cost of revenue

 

 

44,877

 

 

37,192

Gross profit

 

 

48,190

 

 

33,385

 

 

 

 

 

 

 

Operating expenses:

 

 

  

 

 

  

Research and development

 

 

4,271

 

 

3,317

Selling and marketing expense

 

 

9,296

 

 

7,842

General and administrative

 

 

21,273

 

 

17,498

Total operating expenses

 

 

34,840

 

 

28,657

 

 

 

 

 

 

 

Income from operations

 

 

13,350

 

 

4,728

 

 

 

 

 

 

 

Other income (expense):

 

 

  

 

 

  

Interest expense, net

 

 

(757)

 

 

(1,233)

Other (expense) income, net

 

 

(598)

 

 

787

Earnings before income taxes

 

 

11,995

 

 

4,282

 

 

 

 

 

 

 

Provision for income taxes

 

 

2,692

 

 

530

Net income

 

$

9,303

 

$

3,752

 

See accompanying notes to the consolidated financial statements.

5


 

GENEWIZ Group

Consolidated Statements of Comprehensive Income

(In Thousands)

(unaudited)

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

September 30,

 

    

2018

    

2017

Net income

 

$

9,303

 

$

3,752

Foreign currency translation adjustments, net of nil tax

 

 

(1,569)

 

 

802

Comprehensive income

 

$

7,734

 

$

4,554

 

See accompanying notes to the consolidated financial statements.

 

 

 

6


 

GENEWIZ Group

Consolidated Statement of Changes in Stockholders' Equity

(In Thousands, except share)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Convertible Preferred   Stock

    

Ordinary Shares/ Class B

    

  

 

    

  

 

    

  

 

    

  

 

    

  

 

 

 

Series A

 

 

 

 

Series A-1

 

 

 

 

Series A-2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Statutory

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

APIC

    

AOCI

    

Earnings

    

Reserves

    

Total

Balance at December 31, 2017

 

23,753,859

 

 

 3

 

667,000

 

 

3,740

 

1,665,818

 

 

16,720

 

193,250

 

 

 —

 

 

2,522

 

 

(55)

 

 

10,068

 

 

2,307

 

 

35,305

Issuance of Series A-2 preferred shares

 

 —

 

 

 —

 

 —

 

 

 —

 

14,918

 

 

150

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

150

Stock options exercised

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

169,860

 

 

 —

 

 

205

 

 

 —

 

 

 —

 

 

 —

 

 

205

Repurchase of exercised stock options

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

(155,460)

 

 

 —

 

 

(16)

 

 

 —

 

 

 —

 

 

 —

 

 

(16)

Accrued dividend – Series B preferred shares

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(592)

 

 

 —

 

 

(592)

Share based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

435

 

 

 —

 

 

 —

 

 

 —

 

 

435

Foreign exchange differences

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,569)

 

 

 —

 

 

 —

 

 

(1,569)

Statutory reserve

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(565)

 

 

565

 

 

 —

Net income – nine months ended September 30, 2018

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,303

 

 

 —

 

 

9,303

Balance at September 30, 2018 (unaudited)

 

23,753,859

 

$

 3

 

667,000

 

$

3,740

 

1,680,736

 

$

16,870

 

207,650

 

$

 —

 

$

3,146

 

$

(1,624)

 

$

18,214

 

$

2,872

 

$

43,221

 

See accompanying notes to the consolidated financial statements .

 

 

7


 

 

GENEWIZ Group

Consolidated Statements of Cash Flows

(In Thousands)

(unaudited)

 

 

 

 

 

 

 

 

    

Nine Months 

    

Nine Months 

 

 

Ended 

 

Ended 

 

 

September 30,

 

September 30,

 

 

2018

 

2017

Operating activities

 

 

  

 

 

  

Net income

 

$

9,303

 

$

3,752

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

5,539

 

 

4,192

Share based compensation expense

 

 

1,083

 

 

1,336

Loss on sale of assets

 

 

535

 

 

34

Foreign exchange gain (loss), net

 

 

(341)

 

 

(4)

Allowance for doubtful accounts

 

 

(716)

 

 

342

Accretion of debt discount and issuance cost

 

 

172

 

 

51

Loss on debt extinguishment

 

 

 —

 

 

262

Deferred income taxes

 

 

1,573

 

 

539

Change in assets and liabilities:

 

 

  

 

 

  

(Increase) decrease in accounts receivable, net

 

 

123

 

 

(10,783)

(Increase) decrease in account receivable – related party, net

 

 

(1,970)

 

 

105

Increase in inventories

 

 

(425)

 

 

(153)

Increase in prepaid expenses and other current assets

 

 

(2,876)

 

 

(1,966)

Increase in other non-current assets

 

 

(45)

 

 

(107)

Increase (decrease)in accounts payable

 

 

(594)

 

 

919

Increase (decrease) in unearned revenue

 

 

(2,557)

 

 

213

Decrease in deferred income

 

 

(1,741)

 

 

(107)

Decrease in other non-current liabilities

 

 

(1,501)

 

 

(161)

Increase in accrued expenses and other current liabilities

 

 

2,917

 

 

3,373

Net cash provided by operating activities

 

 

8,479

 

 

1,837

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

  

 

 

  

Capital expenditures

 

 

(5,156)

 

 

(5,909)

Proceeds from sale of assets

 

 

 —

 

 

14

Net cash used in investing activities

 

 

(5,156)

 

 

(5,895)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

  

 

 

  

Proceeds from bank loan, net of issuance costs

 

 

4,689

 

 

17,974

Proceeds from revolver loan

 

 

 —

 

 

2,500

Payments on bank loan

 

 

(10,123)

 

 

(6,930)

Repayment of revolver loan

 

 

 —

 

 

(10,500)

Payments of capital lease obligations

 

 

(1,071)

 

 

(645)

Proceeds from exercise of Series B preferred shares warrants

 

 

 —

 

 

6,329

Proceeds from issuance of Series A-1 convertible preferred shares, net of issuance costs

 

 

 —

 

 

3,740

Proceeds from issuance of Series A-2 convertible preferred shares, net of issuance costs

 

 

150

 

 

 —

Proceeds from exercise of options from employees

 

 

205

 

 

665

Dividend payments

 

 

(4,206)

 

 

 —

Purchase of ordinary shares from employees

 

 

(674)

 

 

(2,934)

Net cash provided by (used in) financing activities

 

 

(11,030)

 

 

10,199

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,301)

 

 

974

Net increase (decrease) in cash and cash equivalents

 

 

(9,008)

 

 

7,115

Cash and cash equivalents at beginning of period

 

 

40,448

 

 

14,439

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

31,440

 

$

21,554

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

Cash paid for income taxes

 

$

2,865

 

$

355

Cash paid for interest expenses

 

$

770

 

$

977

 

See accompanying notes to the consolidated financial statements.

 

 

8


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

1. Principal Activities and Currency

GENEWIZ Group (the "Company" or "GENEWIZ") is an exempted company in the Cayman Islands with limited liability under the Companies Law of the Cayman Islands.

Principal Activities:

The Company is a holding company and conducts all of its operations through its subsidiaries which are located in United States (US), China (PRC), United Kingdom (UK), France, Germany and Japan. The Company and its subsidiaries (collectively, the "Group") provides contract research in Sanger DNA sequencing, high throughput/next generation sequencing, gene synthesis, molecular biology, bioinformatics, and GLP regulatory services.

The Company offers its service to pharmaceutical companies, universities, research institutions, government agencies, and biotechnology companies. GENEWIZ is also an institutional outsourcing partner for leading academic and research institutions.

Currency:

Items included in the financial statements of each entity comprising the Company are measured using  the  currency  of  the  primary  economic  environment  in  which  the  entity  operates  (the functional currency). The functional currency for Group, GENEWIZ Inc., and GENEWIZ LLC is the US Dollar ("USD"), the functional currency for Suzhou GENEWIZ Biological Technology Co., Ltd ("GENEWIZ Suzhou"), GENEWIZ (Guangzhou) Biological Technology Co., Ltd (GENEWIZ Guangzhou), and Nanjing GENEWIZ Biological Technology Co., Ltd (GENEWIZ Nanjing) is the Renminbi (RMB), the functional currency for GENEWIZ Japan Corp is the Japanese Yen (JPY), GENEWIZ UK Limited is the British Pound (GBP), and for GENEWIZ France Ltd and GENEWIZ Germany GMBH the functional currency is the Euro (EUR). The Company consolidates its financial statements in USD.

Foreign currency transactions in each entity comprising the Company are translated into the functional currency of the entity using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within other income (expense), net in the consolidated statements of income.

The results and financial position of the Company and its subsidiaries that have a functional currency different from the USD are translated into USD as follows:

a.

assets and liabilities are translated at the closing exchange rate as of each period end;

b.

income and expenses are translated at average monthly exchange rates that are relevant for the respective periods for which the income and expenses occurred;

c.

significant transactions use the exchange rate on the date of the transaction; and

d.

all resulting exchange differences arising from such translation are recognized directly in other comprehensive income and the cumulative impact is presented in accumulated other comprehensive income (AOCI) as a separate component of equity.

 

9


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation:

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("US GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative US GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

The accompanying consolidated financial statements include the accounts of the Group and its direct or indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation financial statements.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities revenue and expense, and the related disclosure of contingent assets and liabilities. Specific accounts that require management estimates include, but not limited to, assumption impacting share-based compensation, preferred shares, deferred tax assets, useful life of property and equipment and allowance for doubtful accounts. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates, and such differences may be material to the accompanying consolidated financial statements.

Fair Value of Financial Instruments:

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, advances from customers, and accrued expenses and other current liabilities approximate fair value due to the short-term maturity of these instruments.

Warrants to purchase shares of the Company’s convertible preferred stock are stated at fair value. The convertible preferred stock warrant liabilities are remeasured at the end of each reporting period, and changes to the fair value of the instruments are reported as other income, net in the accompanying consolidated statements of income.

Revenue Recognition:

The Company enters into contracts or pricing agreements with pharmaceutical companies, universities, research institutions, government agencies and biotech companies for the processing or generation of DNA and related samples.

The Company recognizes revenue when there is persuasive evidence of an arrangement, products have been delivered to the customer and/or services have been rendered, the title and risk of loss have passed, the fee for the goods are fixed or determinable, and collectability is reasonably assured.

In certain instances, all revenue recognition criteria have been met, however billing has not yet occurred. In these instances, the Company records unbilled receivables and revenue. As of September 30, 2018 and December 31, 2017, unbilled

10


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

receivables were $557 and $230, respectively, and were included in accounts receivable on the accompanying consolidated balance sheets.

Cost of Revenue:

Cost of revenue includes direct labor and related benefit charges, direct materials, shipping and handling fees, and an allocation of facility charges and other direct costs.

Research and Development Costs:

Research and development costs are expensed as incurred and consist primarily of supplies, salaries and benefits, depreciation expense, and other expenses incurred by the Company to develop and improve the Company’s service offering, technologies and processes, and are recorded as incurred.

Cash and Cash Equivalents:

The Company considers all investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. The Company invests its cash and cash equivalents with highly rated financial institutions. Management believes that the financial risks associated with its cash equivalents are minimal. Cash and cash equivalents consist of cash, bank deposits, term deposits, which are not restricted in use, and investments in money market funds as of September 30, 2018 and December 31, 2017.

Accounts Receivable:

The accounts receivable balance primarily includes amounts due from clients and third parties.

The Company provides an allowance for doubtful accounts equal to estimated uncollectible receivables. This estimate is based on the current status of each customer’s receivable balance as well as current economic and market conditions. The estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, the Company may be required to increase or decrease our allowances. Receivables are written off against the allowance only upon determination that such amounts are not recoverable and all collection attempts have failed. During the nine months ended September 30, 2018 and 2017, the Company recognized expenses (recoveries) of $(716) and $342, respectively, within general and administrative expenses in our consolidated statements of income, associated with our allowances for doubtful accounts.

Inventories:

Inventories are goods that will be used in the production of services or goods. Inventory is stated at the lower of cost or realizable value. Cost is determined by the first-in first-out method.

Concentration of Credit Risk and Off-Balance-Sheet Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

11


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

The Company maintains cash and cash equivalents with various major financial institutions. The total cash balances on deposit that exceeded the balances insured by the Federal Deposit Insurance Commission, were approximately $29,590 and $38,944 at September 30, 2018 and December 31, 2017, respectively.

Concentration of Credit Risk and Off-Balance-Sheet Risk (continued):

Substantially all of the Company’s accounts receivable are with companies in the healthcare or biopharmaceutical industry, institutions and universities. However, concentrations of credit risk are limited due to the number of the Company’s customers as well as their dispersion across many different geographic regions.

There were no customers with more than 10% of consolidated revenues for the nine months ended September 30, 2018 or 2017, and there were no customers with more than 10% of consolidated accounts receivable as of September 30, 2018 or December 31, 2017.

Long-Lived Assets:

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In such instances, the recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset group to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, an impairment loss would be recognized if the carrying amount of the asset exceeds the fair value of the asset. The Company did not recognize any impairment of long-lived assets during the nine months ended September 30, 2018 or 2017.

Property and Equipment:

Property and equipment consists of computer equipment, machinery and equipment, furniture and fixtures, leasehold improvements, land use right and equipment used in the Company’s research and development activities and is recorded at cost less accumulated depreciation.

Depreciation is calculated using the straight-line method based on estimated useful lives and in the case of leasehold improvements, the shorter of the useful life or the remaining term of the lease, as set forth below:

 

 

 

 

    

Years

Buildings and building improvements

 

39

Machinery and equipment

 

3-10

Software

 

5

Leasehold improvements

 

7

Furniture and fixtures

 

7

Automobiles

 

5

Land use right

 

50

 

Capitalized Software Costs:

The Company capitalizes internal use software which is ready for service and capitalizes software development costs incurred on significant projects starting from the time that the preliminary project stage is completed until the project is substantially complete and the software is ready for its intended use. Capitalized costs include payroll and payroll-related costs. Research and development phase costs and other computer software maintenance costs related to software are

12


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

expensed as incurred. Capitalized software costs are amortized using the straight-line method over the estimated useful life of the underlying system, generally five years.

Leases:

A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified as an operating lease. When a lease contains rent holidays or requires fixed escalations of the minimum lease payments, the Company records the total rental expense on a straight-line basis over the lease term and the difference, if any, between the straight-line rental expense and cash payment under the lease is recorded as deferred rent liabilities (which included in accrued expenses and other current liabilities or other non-current liabilities in the consolidated balance sheet).

Leases that transfer substantially all the rewards and risks of ownership of assets to the Company, other than legal title, are accounted for as capital leases. At the inception of a capital lease, the cost of the leased asset is capitalized at the lower of the net present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing at the fair value of the lease property at the inception of the lease. Assets held under capital leases are included in property, plant and equipment, and depreciated over the shorter of the lease terms or the estimated useful lives of the assets. The finance costs of such leases are charged to the consolidated statement of income so as to provide a constant periodic rate of charge over the lease terms.

Government Grants:

The Company qualifies for grants from the PRC government for achieving certain research and development milestones. Government grants related to assets are recorded as deferred income when received, and are then recognized as other income on a straight-line basis over the useful life of the associated asset. Government grants which were unrestricted in use and not refundable, are recorded in other income in the consolidated statement of operations, when received.

Convertible Preferred Stock Warrants:

Freestanding warrants to purchase the Company’s convertible preferred stock were classified as a liability on the accompanying balance sheets. The convertible preferred stock warrants were recorded as liabilities because the underlying shares of convertible preferred stock are contingently redeemable, which, therefore, may obligate the Company to transfer assets at some point in the future to settle these warrants. The warrants are recorded at estimated fair value and are subject to remeasurement at each balance sheet date. During the year ended December 31, 2017, all of the 1,124,167 warrants outstanding as of December 31, 2016 were exercised and the related liability was extinguished. As such, no warrants were outstanding as of December 31, 2017 or September 30, 2018.

Profit Appropriation to Statutory Reserves:

In accordance with current Chinese laws and regulations, our subsidiaries in China are required to allocate to their general reserves at least 10% of their respective after-tax profits for the year determined in accordance with Chinese accounting standards and regulations. Each of our subsidiaries and affiliated entities in China may stop allocations to its general reserve if such reserve has reached 50% of its registered capital. Allocations to these statutory reserves can only be used for specific purposes and are not transferable to use in the form of loans, advances, or cash dividends.

13


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

Stock-Based Compensation:

The Company maintains stock compensation plans as a long-term incentive for employees, and members of the Company’s Board of Directors and advisors. The 2016 Plan allows for the issuance of non-statutory and incentive stock options to employees, non-statutory stock options to non- employees, and restricted stock awards to employees and non-employees.

Per the terms of the Company’s 2016 option plan, the Company has the right, but not the obligation, to repurchase exercised options upon employment termination of the holder for any reason within the later of (a) 180 days from termination or (b) 180 days from exercise. Given this provision the Company assesses the probability that the Company will repurchase immature shares on a grantee by grantee basis. The Company has determined that on the date in which an employee is terminated or leaves the Company for any reason, it is probably that the Company will repurchase the shares exercised for cash. Therefore, upon termination, the vested but unexercised stock options are reclassed from equity to liability and marked to market, with any change in fair value recorded through the consolidated statement of income.

The Company has determined that it is not probable that they will repurchase exercised options of employees and thus are accounted for as equity awards.

The Company measures stock-based compensation at the grant date based on the fair value of the award and recognize stock-based compensation expense over the requisite service period. The fair value of the Company’s stock options has been determined using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including (i) the expected stock price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends. Due to the lack of historical and implied volatility data of the Company’s Ordinary Shares, the expected stock price volatility has been estimated based on the historical volatilities of a specified group of companies in the Company’s industry for a period equal to the expected life of the option. The Company selected companies that it considers to have comparable characteristics to the Company, including enterprise value, risk profiles and position within the industry and with historical share price information sufficient to meet the expected term of the stock options. The historical volatility data has been computed using the daily closing prices for the selected companies.

The expected life of the options granted represents the period of time that options granted are expected to be outstanding and is calculated using the simplified method, which is the mid-point between the vesting date and the end of the contractual term for each option. The risk-free interest rate is based on a zero coupon, United States Treasury instrument whose term is consistent with the expected life of the stock option. The Company has not paid, and does not anticipate paying, cash dividends on its shares of Ordinary Shares; therefore, the expected dividend yield is zero. The Company uses historical data to estimate pre-vesting option forfeitures and records stock- based compensation expense only for those awards that are expected to vest.

The Company’s share-based awards are subject to service-based or service and performance-based vesting conditions. The Company records compensation expense for service-based awards over the vesting period of the award on a straight-line basis. For awards with service and performance based conditions, compensation related to the performance-based vesting conditions is recognized when achievement of the performance condition is considered probable and the compensation expense related to the service condition is recorded using the accelerated method.

14


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

Certain weighted-average information and assumptions used in the option-pricing model for options granted to employees, directors, and non-employees are as follows:

 

 

 

 

 

 

 

    

Nine months Ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

Expected life (in years)

 

5.7-5.8

 

5.7-5.8

 

Risk-free interest rate

 

2.3 - 2.9

%  

2.3

%

Volatility

 

22 - 48

%  

22.6

%

Dividend yield

 

 —

 

 —

 

 

Income Taxes:

The Company accounts for income taxes in accordance with FASB ASC Topic 740, Income Taxes (ASC 740). Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and tax credits, if any. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of the relevant taxing authorities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in which temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the consolidated statement of income in the period of the enactment of the change.

The Company considers positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Company has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected for a company operating in the genomic services industry.

The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return regarding uncertainties in income tax positions. The first step is recognition: the Company determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability. The Company has recorded a liability for uncertain tax positions at September 30, 2018 and December 31, 2017 – See Note 9.

15


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax expense for the year ended December 31, 2017. The Company expects to meaningfully benefit from its enactment in future periods. See Note 9 to the consolidated financial statements for further detail.

Fair Value Measurements:

The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in the accounting standards. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 - Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs which are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. Management believes that the Company’s debt (see Note 5) bears interest at the prevailing market rate for instruments with similar characteristics and accordingly, the carrying value approximates its fair value.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2017 (none at September 30, 2018) is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Fair Value Measured Using

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

 

  

 

 

  

 

 

  

 

 

  

Cash equivalents

 

$

4,154

 

$

 —

 

$

 —

 

$

4,154

 

The estimated fair values of the convertible preferred stock warrant liabilities were determined using Level 3, or significant unobservable inputs. Changes to the estimated fair value of the warrants are recorded in other income, net in the consolidated statement of income and were not significant for the nine months ended September 30, 2017.

During the periods ended September 30, 2018 and 2017, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis.

Recent Accounting Pronouncements:

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers . This update supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to

16


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for fiscal years and interim periods beginning after December 15, 2018, for non-public entities (i.e., fiscal year 2019 for the Company). Early adoption is allowed but no earlier than the original effective date for public entities  of  December 15, 2017. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016‑02, Leases. The primary difference between current GAAP and Topic 842 is the required recognition of lease assets and lease liabilities by lessees for leases classified as operating leases. The FASB issued this update to increase transparency and comparability among organizations that engage in operating leases, as lessees. This is effective for the Company in fiscal 2020 and the Company is currently assessing the impact on our consolidated financial statements.

In May 2016, the FASB issued ASU 2016‑09, Improvements to Employee Share-Based Payment Accounting. The amended guidance focuses on how companies record taxes on vested or settled awards, shares repurchased to cover taxes upon employee exercise and the ability for companies to elect to account for forfeitures as they occur. Additionally, the guidance includes items specific to non-public entities related to an award’s expected term and liability classified awards. For non- public companies, the guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance in 2018, and the impact was not significant to the consolidated financial statements

In May 2017, the FASB issued ASU 2017‑09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. Under the new guidance companies that make non-substantive changes to its awards will not be subject to modification accounting guidance. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance in 2018, and the impact was not significant to the consolidated financial statements.

 

17


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

3. Property and Equipment, net

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

    

September 30, 

    

 

 

 

 

2018 

 

December 31,

 

    

(Unaudited)

    

2017

Land

 

$

165

 

$

165

Land use right

 

 

2,156

 

 

 —

Buildings and building improvements

 

 

130

 

 

130

Machinery and equipment

 

 

32,033

 

 

28,880

Software

 

 

5,224

 

 

4,410

Leasehold improvements

 

 

7,724

 

 

6,354

Furniture and fixtures

 

 

599

 

 

385

Automobiles

 

 

477

 

 

505

Construction in progress

 

 

1,841

 

 

5,262

Equipment under capital leases

 

 

5,971

 

 

6,642

Subtotal

 

 

56,320

 

 

52,733

Less accumulated depreciation and amortization of

 

 

(23,853)

 

 

(19,960)

Total

 

$

32,467

 

$

32,773

 

Depreciation and amortization expense related to property, plant and equipment was $5,539, and $4,192 for the nine months ended September 30, 2018 and 2017, respectively. Depreciation and amortization expense included $729 and $232 related to capitalized software and $460 and $812 related to capital leases for the nine months ended September 30, 2018 and 2017, respectively.

 

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

2018

 

December 31,

 

    

(Unaudited)

    

2017

Accrued payroll and related expenses

 

$

4,071

 

$

$
2,726

Taxes payable

 

 

1,210

 

 

1,221

Other payable

 

 

2,283

 

 

1,719

Total accrued expenses and other current liabilities

 

$

7,564

 

$

$
5,666

 

 

18


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

5. Debt

Debt consist of the following:

 

 

 

 

 

 

 

 

    

September 30,

    

 

 

 

 

2018

 

December 31,

 

    

(Unaudited)

    

2017

Term loan (US)

 

$

10,031

 

$

10,331

Revolving credit (US)

 

 

 —

 

 

 —

Bank loans (China)

 

 

5,685

 

 

10,999

Unamortized discount/issuance costs

 

 

(305)

 

 

(321)

Capital lease obligations

 

 

3,937

 

 

4,983

Total debt outstanding

 

 

19,348

 

 

25,992

Less current debt

 

 

(6,732)

 

 

(11,252)

Long-term debt outstanding

 

$

12,616

 

$

14,740

 

In June 2017, the Company entered into a new term loan facility (Term Loan) in the amount of $10,700, with CitiBank N.A, to fund its working capital and other general corporate needs. The Company also obtained new a Revolving Credit line of $10,000 as part of this Term Loan agreement. The Company drew down the entire term loan available under the agreement in June 2017 and repaid the outstanding obligation under the previous term and revolving loan of $9,800.

The debt repayment has been treated as a debt extinguishment and the Company recognized a $262 debt extinguishment loss during the nine months ended September 30, 2017, for the write-off of unamortized debt discount recorded in interest expense, net in the consolidated statement of income.

The Term Loan carries an interest rate equal to the LIBOR rate plus 2.75% and the Company may at their option prepay the Term Loans, in whole or in part, at any time and from time to time without premium or penalty. At September 30, 2018 the interest rate in effect was 5.73%. The revolving credit facility bears interest at the prime rate plus an applicable margin as defined in the loan agreements, and matures in June 2020.

The Term Loan is senior to all other debt and has a first priority lien on all of the Company’s assets, excluding intellectual property; however, intellectual property is subject to a negative pledge. The Term Loan contains customary conditions related to borrowing, events of default, and covenants, including covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire stock, and make investments, in each case subject to certain exceptions. The Term Loan requires that the Company comply with a Consolidated Leverage ratio and a debt service ratio financial covenants. As of September 30, 2018, there have been no events of default.

Total interest expense recorded on the debt was $941 and $1,250 for the nine months ended September 30, 2018 and 2017, respectively. Total interest expense included $15 and $51 interest expense related to the amortization of the issuance cost for the nine months ended September 30, 2018 and 2017, respectively.

China

The bank loans in China included short term loans of $4,030 and $8,100 as of September 30, 2018 and December 31, 2017, respectively. The interest rates of these loans were from 3.80% to 4.57%, and 3.80% to 4.35%, during 2018 and 2017. The Company also has long term loans outstanding of $1,655 and $2,899 as of September 30, 2018 and December 31, 2017. As of September 30, 2018, $828 of the long term loan was due within one year and was recorded in

19


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

the current portion of long-term debt. The interest rate was equal to the LIBOR rate plus 3.1%. There are no covenants with respect to these loans.

Future minimum payments with regards to the total debt outstanding (other than the capital leases) as of September 30, 2018 is as follows:

 

 

 

 

Year ending December 31:

    

 

  

2018 (remaining period)

 

$

1,350

2019

 

 

4,886

2020

 

 

2,700

2021

 

 

4,158

2022 and thereafter

 

 

2,622

Total minimum loan payments

 

$

15,716

 

 

6. Convertible Preferred Stock

Series B Preferred Shares:

Activity in the Series B Preferred shares is summarized as follows:

 

 

 

 

 

 

 

    

Shares

    

Amount

Balance at December 31, 2017

 

4,496,667

 

 

28,742

Accretion of dividend

 

 —

 

 

593

Payment of dividend

 

 —

 

 

(4,206)

Balance at September 30, 2018

 

4,496,667

 

$

25,129

 

On January 7, 2016, the Company issued 3,372,500 Redeemable Convertible Series B Preferred Shares (Series B  Preferred Shares) at a price of $5.634 per share and 1,124,167 Series B Warrants, convertible into 1,124,167 Series B Preferred Shares with an exercise price of $5.634 per share.

The Series B Warrants were exercisable into Series B Preferred Shares at exercise price of $5.634 per share until January 7, 2018. The warrants were considered to be freestanding instruments that required bifurcation from the Series B Preferred Shares and was therefore accounted for as liability. The warrants were exercised in January 2017.

The Series B Preferred Shareholders can obtain creditor rights as promissory note holders if the Series B Preferred Share are redeemed and the Company has insufficient funds to pay the redemption price. The Company has evaluated this feature and has determined that this feature would not impact the treatment of the Series B Preferred Share.

The Series B Preferred Shares is classified as liabilities because at issuance, this feature does not currently grant the preferred shareholders creditor rights. Furthermore, the Company has evaluated the redemption features and has determined that, given redemption is at the holder’s option and therefore outside the control of the Company, such securities should not be classified as permanent shareholders’ equity. Accordingly, such securities are classified as mezzanine equity on the balance sheet.

20


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

Series B Preferred Shares (continued):

The Company records the difference between the initial carrying value and the ultimate redemption value to the earliest possible redemption date at each reporting date. The difference each period relates to the 8% (3% after March 2018, if and only if declared – see below) per annum compounded accrued dividends whether or not declared entitled to by the Series B Preferred Shareholders. The accrued dividend is recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-in-capital. Once additional paid-in-capital has been exhausted, additional charges are recorded by increasing the accumulated deficit.

In April 2018, the Company paid the cumulative dividend accrued to Series B shareholders of $4,206. The cumulative accrued dividend and resulting redemption value of the Series B Preferred Shares as of September 30, 2018 and December 31, 2017, are $0 and $25,129 and $3,615 and $28,742, respectively.

Series A Preferred Shares:

During the fourth quarter of 2017, the Company redeemed and retired 174,041 shares of Series A Preferred Stock from the Founders for $1,750.

Series A‑1 Preferred Shares:

On January 9, 2017, the Company executed an agreement with related parties to issue 667,000 Convertible Series A‑1 Preferred Shares (Series A‑1 Preferred Shares) at a price of $5.634 per share. Total cash proceeds received by the Company was $3,740, which was net of issuance cost incurred of $17.

Additionally, pursuant to the Shareholder resolution, the Company redeemed 667,000 Class B ordinary shares from the shareholders at a price per share of $4.33, or $2,900 and 475,000 of the 667,000 shares were redeemed from employees. The difference of $1,231 between the fair value of $869 (at $1.83 per share) on the date of redemption and the $2,100 paid (at $4.33 per share) was recorded as compensation expense through the consolidated statement of income. The remaining 192,000 shares were redeemed from a former employee and as such the difference of $831 between the par value and the cash consideration was recorded as a deemed dividend through retained earnings. All shares repurchased were retired by the Company.

Series A‑2 Preferred Shares:

On November 10, 2017, the Company executed an agreement with new investors to issue 1,665,818 Convertible Series A‑2 Preferred Shares (Series A‑2 Preferred Shares) at a price of $10.0551  per  share.  The total  value of the  Series   A‑2 Shares and  cash proceeds received was $16,720, which is net of issuance costs of $30. Pursuant to the Shareholder resolutions, the Company repurchased and retired 174,041 Series A Preferred Shares from the Founders with total consideration of $1,750, based on the price of $10.0551 per share, which was charged to retained earnings as a deemed dividend.

In 2018, a board member of the Company purchased 14,918 Series A‑2 Preferred shares for $150.

Rights and Preferences:

As of December 31, 2017 and 2016, the holders of the Series B Preferred Shares and Series A, A‑1 and A‑2 Preferred Shares (together the "Preferred Shares") had the following rights and preferences, unless stated otherwise.

21


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

Dividends:

Through March 2018:

The holders of the Series B Preferred Shares shall be entitled to receive cumulative dividends in preference to any dividend on the Company’s Ordinary Shares at the rate of 8% compounded per annum, whether or not declared by the Board of Directors. The holders of Preferred Shares also shall be entitled to participate pro rata in any dividends paid on the Ordinary Shares on an as-if- convertedbasis.

The holders of the Series A and A‑1 Preferred Shares shall be entitled to receive cumulative dividends in preference to any dividend on the Company’s Ordinary Shares at the rate of 3% compounded per annum, whether or not declared by the Board of Directors. The holders of Preferred Shares also shall be entitled to participate pro rata in any dividends paid on the Ordinary Shares on an as-if-convertedbasis.

The holders of the Series A‑2 Preferred Shares shall be entitled to receive declared and unpaid dividends in preference to any dividend on the Company’s Ordinary Shares at the rate of 3% per annum, on non-compounded basis, subject to declaration by the Board of Directors. The holders of Preferred Shares also shall be entitled to participate pro rata in any dividends paid on the Ordinary Shares on an as-if-convertedbasis.

Post March 2018:

In March 2018, The Company amended the Memorandum of Association. As a result of the amendment and effective March 15, 2018, the holders of Series A and A‑1 Preferred Shares shall be entitled to receive non-cumulative non-compounding cash dividends at the rate of three percent (3%) of the applicable Preferred Share Issue Price, if and when declared by the Board (including the affirmative vote of the Investor Director), on each outstanding Preferred Share, which changed from the previous cumulative compounding cash dividends of the same rate, under the original agreement. Also, effective March 15, 2018, the holders of Series B Preferred Shares shall be entitled to receive non-cumulative non-compounding cash dividends at the rate of three percent (3%) of the applicable Preferred Share Issue Price, if and when declared by the Board (including the affirmative vote of the Investor Director), on each outstanding Preferred Share, which changed from the previous cumulative compounding cash dividends at the rate of eight percent (8%), under the original agreement. Additionally, if and when dividends are declared, the Company has the right to choose to pay those dividends either in cash or in shares of the Company at the then-current fair market value. In addition, the Company declared the accumulated dividends due to the Series B Preferred Shares and Series A‑1 Preferred Shares as of March 15, 2018 and paid the $4,206 to the shareholders in April 2017. Further, the Series A Preferred Shareholders waived their right to the dividend of $3,200.

Conversion:

Holders of Series A and B Preferred Shares shall have the right to convert their units into Class A Ordinary Shares at any time at a conversion price equal to the Original Issue Price, subject to adjustments under certain circumstances. The Series A  and B Preferred Shares will be automatically converted into Ordinary Shares upon (i) the closing of a Qualified IPO, or (ii) the conversion date specified by written consent or agreement of the holders of at least 50% of all then outstanding Series B Preferred Shares (Preferred Majority).

A Qualified Public Offering is defined as upon the closing of a firm commitment underwritten public offering of the Class A Ordinary Shares, with a pre-offering valuation of the Company of no less than Three Hundred Million US dollars ($300,000) and gross proceeds to the Company of no less than Thirty Million US dollars ($30,000).

22


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

With regard to the Series B Preferred Shares only, if the Company shall issue or deemed to have issued any additional equity or any instrument or securities convertible or exercisable into equity (Convertible Securities) or any additional Ordinary Shares (New Ordinary Shares), under certain circumstances, , at a price per Ordinary Share (on an as-converted basis) less than the applicable conversion prices then of corresponding Redeemable Convertible Preferred Shares, then the relevant conversion price, shall be reduced per the Series B agreement, concurrently with such issue.

Redemption:

Holders of Series B Preferred Shares shall have the right to redeem up to (a) 1/3 of Series B Preferred Shares at any time commencing from the 5th anniversary of the Closing, (b) additional 1/3 at any time commencing from the 6th anniversary of the Closing, and (c) the final 1/3 at any time commencing from the 7th anniversary of the Closing at the price per share equal to the initial issuance price, and a return thereon at a 8% compounded annual rate. There is no redemption feature for any Class of Series A Preferred.

Voting Rights:

Holders of Series A and B Preferred Shares shall have the same voting rights as Class A Ordinary Shares on an as-if-converted basis.

Liquidation Preference:

Upon any liquidation, dissolution or winding up of the Company, holders of Series B Preferred Shares shall be entitled to receive, prior to any distribution to the holders of Ordinary Shares or any other class or series of shares then outstanding, an amount per preferred share equal to the Original Issue Price of their preferred shares plus any accrued and unpaid dividends. Additional distributions to holders of Series B Preferred Shares are subject to certain restrictions.

 

7. Commitments and Contingencies

Operating Leases:

The Company leases various facilities and equipment under non-cancelable lease arrangements. Future minimum rental commitments for leases with non-cancelable terms of one year or more at September 30, 2018, are as follows:

 

 

 

 

2018 (remainder of year)

    

$

768

2019

 

 

2,908

2020

 

 

2,656

2021

 

 

1,961

2022

 

 

858

Thereafter

 

 

1,815

Total minimum lease payments

 

$

10,966

 

Rent expense for the nine months ended September 30, 2018 and 2017 was $3,036 and $2,926, respectively.

Capital Leases:

The Company leases certain machines that are classified as capital leases and have remaining lease terms ranging from two to five years.

23


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

At September 30, 2018 the total future minimum lease payments under these capital leases and their present value are as follows:

 

 

 

 

2018 (remainder of year)

    

$

362

2019

 

 

1,391

2020

 

 

1,277

2021

 

 

1,044

2022

 

 

170

Total

 

 

4,244

Less amount representing interest

 

 

(307)

Capital lease obligations

 

$

3,937

 

Capital Commitment:

At September 30, 2018, the Company had commitments of $364 relating to purchase of plant and machinery and $873 for the construction of building.

Legal Proceedings:

The Company is a party to claims and lawsuits arising in the normal course of business. While the ultimate resolution of these matters has yet to be determined, and although the results of litigation and claims cannot be predicted with certainty, the Company does not believe that their outcome will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

 

8. Stockholders’ Equity

Ordinary Shares:

The Ordinary Shares confers upon its holders the right to receive dividends out of any assets legally available, when and as declared by the Board of Directors, but subject to the prior right of the holders of Series APreferred Shares and Series B Preferred Shares as described above.

Ordinary Shares reserved for future issuance as of September 30, 2018 consisted of the following:

 

 

 

Preferred shares

    

26,345,245

Shares available for grant under stock option plan

 

11,940

Options issued and outstanding under stock option plan

 

2,477,410

Total ordinary shares reserved for future issuance

 

28,834,595

 

Stock Incentive Plan:

Under the Company’s 2016 Equity Incentive Plan (the 2016 Plan), options and other stock awards to purchase shares of Ordinary Shares may be granted to employees, directors, and consultants. Incentive stock options are granted to employees and non-statutory stock options are granted to consultants and directors at an exercise price not less than 100% of the fair value (as determined by the Company’s Board of Directors) of the Company’s Ordinary Shares on the date of grant. The

24


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

exercise price of options granted to stockholders who hold 10% or more of the Company’s Ordinary Shares on the option grant date shall not be less than 110% of the fair value of the Company’s Ordinary Shares on the date of grant for both incentive and non-qualified stock option grants. These options generally vest over four years and expire ten years from the date of grant. There were no unvested shares subject to repurchase as of September 30, 2018 and December 31, 2017.

The 2016 Plan can be terminated by the Company’s Board of Directors at any time.

Stock Option Activity:

A  summary of the Company’s stock option activity is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted-

    

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

 

 

 

Number of

 

Average

 

contractual

 

Aggregate

 

    

Shares

    

Exercise Price

    

term (years)

    

Intrinsic value

Balance at December 31, 2017

 

2,113,510

 

$

1.18

 

6.76

 

$

6,551

Options granted

 

666,180

 

 

7.31

 

 —

 

 

 —

Options exercised

 

(169,860)

 

 

1.21

 

 —

 

 

 —

Options forfeited

 

(132,420)

 

 

1.38

 

 —

 

 

 —

Balance at September 30, 2018

 

2,477,410

 

$

2.82

 

8.06

 

$

8,926

Exercisable as of September 30, 2018

 

1,470,674

 

$

1.08

 

7.31

 

$

7,873

Vested or expected to vest at September 30, 2018

 

2,113,946

 

$

2.71

 

6.74

 

$

9,469

 

Options to purchase 363,464 and 140,192 shares of ordinary Shares are performance based and vest upon a successful Initial Public Offering or change in control at September 30, 2018 and December 31, 2017, respectively. This unvested performance-based option is excluded from the vested or expected to vest balance as of September 30, 2018 and December 31, 2017.

The Company also issued 36,000 restricted shares under the 2016 Plan during the nine months ended September 30, 2018, of which 18,000 shares had vested as of September 30, 2018.

The Company has recognized $1,083 and $1,336 of stock compensation expense for the nine months ended September 30, 2018 and 2017, respectively, of which approximately $435 and $561, respectively, were recorded in equity and the remainder initially recorded as a liability.

25


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

Stock Incentive Plan:

The following table summarizes stock-based compensation expense for employees for the nine months ended September 30, 2018 and 2017, which was included in the consolidated statements of income as follows:

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

September 30,

 

    

2018

    

2017

Cost of revenue

 

$

199

 

$

46

General and administrative

 

 

404

 

 

1,271

Research and development

 

 

53

 

 

 2

Selling and marketing expenses

 

 

427

 

 

17

 

 

$

1,083

 

$

1,336

 

At September 30, 2018, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plan but not yet recognized was approximately $970. This cost will be amortized on a straight-line basis over the remaining vesting period and will be adjusted for subsequent changes in estimated forfeitures. The weighted-average remaining recognition period is approximately four years.

 

9. Income Taxes

Effective January 1, 2016, GENEWIZ LLC elected to be treated as a C corporation for both federal and state purposes, thus subject to corporate income tax and deferred income tax in the US. The Company is incorporated as an exempt company in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain in the Cayman Islands. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.

In December 2017, a law commonly known as the Tax Cuts and Jobs Act (TCJA) was enacted in the United States. Among other things, the TCJA reduces the US corporate income tax rate to 21% and implements a new system of taxation for non-US earnings, including imposing a one- time tax on the deemed repatriation of undistributed earnings of non-US subsidiaries. As the FASB staff previously determined they would not object to private companies applying SEC Staff Accounting Bulletin (SAB) 118, the Company has prepared and recorded preliminary estimates of accounting for the tax effects of the TCJA based on SAB 118 estimate principles.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the TCJA and refining its calculations, which could potentially affect the measurement of these balances. The provisional amount recorded related to the re-measurement of the Company’s deferred tax balance was a tax expense of $4,965 recognized in the fourth quarter of 2017.

The one-time transition tax is based on the Company’s total post‑1986 earnings and profits ("E&P") that the Company previously deferred from US income taxes. The Company recorded a provisional amount for its one-time transition tax liability for all of its foreign subsidiaries, resulting in an increase in income tax expense of $1,882. The remaining unpaid balance of this tax liability (included in long- term tax payable) was $1,722 at December 31, 2017, which was to be paid over 8 years. The liability was reversed in 2018 as the Company elected to utilize net operating losses and credits against the one-time transition tax on its 2017 income tax return.

26


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable.

China

All of the Group’s subsidiaries registered in the PRC and only having operations in Mainland China are subject to PRC enterprise income tax on the taxable income as reported in their PRC statutory accounts adjusted in accordance with relevant PRC income tax laws, which unifies an income tax rate of 25%. On March 16, 2007, the National People’s Congress of PRC enacted an Enterprise Income Tax Law (EIT Law), under which Foreign Investment Enterprises (FIEs) and domestic companies would be subject to EIT at a uniform rate of 25%. The EIT law became effective on January 1, 2008.

GENEWIZ Suzhou has obtained a high and new technology enterprise ("HNTE") certificate effective from January 1, 2013 and renewed in 2016, with a valid period of three years. Therefore, the entity is eligible to enjoy a preferential tax rate of 15% when it has taxable income under the EIT Law, as long as it maintains the HNTE qualification and duly conducts filing procedures with relevant tax authority regarding the tax incentive.

Summary:

GENEWIZ sources of income before taxes, classified between domestic and foreign entities for the nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

 

 

 

 

 

    

2018

    

2017

Pre-tax income

 

 

  

 

 

  

Domestic

 

$

7,096

 

$

708

Foreign

 

 

4,899

 

 

3,574

Total pre-tax income

 

$

11,995

 

$

4,282

 

Total income tax expense for the nine months ended September 30, 2018 and 2017 was $2,692 and $530, respectively.

The effective tax rate for 2018 of 22% was favorably impacted primarily by the tax effect of the foreign earnings taxed at rates lower than the US statutory rate and unfavorably impacted by state income taxes.

The effective rate for 2017 of 12% was favorably impacted primarily by foreign earnings taxed at rates lower than the US statutory rate.

27


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

 

 

 

 

 

 

 

 

    

September 30,

    

    

 

 

 

2018

 

December 31,

 

    

(Unaudited)

    

2017

Deferred tax assets:

 

 

  

 

 

  

Accounts receivable

 

$

646

 

$

646

Accrued expenses

 

 

310

 

 

310

Government grants

 

 

140

 

 

140

R&D credits

 

 

326

 

 

326

Depreciation

 

 

 —

 

 

202

Amortization

 

 

9,719

 

 

9,870

Tax reserves

 

 

1,078

 

 

920

Tax loss carryforwards

 

 

106

 

 

1,943

Other

 

 

 3

 

 

 3

 

 

 

12,328

 

 

14,360

 

 

 

 

 

 

 

Less: valuation allowance

 

 

(106)

 

 

(106)

Deferred tax assets, net of valuation allowance

 

 

12,222

 

 

14,254

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

  

 

 

  

Depreciation

 

 

(1,679)

 

 

(2,124)

Total deferred tax liabilities

 

$

(1,679)

 

$

(2,124)

Net deferred tax asset

 

$

10,543

 

$

12,130

 

At December 31, 2017, the Company has foreign tax loss carryforwards of $492. Most of the foreign losses have an indefinite carryover period.

The Company recorded a liability for an unrecognized income tax benefits, which is included in long term taxes payable in the consolidated balance sheet. Including accrued interest and penalties the balance of such liability, partially offset by the change in deferred tax assets related to such matter, at September 30, 2018 and December 31, 2017 was $12,403 and $12,459, respectively. The annual incremental charge is recorded as a component of income tax expense in the accompanying consolidated statement of income.

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction, various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2014 in the US and China, its major jurisdictions.

 

28


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

10. Related Party Transactions

a)

Name and relationship

 

 

 

Name of Related Party

    

Relationship With the GROUP

The Founders

 

Controlling Shareholders of the Company

Admera Health LLC

 

An entity under significant influence of the Founders

Admera Health (HK) Limited

 

An entity under significant influence of the Founders

Admera Health Suzhou Ltd.

 

An entity controlled by Admera Health (HK) Limited

Admera Health Tianjin Ltd.

 

An entity controlled by Admera Health Suzhou Ltd.

 

b)

Related-party transactions

The Group had transactions with a related parties during 2017 and 2018 summarized as follows:

 

 

 

 

 

 

 

 

    

Nine months Ended

 

 

September 30,

 

    

2018

    

2017

1) Purchase of services from

 

 

  

 

 

  

Admera Health LLC (i)

 

$

47

 

$

14

2) Rendering of services to

 

 

  

 

 

  

Admera Health Suzhou Ltd (i)

 

 

77

 

 

18

●   Admera Health LLC (i)

 

 

766

 

 

150

3) Expenses paid on behalf of

 

 

  

 

 

  

●   Admera Health LLC

 

 

835

 

 

1,049

●   Admera Health Suzhou Ltd

 

 

 3

 

 

51

 

Note (i) - The prices are mutually agreed according to the published prices.

The Group had the following balances with its related parties as follows:

 

 

 

 

 

 

 

 

    

September 30,

    

 

 

 

 

2018

 

December 31,

 

 

(Unaudited)

 

2017

1) Amounts due from related parties

 

 

  

 

 

  

Admera Health LLC

 

$

2,167

 

$

729

Admera Health Suzhou Ltd

 

 

 —

 

 

11

Total

 

$

2,167

 

$

740

 

 

 

 

 

 

 

 

 

    

September 30,

    

    

 

 

 

2018

 

December 31,

 

    

(unaudited)

    

2017

1) Amounts due to a related-party

 

 

  

 

 

  

Admera Health LLC

 

$

28

 

$

24

The Founders

 

 

 —

 

 

1,750

Total

 

$

28

 

$

1,774

 

 

29


 

GENEWIZ Group

 

Notes to Consolidated Financial Statements (continued)

(In Thousands, Except where otherwise stated)

 

September 30, 2018

 

11. Subsequent Events

The Company has evaluated subsequent events through the date the financial statements were available to be issued which is November 13, 2018.

In September 2018, Brooks Automation, Inc. (BRKS) entered into a definitive agreement to acquire GENEWIZ Group. The total cash purchase price for the acquisition will be approximately $450 million, subject to working capital and other adjustments. The transaction is expected to close by the end of this calendar year upon satisfaction of customary closing conditions and regulatory approvals.

 

30


Exhibit 99.3

 

ITEM 2.   PRO FORMA FINANCIAL INFORMATION

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

On November 15, 2018, Brooks Automation, Inc. (the “Company”) completed the acquisition of GENEWIZ Group, an exempted company with limited liability incorporated under the Laws of the Cayman Islands (“GENEWIZ”), a leading global genomics service provider headquartered in South Plainfield, New Jersey. Pursuant to the Agreement of Merger, dated as of September 26, 2018 (the “Merger Agreement”), by and among the Company, Darwin Acquisition Company, an exempted company with limited liability incorporated under the Laws of the Cayman Islands and wholly owned subsidiary of the Company, GENEWIZ and Shareholder Representative Services LLC, as the representative of the security holders of GENEWIZ, the Company paid a total cash purchase at closing of $450.0 million, which is subject to adjustment based on GENEWIZ’s cash, transaction expenses, net working capital, indebtedness, accounts receivable (subject to a collar) and other amounts as of the closing  (collectively, the “Acquisition”).

 

On November 15, 2018, the Company and its subsidiary, BioStorage Technologies, Inc., entered into that certain Incremental Amendment (the “Amendment”) to that certain Credit Agreement, dated as of October 4, 2017, by and among the Company, the several lenders party thereto from time to time and Morgan Stanley Funding, Inc., as administrative agent for the lenders. Under the Amendment, the Company obtained a senior secured U.S. dollar term loan incremental facility in the aggregate amount of $350,000,000 (the, “Incremental Loan”). The net proceeds of the Incremental Loan were used to fund a portion of the Acquisition purchase price with the remaining amount due paid from available funds of the Company. The Incremental Loan requires quarterly principal payments equal to 0.25% of the initial principal balance or $875,000 per quarter. The Company may elect that the borrowings comprising the Incremental Loan bear interest at a rate per annum equal to (a) the ABR plus 1.50% or (b) the Adjusted LIBO Rate plus 2.50%. “ABR” is equal to the highest of (a) the federal funds effective rate plus ½ of 1%, (b) the rate of interest per annum from time to time published by the Wall Street Journal as being the prime rate and (c) the one-month LIBO rate plus 1.00%. “LIBO Rate” is equal to the rate for Eurodollar deposits in the London interbank market for a period of one, two, three or six months, in each case selected by the Company (or if agreed to by each applicable lender, twelve months or less than one month), appearing on Page LIBOR01 of the Reuters screen (or applicable successor screen or service); provided that the LIBO Rate shall not be less than 0%. “Adjusted LIBO Rate” is the LIBO Rate as adjusted for statutory reserve requirements for Eurodollar liabilities (if any). The initial rate of the Incremental Loan as of November 15, 2018 was approximately 5.12%.

 

The unaudited pro forma condensed combined financial information is based on the assumptions set forth in the notes to such information. The unaudited pro forma adjustments made in the compilation of the unaudited pro forma condensed combined financial information are based solely upon available information and assumptions that the Company considers to be reasonable, and have been made solely for purposes of developing such unaudited pro forma condensed combined financial information for illustrative purposes in compliance with the disclosure requirements of the Securities and Exchange Commission (“SEC”). The unaudited pro forma financial adjustments give effect, where applicable, to (i) the Acquisition and (ii) the Company’s partial financing of the Acquisition with the Incremental Loan.

 

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position or operating results that would have been achieved had the Acquisition been consummated as of the date indicated or of the results that may be obtained in the future. This unaudited pro forma combined financial information and the accompanying notes should be read together with (1) the Company’s audited consolidated financial statements and accompanying notes, as of and for the fiscal year ended September 30, 2018 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which was filed with the SEC on November 29, 2018 and (2) the GENEWIZ audited and unaudited consolidated financial statements included in this report.

 

The actual operating results for GENEWIZ will be consolidated with the Company’s operating results for all periods subsequent to the Acquisition date of November 15, 2018.


 

The unaudited pro forma condensed combined statement of income from continuing operations of the Company for the twelve months ended September 30, 2018 included herein does not reflect any potential cost savings or other operating efficiencies that should result from the integration of the companies and excludes the discontinued operations of the Company.

 

The unaudited pro forma condensed combined statement of income from continuing operations of the Company for the twelve months ended September 30, 2018 gives effect to the Acquisition and the related Incremental Loan financing as if both had occurred effective October 1, 2017. The operating results for GENEWIZ included in the unaudited pro forma condensed combined statement of income from continuing operations reflect (i) the three months ended December 31, 2017, which were derived from the audited consolidated financial statements of GENEWIZ for the year ended December 31, 2017 and the unaudited financial statements of GENEWIZ for the nine months ended September 30, 2017, and (ii) the nine months ended September 30, 2018 in order to comply with SEC guidance related to situations where the fiscal year end of the audited financial statements of the acquiree are not within 93 days of the fiscal year end of the acquirer.

 

The unaudited pro forma condensed combined balance sheet of the Company as of September 30, 2018 gives effect to the Acquisition and the related Incremental Loan financing as if both had occurred effective September 30, 2018.


 

Brooks Automation, Inc.

Pro Forma Condensed Combined Balance Sheet

(Unaudited)

As of September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Acquisition

 

Financing

    

    

 

 

 

Brooks

 

GENEWIZ

 

Pro Forma

 

Pro Forma

 

Brooks

 

    

Sept 30, 2018

    

Sept 30, 2018

    

Adjustments

    

Adjustments

    

Pro Forma

 

 

(in thousands)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

  

 

 

  

 

 

  

  

 

  

  

 

  

Cash and cash equivalents

 

$

197,708

 

$

31,440

 

$

(473,986)

(a)   

$

340,540

(q)

$

88,499

 

 

 

 

 

 

 

 

 

(6,268)

(b)  

 

 —

 

 

  

 

 

 

 

 

 

 

 

 

(935)

(p)  

 

 

 

 

 

Marketable securities

 

 

46,281

 

 

 —

 

 

 —

 

 

 —

 

 

46,281

Accounts receivable, net

 

 

125,192

 

 

30,445

 

 

(3,000)

(c)  

 

 —

 

 

152,637

Inventories

 

 

96,986

 

 

4,619

 

 

 —

 

 

 —

 

 

101,605

Prepaid expenses and other current assets

 

 

31,741

 

 

9,203

 

 

(1,453)

(d)  

 

 —

 

 

40,426

 

 

 

 

 

 

 

 

 

935

(p)  

 

 

 

 

 

Current assets held for sale

 

 

66,148

 

 

 —

 

 

 —

 

 

 —

 

 

66,148

Total current assets

 

 

564,056

 

 

75,707

 

 

(484,707)

 

 

340,540

 

 

495,596

Property, plant and equipment, net

 

 

59,988

 

 

32,467

 

 

3,495

(e)  

 

 —

 

 

95,950

Long-term marketable securities

 

 

7,237

 

 

 —

 

 

 —

 

 

 —

 

 

7,237

Long-term deferred tax assets

 

 

43,798

 

 

10,543

 

 

(10,543)

(l)

 

 —

 

 

43,798

Goodwill

 

 

255,876

 

 

 —

 

 

238,184

(f)  

 

 —

 

 

494,060

Intangible assets, net

 

 

99,956

 

 

 —

 

 

188,524

(g)  

 

 —

 

 

288,480

Other assets

 

 

5,294

 

 

1,069

 

 

1,940

(h)  

 

 —

 

 

21,703

 

 

 

 

 

 

 

 

 

13,400

(i)  

 

 

 

 

  

Non-current assets held for sale

 

 

59,052

 

 

 —

 

 

 —

 

 

 —

 

 

59,052

Total assets

 

$

1,095,257

 

$

119,786

 

$

(49,707)

 

$

340,540

 

$

1,505,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Current liabilities

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Short-term debt and current portion of long-term debt

 

$

2,000

 

$

6,732

 

$

(1,337)

(j)  

$

3,500

(q)

$

10,895

Accounts payable

 

 

55,873

 

 

6,962

 

 

 —

 

 

 —

 

 

62,835

Deferred revenue

 

 

25,884

 

 

3,226

 

 

 —

 

 

 —

 

 

29,110

Accrued expenses and other current liabilities

 

 

73,472

 

 

7,592

 

 

(637)

(j)  

 

 —

 

 

79,598

 

 

 

 

 

 

 

 

 

(829)

(k)  

 

 

 

 

  

Current liabilities held for sale

 

 

7,388

 

 

 —

 

 

 —

 

 

 —

 

 

7,388

Total current liabilities

 

 

164,617

 

 

24,512

 

 

(2,803)

 

 

3,500

 

 

189,826

Long-term debt

 

 

194,071

 

 

12,616

 

 

(8,389)

(j)  

 

337,040

(q)

 

535,338

Long-term deferred tax liabilities

 

 

7,135

 

 

 —

 

 

36,096

(l)  

 

 —

 

 

43,231

Long-term pension liabilities

 

 

4,255

 

 

 —

 

 

 —

 

 

 —

 

 

4,255

Other long-term liabilities

 

 

5,547

 

 

1,905

 

 

(990)

(m)  

 

 —

 

 

6,462

Long-term tax reserves

 

 

1,102

 

 

12,403

 

 

997

(n)  

 

 —

 

 

14,502

Non-current liabilities held for sale

 

 

698

 

 

 —

 

 

 —

 

 

 —

  

 

698

Total liabilities

 

 

377,425

 

 

51,436

 

 

24,911

 

 

340,540

  

 

794,312

GENEWIZ historical mezzanine equity

 

 

 —

 

 

25,129

 

 

(25,129)

(o)  

 

 

  

 

 —

Stockholders' Equity

 

 

  

 

 

  

 

 

  

 

 

  

  

 

  

Preferred stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

  

 

 —

Common stock

 

 

841

 

 

 —

 

 

 —

 

 

 —

  

 

841

Additional paid-in capital

 

 

1,898,434

 

 

 —

 

 

 —

 

 

 —

  

 

1,898,434

Accumulated other comprehensive income

 

 

13,587

 

 

 —

 

 

 —

 

 

 —

  

 

13,587

Treasury stock at cost

 

 

(200,956)

 

 

 —

 

 

 —

 

 

 —

  

 

(200,956)

Accumulated deficit

 

 

(994,074)

 

 

 —

 

 

(6,268)

(b)  

 

 —

 

 

(1,000,342)

GENEWIZ historical equity

 

 

 —

 

 

43,221

 

 

(43,221)

(o)  

 

 —

 

 

 —

Total stockholders' equity

 

 

717,832

 

 

43,221

 

 

(49,489)

 

 

 —

  

 

711,564

Total liabilities and stockholders' equity

 

$

1,095,257

 

$

119,786

 

$

(49,707)

 

$

340,540

  

$

1,505,876

 

See Notes to Pro Forma Condensed Combined Financial Information


 

Brooks Automation, Inc.

Pro Forma Condensed Combined Statement of Income from Continuing Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

GENEWIZ

 

    

 

    

    

    

    

    

 

 

 

Brooks

 

Three

 

Nine

 

Twelve

 

Acquisition

 

Financing

 

 

 

 

 

Year Ended

 

Months Ended

 

Months Ended

 

Months Ended

 

Pro Forma

 

Pro Forma

 

Brooks

 

    

Sep 30, 2018

    

Dec 31, 2017

    

Sep 30, 2018

    

Sep 30, 2018

    

Adjustments

    

Adjustments

    

Pro Forma

 

 

(in thousands, except per share data)

Revenues

 

$

631,560

 

$

27,434

 

$

93,067

 

$

120,501

 

$

 —

 

$

 —

  

$

752,061

Cost of revenues

 

 

385,479

 

 

14,351

 

 

44,877

 

 

59,228

 

 

6,189

(r)  

 

 —

 

 

450,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(252)

(s)  

 

  

  

 

 

Gross profit

 

 

246,081

 

 

13,083

 

 

48,190

 

 

61,273

 

 

(5,937)

 

 

 —

  

 

301,417

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

  

 

 

Research and development

 

 

46,936

 

 

1,300

 

 

4,271

 

 

5,571

 

 

 —

 

 

 —

  

 

52,507

Selling, general and administrative

 

 

167,022

 

 

9,274

 

 

30,569

 

 

39,843

 

 

6,697

(r)  

 

 —

 

 

209,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(108)

(s)  

 

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

216

(t)  

 

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,277)

(u)  

 

  

  

 

 

Restructuring charges

 

 

714

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

  

 

714

Total operating expenses

 

 

214,672

 

 

10,574

 

 

34,840

 

 

45,414

 

 

2,528

 

 

 —

  

 

262,614

Operating income

 

 

31,409

 

 

2,509

 

 

13,350

 

 

15,859

 

 

(8,465)

 

 

 —

  

 

38,803

Interest income

 

 

1,881

 

 

33

 

 

184

 

 

217

 

 

 —

 

 

(309)

(x)  

 

1,789

Interest expense

 

 

(9,520)

 

 

(313)

 

 

(941)

 

 

(1,254)

 

 

546

(v)  

 

(19,484)

(y)  

 

(29,712)

Other (expense) income, net

 

 

(3,304)

 

 

1,143

 

 

(598)

 

 

545

 

 

 —

 

 

 —

 

 

(2,759)

Income before income taxes

 

 

20,466

 

 

3,372

 

 

11,995

 

 

15,367

 

 

(7,919)

 

 

(19,793)

 

 

8,121

Income tax (benefit) provision

 

 

(47,251)

 

 

7,511

 

 

2,692

 

 

10,203

 

 

(2,644)

(w)  

 

(5,443)

(z)  

 

(45,135)

Income from continuing operations

 

 

67,717

 

 

(4,139)

 

 

9,303

 

 

5,164

 

 

(5,275)

 

 

(14,350)

 

 

53,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

  

 

  

Basic net income per share from continuing operations

 

$

0.96

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

$

0.76

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

 

 

Diluted net income per share:

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

 

  

Diluted net income per share from continuing operations

 

$

0.95

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

$

0.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared per share

 

$

0.40

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding used in computing net income per share

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

 

  

Basic

 

 

70,489

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

 

70,489

Diluted

 

 

70,937

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

  

 

70,937

 

See Notes to Pro Forma Condensed Combined Financial Information


 

Brooks Automation, Inc.

Notes to Pro Forma Condensed Combined Financial Information

(Unaudited)

 

1. Summary of Transaction

 

On November 15, 2018, Brooks Automation, Inc. (the “Company”) completed the acquisition of GENEWIZ Group, a leading global genomics service provider headquartered in South Plainfield, New Jersey. Pursuant to the Agreement of Merger, dated as of September 26, 2018 (the “Merger Agreement”), by and among the Company, Darwin Acquisition Company, a wholly owned subsidiary of the Company, GENEWIZ and Shareholder Representative Services LLC, as the representative of the security holders of GENEWIZ, the Company paid a total cash purchase at closing of $450.0 million, which is subject to adjustment based on GENEWIZ’s cash, transaction expenses, net working capital, indebtedness, accounts receivable (subject to a collar) and other amounts as of the closing (the “Purchase Price Adjustments”) (collectively, the “Acquisition”).

 

On November 15, 2018, the Company and its subsidiary, BioStorage Technologies, Inc., entered into that certain Incremental Amendment (the “Amendment”) to that certain Credit Agreement, dated as of October 4, 2017, by and among the Company, the several lenders party thereto from time to time and Morgan Stanley Funding, Inc., as administrative agent for the lenders. Under the Amendment, the Company obtained a senior secured U.S. dollar term loan incremental facility in the aggregate amount of $350,000,000 (the, “Incremental Loan”). The net proceeds of the Incremental Loan were used to fund a portion of the Acquisition purchase price with the remaining amount due paid from available funds of the Company.

 

The following table summarizes the components of the preliminary purchase price, assuming the Acquisition had closed on September 30, 2018 (in thousands):

 

 

 

 

 

Base purchase

    

$

450,000

Purchase price adjustments

 

 

23,986

Cash consideration paid

 

 

473,986

Cash acquired

 

 

(31,440)

 

 

$

442,546

 

The following summarizes the preliminary allocation of the purchase price, assuming the Acquisition had closed on September 30, 2018 (in thousands):

 

 

 

 

 

Accounts receivable, net

    

$

27,445

Inventories

 

 

4,619

Prepaid expenses and other current assets

 

 

7,750

Property, plant and equipment, net

 

 

35,962

Goodwill

 

 

238,184

Intangible assets

 

 

188,524

Other assets

 

 

16,409

Short-term debt and current portion of long-term debt

 

 

(5,395)

Accounts payable

 

 

(6,962)

Deferred revenue (customer deposits)

 

 

(3,226)

Accrued expenses and other current liabilities

 

 

(6,126)

Long-term debt

 

 

(4,227)

Long-term deferred tax liabilities

 

 

(36,096)

Other long-term liabilities

 

 

(915)

Long-term tax reserves

 

 

(13,400)

 

 

$

442,546

 


 

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma condensed combined balance sheet and pro forma condensed combined statement of income from continuing operations. The final purchase price allocation will be determined when the Company has finalized the purchase price adjustments with the seller and when the Company has completed the detailed valuations and necessary calculations, including any deferred tax consequences. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocations may include (i) adjustments to the purchase price based on final negotiation of purchase price adjustments with the seller, (ii) changes in the fair value of intangible assets (refer to note 2.), (iii) changes in the fair value of property, plant and equipment, (iv) changes to other assets and liabilities and (v) related changes to the deferred tax liabilities as well as changes to the long-term tax reserves. Depreciation and amortization reflected in the pro forma adjustments could also differ materially based on the changes to the purchase price allocation.

 

2. Intangible Assets

 

Based on the preliminary allocation of the purchase price, the following amounts have been allocated to intangible assets (in thousands):

 

 

 

 

 

Completed technologies- Sanger

    

$

13,887

Completed technologies – NGS/Synthesis

 

 

30,230

Trademarks

 

 

19,029

Customer relationships

 

 

125,378

 

 

$

188,524

 

The estimated fair value attributed to the completed technologies – Sanger was determined based on a discounted cash flow forecast utilizing the relief from royalty method. The royalty rate was determined to be 5.0% based on a review of comparable royalty arrangements. Cash flows were discounted at a rate of 16.5%. The estimated fair value of the completed technologies is expected to be amortized over a period of 15 years based on the pattern in which the economic benefits of the completed technologies are expected to be realized.

 

The estimated fair value attributed to the completed technologies – NGS/Synthesis was determined based on a discounted cash flow forecast utilizing the relief from royalty method. The royalty rate was determined to be 6.0% based on a review of comparable royalty arrangements. Cash flows were discounted at a rate of 16.5%. The estimated fair value of the completed technologies is expected to be amortized over a period of 10 years based on the pattern in which the economic benefits of the completed technologies are expected to be realized.

 

The estimated fair value attributed to the trademarks was determined based on a discounted cash flow forecast utilizing the relief from royalty method. The royalty rate was determined to be 2.0% based on a review of comparable royalty arrangements. Cash flows were discounted at a rate of 16.5%. The estimated fair value of the trademarks is expected to be amortized over a period of 13 years based on the pattern in which the economic benefits of the completed technologies are expected to be realized.

 

The estimated fair value attributed to the customer relationships was determined based on a discounted forecast of estimated net future cash flows to be generated from the customer relationships discounted at a rate of 16.5%. The estimated fair value of the customer relationships is expected to be amortized over a period of 14 years based on the pattern in which the economic benefits of the completed technologies are expected to be realized.

 

Based on the purchase price allocation, which was prepared as if the Acquisition was completed on September 30, 2018, the amount of the purchase price allocated to goodwill is estimated to be $238.2 million. Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired. Goodwill will not be amortized, but will be tested at least annually for impairment, and is not deductible for income tax purposes.

 


 

3. Pro Forma Adjustments

 

The pro forma adjustments to the unaudited pro forma condensed combined financial information are as follows:

 

Unaudited Pro Forma Condensed Combined Balance Sheet – Acquisition

 

(a)  Reflects the gross consideration paid by the Company of approximately $474.0 million, including an estimate of the Purchase Price Adjustments of approximately $24.0 million based on the assumed closing on September 30, 2018.

 

(b)  Reflects the one-time transaction expenses paid by the Company in connection with the Acquisition.

 

(c)   Reflects an adjustment to the fair value of accounts receivable to conform to Brook’s accounting policy.

 

(d)  Reflects the fair value of an acquired grant receivable of approximately $0.7 million and the elimination of a related party receivable of approximately $(2.2) million that was not included in the Acquisition.

 

(e)  Reflects the adjustment to record property, plant and equipment at fair value based on a preliminary asset appraisal performed in connection with the preliminary allocation of the purchase price.

 

(f)   Reflects the estimated goodwill recorded based on the preliminary allocation of the purchase price. See Note 2 – Intangible Assets.

(g)  Reflects the estimated fair value of acquired identifiable intangible assets based on a preliminary intangible asset appraisal performed in connection with the preliminary allocation of the purchase price. See Note 2 – Intangible Assets.

 

(h)  Reflects the estimated fair value of favorable leases acquired based on a preliminary appraisal performed in connection with the preliminary allocation of the purchase price.

 

(i)   Reflects the estimated indemnification receivable of approximately $13.4 million recorded in connection with certain tax indemnifications for uncertain tax positions provided by the former shareholders of GENEWIZ to the Company in connection with the Acquisition.

 

(j)   Reflects the adjustment to record the repayment at the closing of the Acquisition of certain GENEWIZ liabilities, including U.S. debt and related accrued interest of approximately $9.8 million and other liabilities of approximately $0.6 million.

 

(k)    Reflects the net of adjustments to accrued expenses to record (i) an adjustment to reverse deferred income related to a completed government grant of approximately $(0.8) million, (ii) an asset retirement obligation of approximately $0.2 million and (iii) an adjustment to eliminate the current portion of a deferred rent liability of approximately $(0.2) million.

 

(l)   Reflects the deferred tax liability related to the fair value adjustments, principally intangible assets and the reclassification of the deferred tax asset.

 

(m) Reflects the adjustment to eliminate the long-term portion of the deferred rent liability.

 

(n)  Reflects an increase of approximately $1.0 million to the long-term tax reserve to approximately $13.4 million in total, which is offset by the indemnification receivable in (i) above in accordance with the GENEWIZ tax indemnifications.

 

(o)  Reflects the elimination of the historical equity of GENEWIZ.

 

(p)  Reflects prepaid representations and warranty and other insurance purchased at closing as a requirement of the Acquisition.

 

Unaudited Pro Forma Condensed Combined Balance Sheet – Financing

 

(q)  Reflects the net proceeds of the Incremental Loan, which consisted of principal of $350.0 million, net of debt discount and other debt issuance costs of approximately $9.5 million. The current portion is equal to 1% of the initial principal or $3.5 million.

 

 


 

Unaudited Pro Forma Condensed Combined Statement of Income from Continuing Operations – Acquisition

 

(r)   Reflects the adjustments for amortization expense related to the acquired intangible assets, calculated over the estimated useful lives based on the expected pattern in which the economic benefits are expected to be realized consisting of approximately $6.2 million related to completed technologies recorded to cost of sales and approximately $2.1 million related to trademarks and $4.6 million related to customer relationships recorded to selling, general and administrative expense.

 

(s)  Reflects the reduction to depreciation expense based on the estimated useful lives and fair value of property, plant and equipment as compared to the historical depreciation recorded by GENEWIZ and the split between cost of sales and to selling, general and administrative expense.

 

(t)   Reflects the adjustment to record the amortization of the favorable lease asset.

 

(u)  Reflects the elimination of transaction costs incurred and recorded prior to September 30, 2018 by the Company and GENEWIZ of approximately $3.8 million and $0.6 million, respectively, net of approximately $0.1 million of recurring annual expense related to the insurance purchased at closing.

 

(v)  Reflects the elimination of interest expense on certain GENEWIZ indebtedness that was repaid in full upon the closing of the Acquisition.

 

(w)  Reflects the adjustment to the Company’s income tax expense resulting from the pro forma impact of the Acquisition pro forma adjustments.

 

Unaudited Pro Forma Condensed Combined Statement of Income from Continuing Operations – Financing

 

(x)  Reflects the reduction to interest income related to cash used to partially fund the Acquisition.

 

(y)  Reflects the adjustment for the approximately $19.5 million of additional interest expense related to the Incremental Loan, including approximately $17.9 million of cash interest expense based on the initial 5.12% interest rate and approximately $1.6 million of amortization of debt discount and other debt issuance costs. The Incremental Loan is a variable interest rate debt agreement. The annual impact to the unaudited pro forma condensed combined statement of income from continuing operations for a 1/8% change in the interest rate assumptions would be approximately $0.4 million.

 

(z)  Reflects the adjustment to the Company’s income tax expense resulting from the pro forma impact of the Financing pro forma adjustments.