MARAVAI LIFESCIENCES HOLDINGS, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of financial condition and results of operations together with the section titled “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis reflects our historical results of operations and financial position, and contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.” Please also see the section titled “Forward Looking Statements.” We were incorporated in August 2020 and, pursuant to the organizational transactions described in Note 1 to our consolidated financial statements, became a holding company whose principal asset is a controlling equity interest in Topco LLC. As the sole managing member of Topco LLC, we operate and control the business and affairs of Topco LLC and its subsidiaries. Accordingly, we consolidate Topco LLC in our consolidated financial statements and report a non-controlling interest related to the portion of Topco LLC not owned by us. Because the organizational transactions were considered transactions between entities under common control, the consolidated financial statements for periods prior to the organizational transactions and the initial public offering have been adjusted to combine the previously separate entities for presentation purposes. Unless otherwise noted or the context otherwise requires, references in this Annual Report on Form 10-K to “we,” “us” or “our” refer to Maravai LifeSciences Holdings, Inc. and its subsidiaries. Overview We are a leading life sciences company providing critical products to enable the development of drug therapies, diagnostics, novel vaccines and support research on human diseases. Our more than 5,200 customers as of December 31, 2020 include the top 20 global biopharmaceutical companies ranked by research and development expenditures according to industry consultants, and many other emerging biopharmaceutical and life sciences research companies, as well as leading academic research institutions and in vitro diagnostics companies. Our products address the key phases of biopharmaceutical development and include complex nucleic acids for diagnostic and therapeutic applications, antibody-based products to detect impurities during the production of biopharmaceutical products, and products to detect the expression of proteins in tissues of various species. 68 We have and will continue to build a transformative life sciences products company by acquiring businesses and accelerating their growth through capital infusions and industry expertise. Biomedical innovation is dependent on a reliable supply of reagents in the fields of nucleic acid production, biologics safety testing and protein labeling. From inventive startups to the world’s leading biopharmaceutical, vaccine, diagnostics and gene and cell therapy companies, these customers turn to us to solve their complex discovery challenges and help them streamline and scale their supply chain needs beginning from research and development through clinical trials to commercialization. Our primary customers are biopharmaceutical companies who are pursuing novel research and product development programs. Our customers also include a range of government, academic and biotechnology institutions. As of December 31, 2020, we employed a team of over 410 employees, approximately 20% of whom have advanced degrees. We primarily utilize a direct sales model for our sales to our customers in North America. Our international sales, primarily in Europe and Asia Pacific, are sold through a combination of third-party distributors as well as via a direct sales model. The percentage of our total revenue derived from customers in North America was 52.9%, 58.7% and 59.9% for the years ended December 31, 2020, 2019 and 2018, respectively. We generated revenue of $284.1 million, $143.1 million and $123.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total revenue by segment was $206.3 million in Nucleic Acid Production, $54.9 million in Biologics Safety Testing and $22.9 million in Protein Detection for the year ended December 31, 2020, compared to $72.6 million, $44.4 million and $26.1 million, respectively, for the year ended December 31, 2019. Total revenue by segment was $60.0 million in Nucleic Acid Production, $38.5 million in Biologics Safety Testing and $25.3 million in Protein Detection for the year ended December 31, 2018. Our research and development efforts are geared towards meeting our customers’ needs. We incurred research and development expenses of $9.3 million, $3.6 million and $4.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. We intend to continue to invest in research and development and new products and technologies to support our customers’ needs for the foreseeable future. We focus a substantial portion of our resources supporting our core business segments. We are actively pursuing opportunities to expand our customer base both domestically and internationally by fostering strong relationships with both existing and new customers and distributors. Our management team has experience working with biopharmaceutical, vaccine, diagnostics and gene and cell therapy companies as well as academic and research scientists. We also intend to continue making investments in our overall infrastructure and business segments to support our growth. We incurred aggregate selling, general, and administrative expenses of $94.2 million, $48.4 million and $41.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Since our inception in 2016, we have incurred net losses in each year up to December 31, 2019. For the year ended December 31, 2020, we reported net income of $89.0 million. Our net losses were $5.2 million and $16.9 million for the years ended December 31, 2019 and 2018, respectively. We expect our expenses will increase in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • invest in processes and infrastructure to enable manufacturing automation; 69 • support research and development to introduce new products and services; • market and sell new and existing products and services; • protect and defend our intellectual property; • acquire businesses or technologies to support the growth of our business; and • function as a public company. Key Factors Affecting Our Results of Operations and Future Performance We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by a number of factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described under the heading “Risk Factors.” Drug Development Pipelines Our financial performance has largely been driven by our customers accelerating their drug development pipelines for cell, gene and RNA therapies. A key factor to our future success will be our ability to provide good manufacturing practices (“GMP”) grade nucleic acids and associated pre-clinical and non-GMP compounds to these customers. Our GMP-grade nucleic acids are manufactured following certain voluntary GMP quality standards and customer specific requirements. We believe these products, including “GMP-grade” materials, are exempt from compliance with the current GMP regulations of the U.S. Food and Drug Administration (“FDA”). See “Business—Government Regulation.” The mRNA and gene editing therapeutics that many of our customers are developing are early in their lifecycle. We expect to see an increase in demand for our GMP-grade nucleic acids to the extent that our customers have success in their early-phase clinical trials of these therapeutics. New FDA policies, and plans for maximizing the use of expedited programs, may advance the development of cell and gene therapies. Additionally, the COVID-19 pandemic has both fostered increased interest in mRNA as a therapeutic modality for this virus and directed significant resources to developing a base of knowledge for mRNA. Demand for Outsourced GMP-grade RNA We believe that growing numbers of RNA therapeutics companies expect to outsource production of pre-clinical and GMP-grade RNA to trusted business partners. Companies are often driven to outsource due to the complex nature of the manufacturing process, faster speeds to market, recent availability of high-quality contract development and manufacturing organizations (“CDMO”) partners, an influx of inexperienced and virtual biopharmaceutical companies, the need for redundancy of clinical and commercial supply and recent moves to onshore critical supply chains. We offer a number of products and services to meet this demand for outsourced pre-clinical and GMP-grade RNA. Demand for Outsourced Biologics Safety Testing Products and Assay Development Services We believe that many biopharmaceutical companies rely on outsourced providers for their biologics safety testing products and assay development needs. Once process development has been completed, biopharmaceutical companies avoid changing biologics safety testing products or providers for fear of affecting the regulatory approval pathway of their therapeutic products. This supports revenue growth for the biologics safety testing products that have been adopted by these companies. We also have long-standing relationships with many of our customers, which are bolstered by the regulatory demands on our customers and the “designed-in” nature of our products and services. A successful partnership with a customer related to the development of their drug leads to repeat business as customers become comfortable with our products. The drug approval process risk is reduced when regulatory bodies are familiar with an impurity detection product vendor and most biopharmaceutical customers are not willing to risk a regulatory issue related to biologics safety testing for their drug program on an unproven vendor. It is therefore critical to our success that our products and services be “designed-in” at the outset, especially to the most promising product candidates. COVID-19 Considerations In late 2019, COVID-19 surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple other regions and countries, including the San Francisco Bay Area, where our Protein Detection business is located, the San Diego, California area, where our Nucleic Acid Production business is located, and the Wilmington, North Carolina area, where our Biologics Safety Testing products business is located. The COVID-19 pandemic continues to evolve, and to date has led to the implementation of 70 various responses, including government imposed shelter-in-place orders, quarantines, travel restrictions and other public health safety measures, as well as reported and continued adverse impacts on healthcare resources, facilities and providers, in California, across the United States and in many other countries throughout the world. In response to the spread of COVID-19, and in accordance with direction from state and local government authorities, we have been and continue to restrict access to our facilities mostly to personnel and third parties who must perform critical activities that are required to be completed on-site, limit the number of such personnel that can be present at our facilities at any one time, and request that some of our personnel work remotely. In the event that government authorities were to further modify current restrictions, our employees conducting research and development, or manufacturing activities may not be able to access our laboratory or manufacturing space, and our core activities may be significantly limited or curtailed, possibly for an extended period of time. As a result of the COVID-19 pandemic, we have experienced and may continue to experience in the future severe disruptions, including: • interruption of or delays in receiving products and supplies from the third parties we rely on to, among other things, manufacture components of our products, due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, which may impair our ability to manufacture and sell our products and provide our services; • limitations on our business operations by the local, state, or federal government that could impact our ability to manufacture, sell or deliver our products and services; • on-site visit limitations and prohibitions imposed by customers that could impact our ability to engage in pre-sales activities, and to provide post-sale activities, such as training and service and support; • delays in customers’ purchasing decisions and negotiations with customers and potential customers; • business disruptions caused by workplace, laboratory and office closures and an increased reliance on employees working from home, travel limitations, cyber security and data accessibility limits, or communication or mass transit disruptions; and • limitations on employee resources that would otherwise be focused on the conduct of our activities, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people. Any of these factors could severely impact our research and development activities, manufacturing business operations and sales, or delay necessary interactions with local regulators, third-party vendors and other important contractors and customers. These and other factors arising from the COVID-19 pandemic could worsen in countries that are already afflicted with COVID-19, could continue to spread to additional countries, or could return to countries where the pandemic has been partially contained, and could further adversely impact our ability to conduct our business generally and have a material adverse impact on our consolidated operations and financial condition and results. For example, our Protein Detection segment experienced a decline in sales during the second quarter of 2020 relative to the same period in 2019 due to stay-at-home orders in the San Francisco Bay Area and the closure of many academic laboratories that are the main customers of this segment and the reduced operations of other customers. Prolonged or repeated closures or shutdowns as a result of the COVID-19 pandemic could continue to affect sales of our protein detection segment adversely. For the year ended December 31, 2020, several of our product categories have experienced accelerated growth, notably our CleanCap ® and oligonucleotide products. We expect the positive impact of COVID-19 on our growth to sustain in the longer term as the entire mRNA category benefited from lessons learned during the COVID-19 pandemic. We expect research in other therapeutic categories to experience increased growth as research conducted for COVID-19 diffuses more broadly into other vaccines and therapies. The extent to which the pandemic may negatively impact our consolidated operations and results of operations, or those of our third-party manufacturers, suppliers, partners or customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, the extent of travel restrictions, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and actions to contain the pandemic or treat its impact, such as social distancing, quarantines, lockdowns or business closures. We have responded to the pandemic by leveraging our deep product portfolio and general scientific expertise to develop robust COVID-19-related product and service offerings providing critical support for the development of therapeutics, vaccines and diagnostics. We expect that our ongoing efforts to utilize our portfolio of products and services to enable solutions for this evolving pandemic will offset the impact of our customer site closures; however, negative impacts may persist. We remain fully operational as we abide by local COVID-19 safety regulations across the world. To achieve this, we have had and continue to have many employees working remotely and have adopted significant protective measures for our employees on site, including conducting weekly COVID-19 testing, staggered shifts, social distancing and hygiene best practices 71 recommended by the Centers for Disease Control and Prevention (the “CDC”) and local public health officials. In addition, we have taken additional steps to monitor and strengthen our supply chain to maintain an uninterrupted supply of our critical products and services. How We Assess Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our business is performing are revenue and Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) adjusted for interest expense, provision for income taxes, depreciation, amortization and equity-based compensation expenses. Adjusted EBITDA reflects further adjustments to eliminate the impact of certain items, including certain non-cash and other items, that we do not consider representative of our ongoing operating performance. We also present Adjusted Free Cash Flow, which is a non-GAAP measure that we define as Adjusted EBITDA less capital expenditures. Management uses Adjusted EBITDA to evaluate the financial performance of our business and the effectiveness of our business strategies. We present Adjusted EBITDA and Adjusted Free Cash Flow because we believe they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry and they facilitate comparisons on a consistent basis across reporting periods. Further, we believe they are helpful in highlighting trends in our operating results because they exclude items that are not indicative of our core operating performance. Adjusted EBITDA is also a component of the financial covenant under our newly refinanced debt (the “New Credit Agreement”) that governs our ability to access more than $63.0 million in aggregate letters of credit obligations and outstanding borrowings under our newly refinanced revolving credit facility (the “New Revolving Credit Facility”). In addition, if we borrow more than $63.0 million, we are required to maintain a specified net leverage ratio. See “—Liquidity and Capital Resources—Sources of Liquidity—Debt Covenants” for a discussion of this financial covenant. Adjusted EBITDA and Adjusted Free Cash Flow have limitations as analytical tools and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. We may in the future incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. In particular, we expect to incur meaningful share-based compensation expense in the future. Other limitations include that Adjusted EBITDA and Adjusted Free Cash Flow do not reflect: • all expenditures or future requirements for capital expenditures or contractual commitments; • changes in our working capital needs; • provision for income taxes, which may be a necessary element of our costs and ability to operate; • the costs of replacing the assets being depreciated, which will often have to be replaced in the future; • the non-cash component of employee compensation expense; and • the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations. In addition, Adjusted EBITDA and Adjusted Free Cash Flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries. Components of Results of Operations Revenue Our revenue consists of product and services revenue and, to a much lesser extent, revenue from royalties attributable to the out-licensing of our proprietary biological assets intellectual property that we may develop. We generated total consolidated revenue of $284.1 million, $143.1 million and $123.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, through the following segments: (i) Nucleic Acid Production, (ii) Biologics Safety Testing and (iii) Protein Detection. Nucleic Acid Production Segment Our Nucleic Acid Production segment focuses on the manufacturing and sale of highly modified nucleic acids products to support the needs of customers’ research, therapeutic and vaccine programs. This segment also provides research products for labeling and detecting proteins in cells and tissue samples. 72 Biologics Safety Testing Segment Our Biologics Safety Testing segment focuses on manufacturing and selling biologics safety and impurity tests and assay development services that are utilized by our customers in their biologic drug manufacturing activities. Protein Detection Segment Our Protein Detection segment products, which include a portfolio of labeling and visual detection reagents, are purchased by our scientific research customers for their tissue-based protein detection and characterization needs. Cost of Revenue Cost of revenue associated with our products primarily consists of manufacturing related costs incurred in the production process, including personnel and related costs, equity-based compensation from awards issued by both MLSH 1 and one of our subsidiaries, and stock options and restricted stock units (“RSUs”) we have issued, inventory write-downs, costs of materials, labor and overhead, packaging and delivery costs and allocated costs, including facilities, information technology, depreciation, and amortization of intangibles. Cost of revenue associated with our services primarily consists of personnel and related costs, equity-based compensation awards, cost of materials and allocated costs, including facilities and information technology costs. Costs of services were not material to the years ended December 31, 2020, 2019 and 2018. We expect cost of revenue to increase in future periods as our revenue grows. Operating Expenses Research and development. Research and development costs primarily consist of salaries, benefits, incentive compensation, equity-based compensation from awards issued by both MLSH 1 and one of our subsidiaries as well as equity-based compensation from stock options and RSUs issued by us, cost of supplies, in-process research and development costs from asset acquisitions and allocated facilities costs for employees engaged in research and development of products and services. We expense all research and development costs in the period in which they are incurred. Payment made prior to the receipt of goods or services to be used in research and development are recognized as prepaid assets until the goods are received or services are rendered. We plan to continue to support our research and development efforts, including meeting our customers’ needs. Selling, general and administrative. Our selling, general and administrative expenses primarily consist of salaries, benefits and equity-based compensation from awards issued by both MLSH 1 and one of our subsidiaries as well as stock-based compensation from stock options and RSUs issued by us to employees in our commercial sales functions, marketing, executive, accounting and finance, legal and human resource functions as well as travel expenses, professional services fees, such as consulting, audit, tax and legal fees, general corporate costs and allocated costs, including facilities, information technology and amortization of intangibles. We expect that our selling, general and administrative expenses will continue to increase, primarily due to increased headcount to support anticipated growth in the business, costs incurred in increasing our presence globally and increases in marketing activities to drive awareness and adoption of our products and services, and due to incremental costs associated with operating as a public company. Interest Expense Interest expense consist of interest costs and the related amortization of the debt discount and deferred issuance costs on our outstanding debt. Loss on Extinguishment of Debt Loss on extinguishment of debt represent the write-off of remaining unamortized debt discount and deferred issuance costs on previously outstanding debt when we engage in refinancing activities. Non-Controlling Interests As of December 31, 2019 and 2018, Topco LLC held a 70% ownership interest in MLSC Holdings, LLC (“MLSC”) with the remaining 30% being recorded as non-controlling interests in our consolidated financial statements . On September 16, 2020, 73 Topco LLC entered into various agreements with current investors in MLSC, the parent of Cygnus Technologies, to repurchase 43,264 MLSC Class B preferred units and 18,387,206 MLSC common units from the investors for approximately $120.0 million. Additionally, the agreements provided that the remaining 16,736 MLSC Class B preferred units and 7,112,794 MLSC common units held by the investors party to the agreements were subject to exchange into a variable number of common units of MLSH 1 with a total fixed value of approximately $46.4 million. The repurchase for cash consideration and exchange into common units of MLSH 1 was completed leading up to and as a part of the initial public offering. As of December 31, 2020, Topco LLC holds a 100% ownership interest in MLSC. In connection with the IPO certain organizational transactions were effected (the “Organizational Transactions”) whereby the Company was appointed as the sole managing member of Topco LLC pursuant to the amended and restated Topco LLC operating agreement (the “LLC Operating Agreement”). Because we manage and operate the business and control the strategic decisions and day-to-day operations of Topco LLC and also have a substantial financial interest in Topco LLC, we have consolidated the assets, liabilities, non-controlling interest and financial results of Topco LLC into our consolidated financial statements. A portion of our consolidated net income (loss) is allocated to the non-controlling interest to reflect the entitlement of the non-controlling interest holders to Topco LLC’s net income (loss). As of December 31, 2020, we hold 37.5% of the outstanding LLC Units of Topco LLC, and 62.5% of the outstanding LLC Units of Topco LLC is held by MLSH 1. Therefore, we report non-controlling interests based on LLC Units of Topco LLC held by MLSH 1 on our consolidated balance sheets as of December 31, 2020. Income or loss attributed to the non-controlling interests is based on the LLC Units outstanding during the period and is presented on the consolidated statements of operations and consolidated statements of comprehensive income. Income Tax Expense (Benefit) As a result of our ownership of LLC Units in Topco LLC, we are subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Topco LLC and will be taxed at the prevailing corporate tax rates. 74 Results of Operations The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change 2020 2019 2018 in thousands, except per share and per unit data Revenue $ 284,098 $ 143,140 $ 123,833 98.5 % 15.6 % Operating expenses: Cost of revenue (1) 79,649 66,849 60,765 19.1 % 10.0 % Research and development (1) 9,304 3,627 4,499 156.5 % (19.4) % Selling, general and administrative (1) 94,245 48,354 41,194 94.9 % 17.4 % Change in estimated fair value of contingent consideration — 322 939 * (65.7) % Gain on sale and leaseback transaction (19,002) — — Total operating expenses 164,196 119,152 107,397 37.8 % 10.9 % Income from operations 119,902 23,988 16,436 399.8 % 45.9 % Other expense (38,206) (29,841) (32,934) 28.0 % (9.4) % Income (loss) before income taxes 81,696 (5,853) (16,498) * (64.5) % Income tax expense (benefit) 2,880 (652) 417 * (256.4) % Net income (loss) $ 78,816 $ (5,201) $ (16,915) * (69.3) % Net loss attributable to non-controlling interests (10,156) (731) (12,443) * (94.1) % Net income (loss) attributable to Maravai LifeSciences Holdings, Inc. $ 88,972 $ (4,470) $ (4,472) * — % Net income (loss) per Class A common share/unit attributable to Maravai LifeSciences Holdings, Inc. (2) : Basic $ 7.43 $ (0.03) $ (0.07) Diluted $ 2.36 $ (0.03) $ (0.07) Weighted average number of Class A common shares/units outstanding (2) : Basic 10,351,137 253,916,941 253,916,941 Diluted 28,907,979 253,916,941 253,916,941 Non-GAAP measures (2) : Adjusted EBITDA $ 169,165 $ 62,014 $ 53,000 Adjusted Free Cash Flow $ 141,767 $ 42,101 $ 49,263 ____________________ * Not meaningful (1) Includes equity-based compensation expense as follows: Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change in thousands 2020 2019 2018 Cost of revenue $ 282 $ 22 $ 38 1181.8 % (42.1) % Research and development 131 211 297 (37.9) % (29.0) % Selling, general and administrative 24,216 1,446 1,786 1574.7 % (19.0) % Total equity-based compensation expense $ 24,629 $ 1,679 $ 2,121 1366.9 % (20.8) % (2) Net income (loss) per unit for periods prior to our IPO have been retrospectively adjusted to give effect to the unit split on November 11, 2020 as described in Note 1 to our consolidated financial statements. These periods have not been retrospectively adjusted to give effect to the Organizational Transactions described in Note 1 to our consolidated financial statements and the 69,000,000 shares of Class A common stock sold in our IPO. Additionally, basic net income per Class A common stock for the 75 year ended December 31, 2020, has been calculated by dividing net income for the period, adjusted for preferred unit dividends attributable to MLSC Holdings, LLC (“MLSC”) non-controlling interests and net income (loss) attributable to non-controlling interests, by the weighted average Class A common stock outstanding during the period. Diluted net income (loss) per Class A common share/LLC unit gives effect to the potentially dilutive securities by application of the treasury stock method or if-converted method, as applicable. Revenue Consolidated revenue by segment was as follows: Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change Percentage of Revenue in thousands 2020 2019 2018 2020 2019 2018 Revenue Nucleic Acid Production $ 206,320 $ 72,602 $ 60,057 184.2 % 20.9 % 72.6 % 50.8 % 48.5 % Biologics Safety Testing 54,897 44,416 38,492 23.6 % 15.4 % 19.3 % 31.0 % 31.1 % Protein Detection 22,881 26,122 25,284 (12.4) % 3.3 % 8.1 % 18.2 % 20.4 % Total revenue $ 284,098 $ 143,140 $ 123,833 98.5 % 15.6 % 100.0 % 100.0 % 100.0 % Comparison of Years Ended December 31, 2020 and 2019 Total revenue was $284.1 million for the year ended December 31, 2020 compared to $143.1 million for the year ended December 31, 2019, representing an increase of $141.0 million, or 98.5%. Nucleic Acid Production revenue increased from $72.6 million for the year ended December 31, 2019 to $206.3 million for the year ended December 31, 2020, representing an increase of $133.7 million, or 184.2% . The increase in Nucleic Acid Production was driven by increased demand for our proprietary CleanCap ® analogs, which principally serve the growing mRNA vaccine and therapeutic markets, ongoing demand for highly modified RNA products, particularly mRNA, and increased demand for molecular diagnostic test components. Biologics Safety Testing revenue increased from $44.4 million for the year ended December 31, 2019 to $54.9 million for the year ended December 31, 2020, representing an increase of $10.5 million, or 23.6%. The increase was driven by higher demand and consumption of our products as a result of increased COVID-19 related diagnostic needs, coupled with continued increase in the number of bioproduction programs and customers that use our catalog of HCP ELISA and other impurity and contaminant kits. Protein Detection revenue decreased from $26.1 million for the year ended December 31, 2019 to $22.9 million for the year ended December 31, 2020, representing a change of $3.2 million, or 12.4%. The decrease was primarily due to prolonged research laboratory closures as a result of the COVID-19 pandemic. 2019 compared to 2018 Total revenue was $143.1 million for the year ended December 31, 2019 compared to $123.8 million for the year ended December 31, 2018, representing an increase of $19.3 million, or 15.6%. Nucleic Acid Production revenue increased from $60.1 million for the year ended December 31, 2018 to $72.6 million for the year ended December 31, 2019, representing an increase of $12.5 million, or 20.9%. The increase in Nucleic Acid Production was driven by increased demand for highly modified RNA products, particularly mRNA, as well as increased demand for our proprietary CleanCap® analogs, which principally serve the growing mRNA vaccine and therapeutic markets. Biologics Safety Testing revenue increased from $38.5 million for the year ended December 31, 2018 to $44.4 million for the year ended December 31, 2019, representing an increase of $5.9 million, or 15.4%. The increase was driven by a continued increase in the number of bioproduction programs and customers that use our catalog of HCP ELISA kits. Protein Detection revenue increased from $25.3 million for the year ended December 31, 2018 to $26.1 million for the year ended December 31, 2019, representing an increase of $0.8 million, or 3.3%. The increase was driven by strong sales for lectins and glycobiology reagents, histology reagents and blocking reagents. Adjusted EBITDA and Segment Information Management has determined that adjusted earnings before interest, tax, depreciation, and amortization is the profit or loss measure used to make resource allocation decisions and evaluate segment performance. Adjusted EBITDA assists management 76 in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. Corporate costs are managed on a standalone basis and not allocated to segments. We do not allocate assets to our reportable segments as they are not included in the review performed by our Chief Operating Decision Maker for purposes of assessing segment performance and allocating resources. Excluding approximately $0.3 million associated with a building in the United Kingdom, all of our long-lived assets are located within the United States. In February 2021, the Company entered into an agreement to sell the facility. See Note 16 - Subsequent Events within the audited consolidated financial statements. Following is financial information relating to the operating segments (in thousands): Nucleic Acid Production Biologics Safety Testing Protein Detection Corporate Eliminations Total For the year ended December 31, 2020 Revenue $ 207,597 $ 54,897 $ 22,881 $ — $ (1,277) $ 284,098 Adjusted EBITDA $ 133,822 $ 44,516 $ 9,225 $ (18,189) $ (209) $ 169,165 Nucleic Acid Production Biologics Safety Testing Protein Detection Corporate Eliminations Total For the year ended December 31, 2019 Revenue $ 72,602 $ 44,416 $ 26,122 $ — $ — $ 143,140 Adjusted EBITDA $ 22,229 $ 36,371 $ 14,603 $ (11,189) $ — $ 62,014 Nucleic Acid Production Biologics Safety Testing Protein Detection Corporate Eliminations Total For the year ended December 31, 2018 Revenue $ 60,057 $ 38,492 $ 25,284 $ — $ — $ 123,833 Adjusted EBITDA $ 16,751 $ 31,199 $ 13,846 $ (8,796) $ — $ 53,000 Comparison of Years Ended December 31, 2020 and 2019 Inter-segment revenue was $1.3 million for the year ended December 31, 2020 and represents intersegment revenue between Nucleic Acid Production and Protein Detection segments. There was no intersegment revenue for the year ended December 31, 2019. The inter-segment sales and related gross margin on inventory recorded at the end of the period are eliminated for consolidation purposes in the Eliminations column. Internal selling prices for intersegment sales are consistent with the segment’s normal retail price offered to external parties. There was no commission expense recognized for intersegment sales for the year ended December 31, 2020. Comparison of Years Ended December 31, 2019 and 2018 There was no inter-segment activity for the years ended December 31, 2019 and 2018. All of the revenue for each segment is from external customers. 77 A reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, is set forth below: Year Ended December 31, in thousands 2020 2019 2018 Net income (loss) $ 78,816 $ (5,201) $ (16,915) Add: Amortization 20,320 20,274 20,122 Depreciation 5,593 3,810 2,225 Interest expense 30,740 29,959 27,399 Income tax expense (benefit) 2,880 (652) 417 EBITDA 138,349 48,190 33,248 Acquisition contingent consideration (a) — 322 939 Acquisition integration costs (b) 3,857 6,170 7,529 Amortization of purchase accounting inventory step-up (c) — 1,856 2,967 Acquired in-process research and development costs (d) 2,881 — — Equity-based compensation (e) 24,629 1,679 2,121 GTCR management fees (f) 680 523 574 Gain on sale and leaseback transaction (g) (19,002) — — Merger and acquisition related expenses (h) 395 3,274 — Financing costs (i) 9,784 — — Loss on extinguishment of debt (j) 7,592 — 5,622 Adjusted EBITDA $ 169,165 $ 62,014 $ 53,000 ____________________ (a) Refers to the change in fair value and settlement of earn-out payments related to a 2017 acquisition. (b) Refers to incremental costs incurred to execute and integrate completed acquisitions. (c) Refers to a non-cash charge related to the amortization expense of the step-up of inventory from purchase price accounting. (d) Refers to in-process research and development charge associated with the acquisition of MockV Solutions, Inc. (e) Refers to non-cash expense associated with equity-based compensation. (f) Refers to cash fees paid to GTCR, pursuant to the advisory services agreement that was terminated in connection with our IPO. (g) Refers to the gain on the sale of our Burlingame, California facility, which was leased back to the Company in 2020. (h) Refers to diligence, legal, accounting, tax and consulting fees incurred associated with acquisitions that were not consummated. (i) Refers to transaction costs related to our IPO and the refinancing of our long-term debt that are not capitalizable or cannot be offset against proceeds from such transactions. (j) Refers to non-operating cash expense incurred on extinguishment of debt. Adjusted Free Cash Flow Adjusted Free Cash Flow, which is a non-GAAP measure that we define as Adjusted EBITDA less capital expenditures, is set forth below (in thousands): Year Ended December 31, 2020 2019 2018 Adjusted EBITDA 169,165 $ 62,014 $ 53,000 Capital expenditures (a) (27,398) (19,913) (3,737) Adjusted Free Cash Flow $ 141,767 $ 42,101 $ 49,263 (a) We define capital expenditures as purchases of property and equipment, which are included in cash flows from investing activities, and accounts payable and accrued expenses and other current liabilities. 78 Costs of Revenue Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change Percentage of Revenue in thousands 2020 2019 2018 2020 2019 2018 Cost of revenue $ 79,649 $ 66,849 $ 60,765 19.1 % 10.0 % 28.0 % 46.7 % 49.1 % Comparison of Years Ended December 31, 2020 and 2019 Cost of revenue increased by $12.8 million from $66.8 million for the year ended December 31, 2019 to $79.6 million for the year ended December 31, 2020, or 19.1%. The increase in cost of revenue was primarily attributable to an increase in direct product costs resulting from higher revenue, increases in personnel costs associated with overall growth and expansion of the Company, and higher overall supplies and materials costs. Comparison of Years Ended December 31, 2019 and 2018 Cost of revenue increased by $6.1 million from $60.8 million for the year ended December 31, 2018 to $66.8 million for the year ended December 31, 2019, or 10.0%. The increase in cost of revenue was primarily attributable to an increase in direct product costs resulting from higher revenue, personnel costs, and supplies and materials costs, as margins were generally consistent. Research and Development Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change Percentage of Revenue in thousands 2020 2019 2018 2020 2019 2018 Research and development $ 9,304 $ 3,627 $ 4,499 256.5 % (19.4) % 3.3 % 2.5 % 3.6 % Comparison of Years Ended December 31, 2020 and 2019 Research and development expenses increased by $5.7 million from $3.6 million for the year ended December 31, 2019 to $9.3 million for the year ended December 31, 2020, or 256.5%. The increase was primarily attributable to an increase in supplies and materials costs of $1.4 million, a $2.9 million increase in in-process research and development costs related to an asset acquisition, and $0.8 million increase in personnel costs due to increases in headcount. Comparison of Years Ended December 31, 2019 and 2018 Research and development expenses decreased by $0.9 million from $4.5 million for the year ended December 31, 2018 to $3.6 million for the year ended December 31, 2019, or 19.4%. The decrease was primarily attributable to a $0.6 million decrease in personnel cost due to a reduction in headcount and a $0.3 million decrease in facilities and information technology allocation. Selling, General and Administrative Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change Percentage of Revenue in thousands 2020 2019 2018 2020 2019 2018 Selling, general and administrative $ 94,245 $ 48,354 $ 41,194 94.9 % 17.4 % 33.2 % 33.8 % 33.3 % Comparison of Years Ended December 31, 2020 and 2019 Selling, general and administrative expenses increased by $45.9 million from $48.4 million for the year ended December 31, 2019 to $94.2 million for the year ended December 31, 2020, or 94.9%. The increase was primarily due to a $22.8 million increase in equity-based compensation expense primarily from the modification of certain MLSH 1 incentive units, the vesting of certain MLSH 1 incentive units upon our IPO, and the modification of unvested MLSC incentive units in connection with the repurchase of the MLSC non-controlling interest, a $14.5 million increase in professional service costs, and a $7.2 million increase in salaries and related expense predominantly due to an increase in headcount and bonuses. Professional services for the year ended December 31, 2020 including nonrecurring costs on acquisition activity and costs associated with preparing for the Company’s initial public offering. 79 Selling, general and administrative expense were $41.2 million for the year ended December 31, 2018 compared to $48.4 million for the year ended December 31, 2019, representing an increase of $7.2 million, or 17.4%. The increase was due to a $2.5 million increase in personnel costs as we increased our headcount, a $0.9 million increase in facility and information technology costs to support our increase in headcount, a $2.4 million increase in reimbursable expenses passed through from GTCR associated with certain business development activities (See “Related Party Transactions”) offset partially by a decrease in professional services costs of $1.1 million. Professional services in 2018 included non-recurring non-capitalized costs in connection with our debt refinancing and with certain system implementations. Other Income (Expense) Year Ended December 31, 2020 over 2019 Change 2019 over 2018 Change Percentage of Revenue in thousands 2020 2019 2018 2020 2019 2018 Other income (expense): Interest expense $ (30,740) $ (29,959) $ (27,399) 2.6 % 9.3 % (10.8) % (20.9) % (22.1) % Loss on extinguishment of debt $ (7,592) $ — $ (5,622) — % (100.0) % (2.7) % — % (4.5) % Other income $ 126 $ 118 $ 87 6.8 % 35.6 % — % 0.1 % 0.1 % Total other income (expense) $ (38,206) $ (29,841) $ (32,934) 28.0 % (9.4) % (13.4) % (20.8) % (26.6) % Comparison of Years Ended December 31, 2020 and 2019 Other expense was $29.8 million for the year ended December 31, 2019 compared to $38.2 million for the year ended December 31, 2020, representing an increase of $8.4 million, or 28.0%. The increase in expense was primarily attributable to the loss of extinguishment of debt of $7.6 million recognized in the year ended December 31, 2020 and an increase of interest expense of $0.8 million due to the increase in long-term debt. Comparison of Years Ended December 31, 2019 and 2018 Other expense was $32.9 million for the year ended December 31, 2018 compared to $29.8 million for the year ended December 31, 2019, representing a decrease of $3.1 million, or 9.4%. The decrease was primarily attributable to a non-recurring loss on extinguishment of debt of $5.6 million recorded for the year ended December 31, 2018 in connection with the entry into the First Lien Credit Agreement and Second Lien Credit Agreement to refinance existing indebtedness, offset by $2.6 million increase in interest expense. Relationship with GTCR, LLC (“GTCR”) Prior to our initial public offering, we utilized GTCR for certain services pursuant to an advisory services agreement. Under this agreement, GTCR provided us with financial and management consulting services in the areas of corporate strategy, budgeting for future corporate investments, acquisition and divestiture strategies, and debt and equity financings. The advisory services agreement provided that we pay a $0.1 million quarterly management fee to GTCR for these services. We also reimbursed GTCR for out-of-pocket expenses incurred while providing these services. The advisory services agreement also provided that certain of our subsidiaries pay placement fees to GTCR of 1.0% of the gross amount of debt or equity financings. In connection with our IPO, this advisory services agreement was terminated. As GTCR continues to have representation on our Board of Directors, we will continue to pay GTCR for any direct reimbursable expenses related to their Board activities. We paid GTCR $4.4 million, $0.6 million, and $0.6 million in each of the years ended December 31, 2020, 2019, and 2018, respectively, for services in connection with the advisory services agreement. We may continue to engage GTCR from time to time, subject to compliance with our related party transactions policy. The higher fees paid to GTCR in 2020 is driven by the $3.7 million placement fee paid in connection with our debt refinancing in October, 2020. During the year ended December 31, 2018, $52.0 million of capital distributions were made to the Class A unit holders of MLSC, including GTCR. During the year ended December 31, 2020, we paid $96.7 million of distributions to MLSH 1. Pursuant to our IPO, we entered into a tax receivable agreement with MLSH 1, who is primarily owned by GTCR, and MLSH 2. The Tax Receivable Agreement (“TRA”) provides for the payment by us to MLSH 1 and MLSH 2, collectively, of 85.0% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of the Organizational Transactions and IPO. Payment obligations under the TRA are not conditioned upon any Topco LLC unitholders maintaining a continued ownership interest in us or Topco LLC and the rights of MLSH 1 and MLSH 2 under the TRA are assignable. There is no maximum term for the TRA and the TRA will continue until all tax benefits have been utilized or expired unless we exercise our right to terminate the TRA for an agreed-upon amount. 80 No payments were made to MLSH 1 or MLSH 2 pursuant to the TRA during 2020. As of December 31, 2020, our liability under the TRA was $389.5 million. Liquidity and Capital Resources Overview As of December 31, 2020, we had cash of $236.2 million, retained earnings of $0.9 million, and net income of $78.8 million for the fiscal year ended December 31, 2020. We also had positive cash flow from operations of $152.2 million. We have relied on revenue derived from product and services sales and equity and debt financings to fund our operations to date, including the refinance of our existing $400.0 million debt facilities with a new $780.0 million facility (see Note 7 to the audited consolidated financial statements), which provided for the full repayment of $363.0 million of pre-existing debt and accrued interest under the previous outstanding senior secured credit facilities, the repurchase of MLSC incentive units and MLSC non-controlling interests of $9.1 million and $120.0 million, respectively, and to allow for an $88.6 million distribution to MLSH 1 for various incentive unit holders of MLSH 1, which represented a return of capital in Topco LLC. Our principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as make distributions to MLSH 1 under the pre-IPO and Organizational Transactions structure, interest payments and mandatory principal payments on our long-term debt. We plan to utilize our existing cash on hand, together with cash generated from operations, primarily to fund our commercial and marketing activities associated with our products and services, continued research and development initiatives, and ongoing investments into our manufacturing facilities to create efficiencies and build capacity. To the extent revenue from sales in our three business segments continues to grow, we expect our accounts receivable and inventory balances to increase. Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements. Moreover, we have and will continue to incur additional costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, exchange listing and SEC compliance matters. Our future capital requirements will depend on many factors including, but not limited to, our ability to successfully develop and launch new products and services, and to achieve a level of sales adequate to support our cost structure. If we are unable to execute on our business plan and adequately fund operations, or if the business plan requires a level of spending in excess of cash resources, we may seek additional equity, equity-linked or debt financing. If additional financings are required from outside sources, we may not be able to raise additional capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, results of operations and prospects could be adversely affected. As a result of our ownership of LLC units in Topco LLC (the “LLC Units”), the Company is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income of Topco LLC and is taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we will be required to make payments under the Tax Receivable Agreement with MLSH 1 and MLSH 2. Due to the uncertainty of various factors, we cannot precisely quantify the likely tax benefits we will realize as a result of LLC Unit exchanges and the resulting amounts we are likely to pay out to LLC Unitholders of Topco LLC pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. Assuming no changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that future payments under the Tax Receivable Agreement relating to the purchase by the Company of LLC Units from MLSH 1 and the tax attributes received from MLSH 2 in connection with the IPO to be approximately $389.5 million and to range over the next 15 years from approximately $3.4 million to $29.8 million per year and decline thereafter. Future payments in respect of subsequent exchanges or financings would be in addition to these amounts and are expected to be substantial. The foregoing numbers are merely estimates and the actual payments could differ materially. We expect to fund these payments using cash on hand and cash generated from operations. As a result of a change of control, material breach, or our election to terminate the TRA early, (1) we could be required to make cash payments to MLSH 1 and MLSH 2 that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the TRA and (2) we will be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the TRA could have a material adverse effect on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the TRA. 81 In addition to payments to be made under the TRA, we are also required to make tax distributions to the non-controlling interest holders of Topco LLC for the portion of income passing through to them from Topco LLC. Sources of Liquidity Since our inception, we have financed our operations primarily from the issuance of capital units, borrowings under long-term debt agreements and, to a lesser extent, cash flow from operations. Our total debt outstanding of $550.0 million at December 31, 2020, was comprised of our term loan under our New Credit Agreement. New Credit Agreement On October 19, 2020, Maravai Intermediate Holdings, LLC (“Intermediate”), a wholly-owned subsidiary of ours, along with its subsidiaries Vector Laboratories, TriLink BioTechnologies and Cygnus Technologies (together with Intermediate, the “Borrowers”) entered into the New Credit Agreement with lending institutions, including affiliates of certain of the underwriters, for term-loan borrowings (the “New Term Loan”) totaling $600.0 million to refinance our outstanding senior secured credit facilities and to allow for a distribution to our members. The New Credit Agreement also provided for a revolving credit facility (the “New Revolving Credit Facility”) of $180.0 million for letters of credit and loans to be used for working capital and other general corporate financing purposes. Borrowings under the New Credit Agreement are unconditionally guaranteed by Topco LLC, a wholly owned subsidiary of ours, along with the existing and future material domestic subsidiaries of Topco LLC (subject to certain exceptions) as specified in the respective guaranty agreements, and are secured by a lien and security interest in substantially all of the assets of existing and future material domestic subsidiaries of Topco LLC that are loan parties. The New Term Loan becomes repayable in quarterly payments of $1.5 million beginning on March 31, 2021, with all remaining outstanding principal due on October 19, 2027. The New Term Loan includes prepayment provisions that allow the us, at their option, to repay all or a portion of the principal amount at any time. The New Revolving Credit Facility allows the us to repay and borrow from time to time until October 19, 2025, at which time all amounts borrowed must be repaid. Subject to certain exceptions and limitations, we are required to repay borrowings under the New Term Loan and New Revolving Credit Facility with the proceeds of certain occurrences, such as the incurrence of debt, certain equity contributions, and certain asset sales or dispositions. Borrowings under the New Credit Agreement bear interest (a) initially, at our option, either (i) at the Base Rate plus 3.25% per annum or (ii) the Adjusted Eurocurrency Rate plus 4.25% per annum and (b) after delivery of the compliance certificate for the fiscal quarter ending March 31, 2021, at our option, either at (i) the Base Rate plus the applicable margin of 3.25% per annum with a stepdown to 3.00% based on Intermediate’s first lien net leverage ratio or (ii) the Adjusted Eurocurrency Rate plus the margin of 4.25% per annum with a stepdown to 4.00% based on Intermediate’s first lien net leverage ratio. Interest rates will also decrease an additional 0.25% in any period if the Company’s credit ratings issued by Moody’s and S&P are B2 or better and B or better, respectively. The Base Rate is defined as the greatest of (i) the rate last quoted by The Wall Street Journal as the “Prime Rate” in the United States, (ii) the NYFRB Rate plus 0.50% per annum, (iii) the Adjusted Eurocurrency Rate for a one month interest period plus 1.00% per annum, (iv) solely with respect to the initial term loans, 2.00% per annum and (v) for any loans that are not initial term loans, 1.00% per annum. The “Adjusted Eurocurrency Rate” is defined as the greater of (a) with respect to the initial term loans the greater of (i) the Eurocurrency Rate for such interest period multiplied by the Statutory Reserve Rate (as such term is defined in the New Credit Agreement), and (ii) 1.00% and (b) with respect to the revolving loans, the greater of (i) the Eurocurrency Rate for such interest period multiplied by the Statutory Reserve Rate (as such term is defined in the New Credit Agreement), and (ii) 0%. The “Eurocurrency Rate” is defined as the London Inter-bank Offered Rate (“LIBOR”) as displayed by Reuters (which if negative will be deemed to be 0.00%) or, if LIBOR is unavailable, a rate based on historical LIBOR, as determined by the administrative agent under the New Credit Agreement. Accrued interest under the New Credit Agreement is payable by us (a) quarterly in arrears with respect to Base Rate loans, (b) at the end of each interest rate period (or at each three-month interval in the case of loans with interest periods greater than three months) with respect to Eurocurrency Rate loans, (c) on the date of any repayment or prepayment and (d) at maturity (whether by acceleration or otherwise). An annual commitment fee is applied to the daily unutilized amount under the New Revolving Credit Facility at 0.375% per annum, with one stepdown to 0.25% per annum based on Intermediate’s first lien net leverage ratio. Debt Covenants 82 The New Credit Agreement includes a financial covenant that requires that, if as of the end of any fiscal quarter the aggregate amount of letters of credit obligations and borrowings under the New Revolving Credit Facility outstanding as of the end of such fiscal quarter (excluding cash collateralized letters of credit obligations and letter of credit obligations in an aggregate amount not in excess of $5.0 million at any time outstanding and for the first four fiscal quarters ending after October 19, 2020, borrowings of revolving credit loans made on October 19, 2020) exceed 35% of the aggregate amount of all Revolving Credit Commitments in effect as of such date, then the net leverage ratio of Intermediate shall not be greater than 8.00 to 1.00. For purposes of this covenant, the net leverage ratio is calculated by dividing outstanding first lien indebtedness (net of cash) by Adjusted EBITDA over the preceding four fiscal quarters. The New Credit Agreement also contains negative and affirmative covenants in addition to the financial covenant, including covenants that restrict our ability to, among other things, incur or prepay certain indebtedness, pay dividends or distributions, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, and make changes in the nature of the business. The New Credit Agreement contains certain events of default, including, without limitation, nonpayment of principal, interest or other obligations, violation of the covenants, insolvency, court ordered judgments, and certain changes of control. The New Credit Agreement also requires the Company to provide audited consolidated financial statements to the lenders no later than 120 days after year-end. The New Credit Agreement contained one financial covenant (consolidated first lien leverage ratio) measured as of the last day of each fiscal quarter. As of December 31, 2020, we were in compliance with these covenants. The New Credit Agreement also requires mandatory prepayments upon certain excess cash flow, subject to certain step-downs and threshold levels as defined and set forth in the terms of the New Credit Agreement to commence with the fiscal year ending December 31, 2021. At December 31, 2020, interest rate on the New Term loan was 5.25%. Tax Receivable Agreement The purchase of LLC Units by us in connection with our IPO resulted in the acquisition by us of a proportionate share of the existing tax basis of the assets of Topco LLC and its flow-through subsidiaries. Topco LLC (and each of its subsidiaries classified as a partnership for U.S. federal income tax purposes) had in place for the IPO transaction an election under Section 754 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, such purchase of LLC Units by us resulted in an adjustment in the tax basis of the assets of Topco LLC and its flow-through subsidiaries reflected in the proportionate share of such assets treated as acquired by us. In addition, MLSH 1 may from time to time (subject to the terms of the Exchange Agreement) exercise a right to exchange LLC Units for shares of our Class A common stock on a one-for-one basis, or, at our election, for cash from a substantially concurrent public offering or private sale (based on the price of our Class A common stock in such public offering or private sale). We intend to treat such acquisitions of LLC Units as direct purchases of LLC Units from MLSH 1 for U.S. federal income and other applicable tax purposes, regardless of whether such LLC Units are surrendered by MLSH 1 to Topco LLC for redemption or sold to us upon the exercise of our election to acquire such LLC Units directly. Topco LLC (and each of its subsidiaries classified as a partnership for U.S. federal income tax purposes) intends to have in place an election under Section 754 of the Code effective for each taxable year in which an exchange of LLC Units for Class A common stock or cash occurs. As a result, an exchange of LLC Units is expected to result in (1) an increase in our proportionate share of the existing tax basis of the assets of Topco LLC and its flow-through subsidiaries and (2) an adjustment in the tax basis of the assets of Topco LLC and its flow-through subsidiaries reflected in that proportionate share. Any increases in our share of tax basis as a result of the purchase of LLC Units or LLC Unit exchanges will generally have the effect of reducing the amounts that we would otherwise be obligated to pay thereafter to various tax authorities. Such basis increases may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. In connection with the completion of our IPO we also entered into a Tax Receivable Agreement with MLSH 1 and MLSH 2. The Tax Receivable Agreement provides for the payment by us to MLSH 1 and MLSH 2, collectively, of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize from exchanges of LLC Units (together with the corresponding shares of Class B common stock) for Class A common stock, as a result of (i) certain increases in the tax basis of assets of Topco LLC and its subsidiaries resulting from purchases or exchanges of LLC Units, (ii) certain tax attributes of the entities acquired from MLSH 1 and MLSH 2 in connection with the Organizational Transactions (“the Blocker Entities”), Topco LLC and subsidiaries of Topco LLC that existed prior to this offering and (iii) certain other tax benefits related to our entering into the Tax Receivable Agreement, including tax benefits attributable to payments that we make under the Tax Receivable Agreement (collectively, the “Tax Attributes”). The payment obligations under the Tax Receivable Agreement are not conditioned upon any LLC Unitholder maintaining a continued ownership interest in us or Topco LLC and 83 the rights of MLSH 1 and MLSH 2 under the Tax Receivable Agreement are assignable. We expect to benefit from the remaining 15% of the tax benefits, if any, that we may actually realize. Under the TRA, we are required to provide MLSH 1 and MLSH 2 with a schedule setting forth the calculation of payments that are due under the TRA with respect to each taxable year in which a payment obligation arises within ninety (90) days after the extended due date of our U.S. federal income tax return for such taxable year. This calculation will be based upon the advice of our tax advisors. The calculation will become final thirty (30) days after it is provided assuming that no objections are made. Payments under the TRA will generally be made within five (5) business days after this schedule becomes final pursuant to the procedures set forth in the TRA, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Any late payments that may be made under the TRA will continue to accrue interest at LIBOR plus 500 basis points until such payments are made, generally including any late payments that we may subsequently make because we did not have enough available cash to satisfy our payment obligations at the time at which they originally arose. The payment obligations under the TRA are obligations of Maravai LifeSciences Holdings, Inc. and not of Topco LLC. Although the actual timing and amount of any payments that may be made under the TRA will vary, we expect that the aggregate payments that we will be required to make to MLSH 1 and MLSH 2 will be substantial. Any payments made by us under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us or to Topco LLC and, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. We anticipate funding ordinary course payments under the Tax Receivable Agreement from cash flow from operations of Topco LLC and its subsidiaries, available cash and/or available borrowings under the New Credit Agreement. The TRA provides that if (1) certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, (2) we materially breach any of our material obligations under the TRA or (3) we elect an early termination of the TRA, then the TRA will terminate and our obligations, or our successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and, to the extent applicable, that any LLC Units that have not been exchanged are deemed exchanged for the fair market value of our Class A common stock at the time of termination. Payments under the TRA will be based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase or the availability of Blocker Entities’ NOLs, if any, we will not be reimbursed for any cash payments previously made to MLSH 1 and MLSH 2 pursuant to the TRA if any tax benefits initially claimed by us are subsequently disallowed, in whole or in part, by the IRS or other applicable taxing authority. For example, if the IRS later asserts that we did not obtain a tax basis increase or disallows (in whole or in part) the availability of NOLs due to a potential ownership change under Section 382 of the Code, among other potential challenges, then we would not be reimbursed for any cash payments previously made to MLSH 1 and MLSH 2 pursuant to the TRA with respect to such tax benefits that we had initially claimed. Instead, any excess cash payments made by us pursuant to the TRA will be netted against any future cash payments that we might otherwise be required to make under the terms of the TRA. Nevertheless, any tax benefits initially claimed by us may not be disallowed for a number of years following the initial time of such payment or, even if challenged early, such excess cash payment may be greater than the amount of future cash payments that we might otherwise be required to make under the terms of the TRA. Accordingly, there may not be sufficient future cash payments against which to net. The applicable U.S. federal income tax rules are complex, and there can be no assurance that the IRS or a court will not disagree with our tax reporting positions. As a result, it is possible that we could make cash payments under the TRA that are substantially greater than our actual cash tax savings. As of December 31, 2020, our liability under the TRA was $389.5 million. Cash Flows The following table summarizes our cash flows for the periods presented: 84 Year Ended December 31, (in thousands) 2020 2019 2018 Net cash (used in) provided by: Operating activities $ 152,187 $ 24,115 $ (186) Investing activities 6,068 (17,148) (3,451) Financing activities 53,212 (4,167) (9,167) Effects of exchange rate changes on cash 17 34 (69) Net increase (decrease) in cash $ 211,484 $ 2,834 $ (12,873) Operating Activities Net cash provided by operating activities for the year ended December 31, 2020 was $152.2 million, which was primarily attributable to a net income of $78.8 million, non-cash depreciation and amortization of $25.8 million, non-cash amortization of deferred financing costs of $1.8 million, non-cash equity-based compensation of $24.6 million, loss on debt financing of $7.6 million, and $2.9 million of acquired in-process research and development, partially offset by a decrease in deferred income taxes of $5.5 million, the gain on a sale and leaseback transaction of $19.0 million, costs incurred for line of credit refinancing of $3.2 million, and the net cash inflow from the change in our operating assets and liabilities of $35.9 million. Net cash provided by operating activities for the year ended December 31, 2019 was $24.1 million, which was primarily attributable to a net loss of $5.2 million, non-cash depreciation and amortization of $24.1 million, non-cash amortization of deferred financing costs of $1.7 million, non-cash equity-based compensation of $1.7 million, a net cash inflow from the change in our operating assets and liabilities of $2.3 million, partially offset by a decrease in deferred income taxes of $1.2 million. The net change in our operating assets and liabilities reflects a decrease in accounts receivable of $1.9 million, a decrease in prepaid expenses and other current assets of $2.0 million, offset by an increase in accounts payable and accrued liabilities of $6.0 million. Net cash used in operating activities for the year ended December 31, 2018 was $0.2 million, which was primarily attributable to a net loss of $16.9 million, non-cash depreciation and amortization of $22.3 million, non-cash amortization of deferred financing costs of $1.5 million, non-cash unit-based compensation of $2.1 million, non-cash loss on debt refinancing of $5.6 million, an increase in deferred income taxes of $0.3 million, partially offset by a net cash outflow from the change in our operating assets and liabilities of $15.8 million. The net change in our operating assets and liabilities reflects a decrease of approximately $15.9 million, which was primarily attributable to the payment of an earn-out liability associated with the compensatory cost of a legacy acquisition of a business of $14.5 million. Investing Activities Net cash provided by investing activities for the year ended December 31, 2020 was $6.1 million primarily attributable to the proceeds from the sale and leaseback of our Burlingame, California facility of $34.5 million, net of cash outflows of $23.6 million for property and equipment and a cash outflow of $3.0 million associated with the purchase of MockV Solutions, Inc. of which $2.9 million was considered in-process research and development. Net cash used in investing activities for the year ended December 31, 2019 was $17.1 million, which was primarily attributable to purchases of property and equipment of $17.1 million due to higher capital expenditures related to the build out of our manufacturing facility in San Diego, California. Net cash used in investing activities for the year ended December 31, 2018 was $(3.5) million, primarily attributable to purchases of property and equipment of $3.5 million. Financing Activities Net cash provided by financing activities for the year ended December 31, 2020 was $53.2 million, which was primarily attributable to a $1.8 billion of proceeds from the issuance of common stock sold in the Company’s initial public offering, net of offering cost, and $609.0 million from the proceeds of borrowing long-term debt, net of discount. Specifically, the proceeds from the initial public offering of $1.8 billion were offset by the following cash outflows related to the Organizational Transactions: • the purchase of Topco LLC units from MLSH 1 of $1.4 billion, • the sale of Class B common stock to MLSH 1 of $1.7 million • the repurchase of Class A common stock from MLSH 2 of $33.7 million, 85 • the purchase of Blocker Entities from MLSH 2 of $208.1 million, • principal repayment of longer-term debt of $50.0 million, • and tax distribution by Topco LLC to MLSH 1 of $8.2 million. The proceeds from the new borrowings of long-term debt of $609.0 million were offset by principal repayment of long-term debt of $360.0 million, payment to purchase the non-controlling interest in MLSC of $120.0 million, payment of financing costs of $9.3 million, and a distribution to MLSH 1 prior to the IPO of $88.6 million, and the repurchase of vested MLSC incentive units of $9.1 million. Net cash used also included a portion of a $2.0 million payment of contingent consideration of $1.4 million. Net cash used in financing activities for the year ended December 31, 2019 was $4.2 million, which was primarily attributable to principal repayments of long-term debt of $2.5 million and a portion of a $2.0 million payment of contingent consideration of $1.3 million. Net cash used in financing activities for the year ended December 31, 2018 was $9.2 million, which was primarily attributable to net proceeds of $310.6 million from long-term debt borrowings offset by the repayment of the previous long-term debt agreement of $255.0 million, a distribution to our member of $52.1 million, financing costs incurred of $6.7 million, and payment of contingent consideration of $5.8 million. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of December 31, 2020: Payments due by period (in thousands) Total 1 year 2-3 years 4-5 years 5+ years Capital lease commitments (1) $ 75 $ 50 $ 25 $ — $ — Lease facility financing obligations (2) 48,200 4,126 9,662 10,180 24,232 Operating leases (3) 14,936 2,777 4,398 2,475 5,286 Debt obligations (4) 550,000 6,000 12,000 12,000 520,000 TRA payments (5) 389,546 — 25,378 44,316 319,852 Total $ 1,002,757 $ 12,953 $ 51,463 $ 68,971 $ 869,370 _______________ (1) Represents capital lease commitments. See Note 6 to the “Notes to Consolidated Financial Statements” for additional information. (2) Represents lease facility financing obligations. See Note 6 to the “Notes to Consolidated Financial Statements” for additional information. (3) Represents operating leases including the ground lease for our San Diego Facility and Southport Facility. See Note 6 to the “Notes to Consolidated Financial Statements” for additional information. (4) Represents long-term debt principal maturities, excluding interest. See Note 7 to the “Notes to Consolidated Financial Statements” for additional information. (5) Reflects the estimated timing of TRA payments as of December 31, 2020. Such payments could be due later than estimated depending on the timing of our use of the underlying tax attributes. See "Risk Factors-Risks Related to Our Organizational Structure" and Note 12 to our consolidated financial statements for additional information regarding our liability under the TRA. Tax distributions are required under the terms of the Topco LLC Agreement. As of December 31, 2020, we have made tax distributions equal to the estimated obligation due for 2020. See Note 12 to our audited consolidated financial statements for additional information regarding tax distributions. The New Credit Agreement requires mandatory prepayments upon certain excess cash flow, subject to certain step-downs and threshold levels as defined and set forth in the terms of the New Credit Agreement, to commence with the fiscal year ending December 31, 2021. 86 Off-Balance Sheet Arrangements As of December 31, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates We have prepared our consolidated financial statements in accordance with GAAP. Our preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures in the consolidated financial statements. Our estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions and any such difference may be material. While our significant accounting policies are described in more detail in Note 1 to our consolidated financial statements, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our consolidated financial condition and results of operations and require our subjective and complex judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We recognize revenue primarily from the sale of manufactured products, including products that can be purchased out of a catalogue and custom manufactured products, and the performance of services, including custom antibody and assay development contracts, antibody affinity extraction and stability and feasibility studies, which often result in the generation of report deliverables. We also have certain licensing and royalty arrangements. Our customers are primarily life science research pharmaceutical and biotechnology companies. We also sell to global and regional distribution partners and original equipment manufacturer (“OEM”) customers who incorporate our products into their products under their own brands. Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for our arrangements with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The majority of our contracts include only one performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account for revenue recognition. We also recognize revenue from other contracts that may include a combination of products and services, the provision of solely services, or from license fee arrangements which may be associated with the delivery of product. Where there is a combination of products and services, we account for the promises as individual performance obligations if they are concluded to be distinct. Performance obligations are considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, we consider a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. As a practical expedient, we do not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less. Contracts with customers are evaluated on a contract-by-contract basis as contracts may include multiple types of goods and services as described below. Nucleic Acid Production Nucleic Acid Production revenue is generated from the manufacture and sale of highly modified, complex nucleic acids products to support the needs of our customers’ research, therapeutic and vaccine programs. The primary offering of products include: CleanCap ® , mRNA and oligonucleotide contracts typically consist of a single performance obligation. We also sell nucleic acid products for labeling and detecting proteins in cells and tissue samples research. We recognize revenue from these products in the period in which the performance obligation is satisfied by transferring control to the customer. Revenue for nucleic acid catalog products is recognized at a point in time, generally upon shipment to the customer. Revenue for contracts for certain custom nucleic acid products, with an enforceable right to payment and a reasonable margin for work performed to date, is recognized over time, based on a cost-to-cost input method over the manufacturing period. 87 Biologics Safety Testing Our Biologics Safety Testing revenue is associated with the sale of bioprocess impurity detection kit products. We also enter into contracts that include custom antibody development, assay development, and antibody affinity extraction services. These products and services enable the detection of impurities and contaminants that occur in the manufacturing of biologic drugs and other therapeutics. We recognize revenue from the sale of bioprocess impurity detection kits in the period in which the performance obligation is satisfied by transferring control to the customer. Custom antibody development contracts consist of a single performance obligation, typically with an enforceable right to payment and a reasonable margin for work performed to date. Revenue is recognized utilizing a cost-based input method over the term of the contract. Where an enforceable right to payment does not exist, revenue is recognized at a point in time when control is transferred to the customer. Revenue associated with assay development service contracts, which generally occur over a short period of time and consist of a single performance obligation, is recognized at a point in time when a successful antigen test and report is provided to the customer. Affinity extraction services consist of a single performance obligation to perform the extraction service and provide a summary report to the customer. Revenue is recognized either over time or at a point in time depending on contractual payment terms with the customer. Protein Detection We also manufacture and sell protein labeling and detection reagents used by researchers in protein labeling and detection. The contracts to sell these catalog products consist of a single performance obligation to deliver the reagent products. Revenue from these contracts is recognized at a point in time, generally upon shipment of the product to the customer. We recognize royalty revenue related to certain out-licensing and royalty arrangements in the period the sales or usage occur using third-party evidence to estimate the amount to be recorded. To date this revenue has not been material to the consolidated financial statements. We have elected the practical expedient to not disclose the unfulfilled performance obligations for contracts with an original term of one year or less. We had no material unfulfilled performance obligations for contracts with an original term greater than one year as of December 31, 2020 or 2019. We accept returns only if the products do not meet customer specifications and historically, our volume of product returns has not been significant. Further, no warranties are provided for promised goods and services other than assurance type warranties. Revenue for an individual contract is recognized at the related transaction price, which is the amount we expect to be entitled to in exchange for transferring the products and/or services. The transaction price for product sales, which excludes sales taxes we collect, is calculated at the contracted product selling price. The transaction price for a contract with multiple performance obligations is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for products are determined based on the prices charged to customers, which are directly observable. Standalone selling price of services are mostly based on time and materials. Generally, payments from customers are due when goods and services are transferred. As most contracts contain a single performance obligation, the transaction price is representative of the standalone selling price charged to customers. Revenue is recognized only to the extent that it is probable that a significant reversal of the cumulative amount recognized will not occur in future periods. For the years ended December 31, 2020 and 2019, variable consideration has not been material. For arrangements where the anticipated period between timing of transfer of goods and services and the timing of payment is one year or less, we have elected to not assess whether a significant financing component exists. We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Accordingly, revenue for shipping and handling is recognized at the same time that the related product revenue is recognized. Contract assets are generated when contractual billing schedules differ from revenue recognition timing and we record contract receivable when we have an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Applying the practical expedient, we recognize the incremental costs of obtaining contracts as an expense when incurred when the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in sales and marketing and general and administrative expenses. The costs to fulfill the contracts are determined to be immaterial and are recognized as an expense when incurred. Prior to January 1, 2019, revenue from the sale of products and services was recognized when all of the following conditions were met: (1) there was persuasive evidence of an arrangement; (2) the product or service had been delivered to the customer; (3) the collection of the fees was reasonably assured; and (4) the amount of fees to be paid by the customer was fixed or determinable. 88 When an arrangement involved multiple elements, the multiple elements, referred to as deliverables, were evaluated to determine whether they represent separate units of accounting. We performed this evaluation at the inception of an arrangement and as each item was delivered in the arrangement. Generally, we accounted for a deliverable separately if the delivered item has standalone value to the customer and delivery or performance of the undelivered item or service was probable and substantially in our control. When multiple elements could be separated into separate units of accounting, arrangement consideration was allocated at the inception of the arrangement, based on each unit’s relative selling price, and recognized based on the method most appropriate for that unit. Inventory Our inventories consist of raw materials, work in process and finished goods. Inventories are stated at the lower of cost (weighted average cost) or net realizable value. Inventory costs include materials, direct labor and manufacturing overhead, which are related to the purchase or production of inventories. We review our inventory at least quarterly for excess and obsolete inventory based on our estimates of expected sales volumes, production capacity and expiration of raw materials, work-in-process and finished products. Expected sales volumes are determined based on internal sales forecasts that consider both historical and projected sales. We write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected manufacturing requirements. Any write-downs of inventories are charged to cost of revenue. A change in the estimated timing or amount of demand for our products could result in additional provisions for excess inventory quantities on hand. Any significant unanticipated changes in demand or unexpected quality failures could have a significant impact on the value of inventory and reported operating results. During all periods presented in the accompanying consolidated financial statements, there have been no material adjustments related to a revised estimate of inventory valuations. Goodwill Goodwill represents the excess of consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. We conduct a goodwill impairment analysis in the fourth quarter of each year, and more frequently if changes in facts and circumstances indicate that the fair value of our reporting units may be less than carrying amount. Accounting guidance also permits an optional qualitative assessment for goodwill on a reporting unit by reporting unit basis to determine whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further quantitative testing would be necessary. A quantitative assessment is performed if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value but not to exceed the carrying value of goodwill. Within the quantitative impairment test, the fair value of the given reporting unit was determined using both an income approach and market approach. The income approach is a valuation technique under which we estimated future cash flows using the protein detection reporting unit’s financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we projected revenue and applied our fixed and variable cost experience rates to the projected revenue to arrive at the future cash flows. A terminal value was then applied to the projected cash flow stream. Future estimated cash flows were discounted to their present value to calculate the estimated fair value. The discount rate used was the value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair value of the protein detection reporting unit, we were required to estimate a number of factors, including projected operating results, terminal growth rates, economic conditions, anticipated future cash flows, the discount rate and the allocation of shared or corporate items. Our market approach model estimates the fair value of the protein detection reporting unit based on market prices paid in actual precedent transactions of similar businesses and market multiples of guideline public companies. This impairment assessment is sensitive to changes in forecasted cash flows, as well as our selected discount rate. Changes in the reporting unit’s results, forecast assumptions and estimates could materially affect the estimation of its fair value. To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business. 89 In periods prior to 2020, we had three reporting units, Nucleic Acid Production, Biologics Safety Testing, and Protein Detection, with such reporting units being aligned with our segments. However, during the year ended December 31, 2020, we determined that our Nucleic Acid Production segment contained two reporting units that should no longer be combined as a reporting unit due to a lack of economic similarities primarily driven by changes in margins realized by these reporting units. These reporting units continue to be considered as one segment for purposes of segment reporting, as our CODM continues to review financial results and making operating decisions at the Nucleic Acid Production level. The Company performed a quantitative goodwill impairment analysis on each of its four reporting units during the fourth quarter of 2020 and concluded that the fair value of each reporting unit exceeded its carrying value and therefore that it was more-likely-than-not that the fair value of goodwill exceeded its carrying value. We have not recognized any goodwill impairment in any of the periods presented. Leases, Deferred Rent and Lease Facility Financing Accounting We rent our office space and facilities under non-cancelable operating lease agreements and recognize related rent expense on a straight-line basis over the term of the lease. Our lease agreements contain rent holidays, scheduled rent increases and renewal options. Rent holidays and scheduled rent increases are included in the determination of rent expense to be recorded ratably over the lease term. We do not assume renewals in its determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. We begin recognizing rent expense on the date that we obtain the legal right to use and control the leased space. Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight-line basis for the buildings we occupy. Funding of leasehold improvements by our landlord is accounted for as a tenant improvement allowance and recorded as current and non-current deferred rent liabilities and amortized on a straight-line basis as a reduction of rent expense over the term of the lease. In certain arrangements, we are involved in the construction of improvements to buildings we are leasing. To the extent we are involved with the structural improvements of the construction project or take construction risk, we are considered to be the owner of the building and related improvements for accounting purposes during the construction period. Therefore, we record the fair value of the building subject to the lease within property and equipment on the balance sheet, plus the amount of building improvements incurred and funded by us and/or the landlord as of the balance sheet date. We also record a corresponding lease financing obligation on our balance sheet representing the amounts financed by the lessor for the building and lessor financed improvements. Lessor financed improvement incentives due but not yet received are recorded as prepaid expense and other current assets on the balance sheet. Once construction is completed, we consider the requirements for sale-leaseback accounting treatment, including evaluating whether all risks of ownership have been transferred back to the landlord, as evidenced by a lack of our continuing involvement in the leased property. If we conclude the arrangement does not qualify for sale-leaseback accounting treatment, the building and improvements remain on our balance sheet and are subject to depreciation and assessment of impairment. We bifurcate our lease payments into a portion allocated to the lease financing obligation and a portion allocated to the parcel of land on which the building has been built. The portion of the lease payments allocated to the land is treated for accounting purposes as operating lease payments, and therefore is recorded as rent expense in the consolidated statements of operations and comprehensive loss. The portion of the lease payments allocated to the lease financing obligation is further bifurcated into a portion allocated to interest expense and a portion allocated to reduce the lease financing obligation. The interest rate used for the lease financing obligation represents our estimated incremental borrowing rate at the inception of the lease, adjusted to reduce any built-in loss. The initial recording of these assets and liabilities is classified as non-cash investing and financing items, respectively, for purpose of the consolidated statements of cash flows. The most significant estimates used by us in accounting for the lease financing transaction and the impact of these estimates are as follows: • Incremental borrowing rate . We estimate our incremental borrowing rate as the rate we would have incurred to borrow, based on our credit quality at the inception of the lease over a similar term, the funds necessary to purchase the leased building subject to the financing lease transaction. The incremental borrowing rate is used in determining allocating our rental payments between interest expense and a reduction of the outstanding lease financing obligation. • Land capitalization rate . The land capitalization rate is the rate of return on the land underlying the lease properly considering expected income that the land would be expected to generate. The land lease capitalization rate is estimated using comparable market data for land capitalization rates for similar properties. The land capitalization rate is used in determining allocating our rental payments between interest expense and a reduction of the outstanding lease financing obligation. 90 • Fair value of leased building and underlying land . The fair value of a leased building and underlying land subject to the lease financing transaction is based on comparable market data for similar properties as of the lease inception date. The fair value of the underlying land is used in determining allocating our rental payments between interest expense and a reduction of the outstanding lease financing obligation. In July 2018, we entered into a non-cancelable lease for a new manufacturing facility (the “San Diego Facility Lease”) and subsequently took possession of the space. The scope of the tenant improvements did not qualify under the lease accounting guidance as “normal tenant improvements” and we were the deemed owner of the leased building during the construction period for accounting purposes. In 2019, construction on the facility was substantially completed and the leased property was placed into service. We determined that the completed construction project did not qualify for sale-leaseback accounting due to non-recourse financing we provided to the lessor for reimbursed construction costs and has instead been accounted for as a financing transaction. The leased building for the San Diego Facility Lease and related improvements remains on our consolidated balance sheet as of December 31, 2020 and rental payments associated with the lease have been allocated to operating lease expense for the ground underlying the leased building and principal and interest payments on the lease financing obligation. Equity-Based Compensation Incentive Units Prior to the Organizational Transactions, unit-based awards had been granted by MLSH 1 and also by one of our subsidiaries to certain executives and employees of our subsidiaries in the form of non-vested incentive units (“Incentive Units”). No Incentive Units have been granted subsequent to the Organizational Transactions. We recognize compensation expense for MLSH 1 awards in our consolidated financial statements as MLSH 1 is considered to be the economic interest holder in Topco, LLC. Compensation expense for the Incentive Units is recognized over their requisite service period. All awards of Incentive Units were measured based on the fair value of the award on the date of grant. We recognize compensation expense for these awards over the requisite service period. Forfeitures are recognized when they occur. Equity-based compensation expenses are classified in the consolidated statements of operations based on the departments of the related employees. These Incentive Units are subject to service, market or performance conditions. For Incentive Units subject to performance conditions, we evaluate the probability of achieving each performance condition at each reporting date and recognize expense over the requisite service period when it is deemed probable that a performance condition will be met using the accelerated attribution method over the requisite service period. During the year ended December 31, 2020, MLSH 1 performance-based Incentive Units vested as their performance condition was satisfied upon the completion of the IPO. Of these performance-based Incentive Units, certain units were modified to allow for vesting subsequent to the termination of the employment for two employees before the awards were deemed probable of vesting. The calculation of the incremental equity-based compensation expense was based on the new fair value of the award measured as of the date of modification. As a result of the modification and based on the performance condition being satisfied, the Company recognized an incremental equity-based compensation expense of $16.7 million for the year ended December 31, 2020. Stock Options and Restricted Stock Units We began to grant stock options and restricted stock units (“RSUs”) out of our 2020 Omnibus Incentive Plan (the “2020 Plan”) in the fourth quarter of 2020. For awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis over the requisite service period, which is generally four years. The fair value of RSUs is determined based on the number of shares granted and the quoted market price of our Series A common stock on the date of grant. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model (“Black-Scholes Model”). The fair value of option awards as determined by the Black-Scholes Model are affected by our stock price as well as other assumptions. These assumptions include, but are not limited to, the expected term, the expected Class A common stock price volatility, the risk-free interest rate and the expected dividend yield. We have, due to insufficient historical data, used the “simplified method” to determine the expected term of stock options granted with a service condition. If any of the assumptions used in the Black-Scholes Model change significantly, equity-based compensation expense may differ materially in the future from that recorded in the current period. We expect to continue to grant stock options to purchase our Class A common stock and other equity awards in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase. 91 Incentive Units Valuation As there has been no public market for the Incentive Units granted by MLSH 1 or by our subsidiary, the grant date fair value of Incentive Unit awards has been determined by our board of directors with the assistance of management and an independent third-party valuation specialist. We believe our board of directors has the relevant experience and expertise to determine the fair value of these Incentive Units. The grant date fair value of Incentive Units was determined first by estimating our aggregate equity value using a weighting of discounted cash flows, comparable public companies, and comparable-transactions valuation methodologies. An Option-Pricing Method, which utilizes certain assumptions including volatility, time to liquidation, a risk-free interest rate, was then used to allocate our total equity value to our different classes of equity according to their rights and preferences. A discount for lack of marketability was then applied to determine the Incentive Unit’s values to account for their lack of liquidity. In determining the fair value of the Incentive Units, the methodologies used to estimate the enterprise values were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (“AICPA Accounting and Valuation Guide”). The assumptions we use in the valuation model are based on future expectations combined with management’s judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Incentive Units as of the date of each award, including the following factors: • independent valuations performed at periodic intervals by an independent third-party valuation firm; • our operating and financial performance, forecasts and capital resources; • current business conditions; • the hiring of key personnel; • the status of research and development efforts; • the likelihood of achieving a liquidity event for these incentive units, such as an initial public offering or sale of our company, given prevailing market conditions; • any adjustment necessary to recognize a lack of marketability for the Incentive Units; • trends and developments in our industry; • the market performance of comparable publicly traded technology companies; and • the U.S. and global economic and capital market conditions. The dates of our valuation reports, which were prepared on a periodic basis, were not contemporaneous with the grant dates of these Incentive Unit awards. Therefore, we considered the amount of time between the valuation report date and the grant date to determine whether to use the latest Incentive Unit valuation report for the purposes of determining the fair value of these Incentive Units for financial reporting purposes. If Incentive Units were granted a short period of time preceding the date of a valuation report, we assessed the fair value of such Incentive Unit award used for financial reporting purposes after considering the fair value reflected in the subsequent valuation report and other facts and circumstances on the date of grant as described below. The additional factors considered when determining any changes in fair value between the most recent valuation report and the grant dates included, when available, the prices paid in recent transactions involving these Incentive Units, as well as our operating and financial performance, current industry conditions and the market performance of comparable publicly traded companies. There were significant judgments and estimates inherent in these valuations, which included assumptions regarding our future operating performance, the time to completing an initial public offering or other liquidity event and the determinations of the appropriate valuation methods to be applied. If we had made different estimates or assumptions, our equity-based compensation expense, net income (loss) and net income (loss) attributable to Maravai LifeSciences Holdings, Inc. could have been significantly different from those reported in this Form 10-K. In valuing these Incentive Units, the Board of Directors determined the enterprise values of our business by taking a weighted combination of the value indications using the income approach and the market comparable approach valuation methods. Income Approach The income approach estimates value based on the expectation of future cash flows a company will generate, such as cash earnings, cost savings, tax deductions and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date. This weighted-average cost of capital discount rate (“WACC”), is adjusted to reflect the risks inherent in the business. The WACC used for these valuations was determined to be reasonable and 92 appropriate given our debt and equity capitalization structure at the time of each respective valuation. The income approach also assesses the residual value beyond the forecast period and is determined by taking the projected residual cash flow for the final year of the projection and applying a terminal exit multiple. This amount is then discounted by the WACC less the long-term growth rate. Market Comparable Approach The market comparable approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market multiple is determined which is applied to our financial metrics to estimate the value of our parent or our subsidiary. To determine our peer group of companies, we considered life sciences tools companies and selected those most similar to us based on various factors, including, but not limited to, financial risk, company size, geographic diversification, profitability, growth characteristics and stage of life cycle. In some cases, we considered the amount of time between the valuation date and the award grant date to determine whether to use the latest valuation determined pursuant to one of the methods described above or to use a valuation calculated by management between the two valuation dates. Once we determined an enterprise value, we utilized the Black-Scholes Model to allocate the enterprise value to each class of ownership within equity. Black-Scholes Model values these call options on the respective enterprise values allocated to each class of ownership, with exercise prices based on their liquidation preferences, participation rights and strike prices. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent. Income Taxes We are subject to U.S. federal and state income taxes. We are the controlling member of Topco, LLC, which has been, and will continue to be, treated as a partnership for U.S. federal and state income tax purposes. Topco LLC’s wholly-owned U.S. subsidiary, Maravai Life Sciences, Inc. (“Maravai Inc.”) and its subsidiaries, are taxpaying entities in the U.S., Canada, and the U.K. Topco LLC’s other subsidiaries are treated as pass-through entities for federal and state income tax purposes. The income or loss generated by these entities is not taxed at the LLC level. As required by U.S. tax law, income or loss generated by these LLCs passes through to their owners. As such, our tax provision consists solely of the activities of Maravai Inc. and its subsidiaries, as well as our share of income generated by Topco LLC. We anticipate this structure to remain in existence for the foreseeable future. We account for income taxes under the asset and liability method of accounting. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of the deferred tax asset. The realizability of the Company’s deferred tax asset related to its investment in Topco LLC depends on the Company receiving allocations of tax deductions for its tax basis in the investment and on the Company generating sufficient taxable income to fully offset such deductions. We believe it is more likely than not that the Company will generate sufficient taxable income in the future to fully realize any deductions allocated to it from Topco LLC associated with the reversal of its tax basis as of December 31, 2020. However, a portion of the deferred tax asset may only be realizable through the sale or liquidation of the investment and our ability to generate sufficient capital gains. As such, a valuation allowance of $13.3 million has been recorded as of December 31, 2020 to reflect the deferred tax asset that is more likely than not to not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. Significant judgment is required in determining the accounting for income taxes. In the ordinary course of business, many transactions and calculations arise where the ultimate tax outcome is uncertain. Our judgments, assumptions and estimates relative to the accounting for income taxes take into account current tax laws, our interpretation of current tax laws, and possible outcomes of future audits conducted by foreign and domestic tax authorities. Although we believe that our estimates are reasonable, the final tax outcome of matters could be different from our assumptions and estimates used when determining the accounting for income taxes. Such differences, if identified in future periods, could have a material effect on the amounts recorded in our consolidated financial statements. 93 Payable to Related Parties Pursuant to Tax Receivable Agreement In connection with the completion of our IPO we entered into a TRA with MLSH 1 and MLSH 2. The TRA provides for the payment by us to MLSH 1 and MLSH 2, collectively, of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize from exchanges of LLC Units (together with the corresponding share of Class B Common stock), as a result of (i) certain increases in the tax basis of assets of Topco LLC and its subsidiaries resulting from purchases or exchanges of LLC Units, (ii) increase in the tax basis of assets of Topco LLC received form LLC Units held by entities acquired from MLSH 1 and MLSH 2 in connection with the Organizational Transactions (“the Blocker Entities”), Topco LLC and subsidiaries of Topco LLC that existed prior to this offering and (iii) certain other tax benefits related to our entering into the TRA, including tax benefits attributable to payments that we make under the TRA (collectively, the “Tax Attributes”). The payment obligations under the TRA are not conditioned upon any LLC Unitholder maintaining a continued ownership interest in us or Topco LLC and the rights of MLSH 1 and MLSH 2 under the TRA are assignable. We expect to benefit from the remaining 15% of the tax benefits, if any, that we may actually realize. We accrue a liability for the payable to related parties for the TRA and a reduction to stockholders’ equity, when it is deemed probable that the Tax Attributes will be used to reduce our taxable income, as the contractual percentage of the benefit of Tax Attributes that we expected to receive over a period of time. The current portion, if any, of the liability is the amount estimated to be paid within one year of the balance sheet date. For purposes of estimating the value of the payable to related parties for the TRA, the tax benefit deemed realized by us and payable to MLSH 1 and MLSH 2 is computed by taking 85% of the difference between undiscounted forecasted cash income tax liability over the term of benefit of the Tax Attributes and the forecasted amount of such taxes that we would have been required to pay had there been no Tax Attributes (i.e. a with-and-without analysis); provided that, for purposes of determining the tax benefit with respect to state and local income taxes, use simplifying assumptions. The TRA will generally apply to each of our taxable years, beginning with the taxable year that the TRA is entered into. There is no maximum term for the TRA and the TRA will continue until all such tax benefits have been utilized or expired unless we exercise our right to terminate the TRA for an agreed-upon amount equal to the estimated present value of the remaining payments to be made under the agreement (calculated with certain assumptions, including as to utilization of the Tax Attributes). We may record additional liabilities under the TRA when LLC Units of Topco LLC are exchanged in the future and as our estimates of the future utilization of the tax benefits change. If, due to a change in facts, these tax attributes are not utilized in future years, it is reasonably possible no amounts would be paid under the TRA. In this scenario, the reduction of the liability under the TRA would result in a benefit to our consolidated statement of operations. Subsequent adjustments to the payable to related parties for the TRA based on changes in anticipated future taxable income are recorded in our consolidated statement of operations. The actual Tax Attributes, as well as any amounts paid to MLSH 1 and MLSH 2 under the TRA, will vary depending on a number of factors, including: • the timing of any future exchanges—for instance, the increase in any tax deductions will vary depending on the fair value, which may fluctuate over time, of the depreciable or amortizable assets of Topco LLC and its flow-through subsidiaries at the time of each exchange; • the price of shares of our Class A common stock at the time of any future exchanges—the increases and adjustments in our proportionate share of the existing tax basis of the assets of Topco LLC and its flow-through subsidiaries that are directly related to the price of shares of our Class A common stock at the time of future exchanges; • the extent to which such exchanges are taxable—if an exchange is not taxable for any reason, increased tax deductions as a result of legacy IRC Section 754 election in place at Topco LLC will not be available to generate payments under the TRA; • the amount and timing of our income—the TRA generally will require us to pay 85% of the tax benefits as and when those benefits are treated as realized by us under the terms of the TRA. If we do not have taxable income in a particular taxable year, we generally will not be required (absent a change of control or other circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no tax benefits will have been actually realized. Nevertheless, any tax benefits that do not result in realized tax benefits in a given taxable year will likely generate tax attributes that may be utilized to generate tax benefits in future (and possibly previous) taxable years. The utilization of any such tax attributes will result in payments under the TRA; and • applicable tax rates—the tax rates in effect at the time a tax benefit is recognized. The payment obligations under the TRA are obligations of Maravai LifeSciences Holdings, Inc. and not of Topco LLC. Although the actual timing and amount of any payments that may be made under the TRA will vary, we expect that the 94 aggregate payments that we will be required to make to MLSH 1 and MLSH 2 will be substantial. Any payments made by us under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us or to Topco LLC and, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. We anticipate funding ordinary course payments under the TRA from cash flow from operations of Topco LLC and its subsidiaries, available cash and/or available borrowings under the New Credit Agreement. Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect that future payments under the Tax Receivable Agreement relating to the purchase by us of LLC Units from MLSH 1 in connection with this offering to be approximately $389.5 million and to range over the next 15 years from approximately $3.4 million to $29.8 million per year and decline thereafter. These estimates are based on the initial public offering price of $27.00 per share of Class A common stock. Future payments in respect of subsequent exchanges or financing would be in addition to these amounts and are expected to be substantial. The foregoing numbers are merely estimates and actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding TRA payments. There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the TRA exceed the actual benefits we realize in respect of the tax attributes subject to the TRA and/or distributions to us by Topco LLC are not sufficient to permit us to make payments under the TRA after we have paid taxes. The term of the TRA commenced upon the completion of our IPO and will continue until all such tax benefits have been utilized or expire, unless we exercise our rights to terminate the agreements or payments under the agreements are accelerated in the event we materially breach any of our material obligations under the agreements. JOBS Act Accounting Election We are an “emerging growth company” within the meaning of the JOBS Act. The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are electing to use this extended transition period and we will therefore comply with new or revised accounting standards on the earlier of (i) when they apply to private companies; or (ii) when we lose our emerging growth company status. As a result, our financial statements may not be comparable with companies that comply with public company effective dates for accounting standards. We also intend to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act unless we cease to be an emerging growth company. We will remain an emerging growth company until the earliest of (1) December 31, 2025, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Class A common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. Recent Accounting Pronouncements See Note 1 of notes to the consolidated financial statements for a discussion of recent accounting standards and pronouncements.