EDGAR 10-K Filing

Company CIK: 1033905
Filing Year: 2021
Filename: 1033905_10-K_2021_0001033905-21-000012.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences industries, including diagnostics, pharmaceutical and research. These industries depend on a broad range of tests, called assays, to perform diagnostic testing and conduct life science research. We have established a position in several segments of the life sciences industries by developing and delivering products that satisfy a variety of customer needs in specific market segments, including multiplexing, accuracy, precision, sensitivity, specificity, reduction of labor and ability to test for proteins and nucleic acids. These needs are addressed by our proprietary technologies.
Multiplexing, the foundation of our Company, allows the end user in a laboratory to generate multiple laboratory results from a single sample with a single assay. This is important because our end user customers, which include laboratory professionals performing discovery and research, and clinical laboratories performing tests on patients as ordered by physicians and other laboratories, have a fundamental need to perform high quality testing as efficiently as possible. Until the availability of multiplexing technology, the laboratory professional had to perform one assay at a time in a sequential manner, and if additional testing was required on a sample, a second assay would be performed to generate the second result, and so on until all the necessary tests were performed.
Business Strategy
Our Company’s current focus is both on solidifying our leadership position as a provider of effective tools for diagnostic and research use, as well as establishing Luminex as a market leader in the molecular diagnostic market. To achieve these objectives, we have implemented and are pursuing the following strategies:
•Focus on key markets
We have identified the following goals in our key market segments: (i) expanding usage of our automated molecular infectious disease testing solutions, (ii) enabling and expanding end markets for our xMAP technologies through our partnership arrangements, and (iii) developing and expanding the image-based flow cytometry market. We will continue to employ a combination of a product-driven direct sales model focused on select market segments and assay applications and a partnership-driven business model to achieve our goals.
•Develop and deliver market-leading molecular diagnostic platforms and assays
Our research and development and our acquisition activity have expanded the breadth of technologies and solutions we offer our customers to meet their needs. In addition, we collaborate with industry participants, biomedical research institutions and government entities to develop additional products on our platforms, and we continuously consider other adjacent markets where our platforms and assay offerings would be beneficial.
In March 2020, the Biomedical Advanced Research and Development Authority (BARDA) awarded the Company two milestone-based contracts related to the development of diagnostics for SARS-COV-2, with a value of $642,450 each, funding approximately 36% of the overall cost of development. The Company’s management believes these two contracts helped to enable an expansion of the Company’s current portfolio of diagnostics for SARS-CoV-2 (the virus that causes COVID-19). In September 2020, BARDA awarded the Company two additional milestone-based contracts valued at $5,389,813 and $683,500, respectively, related to completing a 510(k) filing for Luminex’s expanded NxTAG Respiratory Pathogen Panel (RPP), which will include the SARS-CoV-2 virus for COVID-19 testing and to support the enhancement of the Company’s xMAP SARS-CoV-2 Multi-Antigen IgG Assay. The Company intends to submit this enhanced serology assay for an Emergency Use Authorization (EUA) when this project is completed.
Based upon our understanding of the needs of our customers to address the impacts of COVID-19, in addition to the above, the Company intends to include diagnostics for SARS-CoV-2 in future syndromic panels.
We also offer our VERIGENE System, which provides automated, cost-effective multiplex capabilities that rapidly and accurately detect infectious pathogens and drug resistance markers, without relying on time-consuming culture methods. We believe the VERIGENE System delivers better outcomes, improved patient care, earlier optimization for patient treatment and improved laboratory and hospital efficiency, all at a lower cost than competing systems. We currently offer assays on the VERIGENE platform in the categories of Bloodstream Infection Tests, Gastrointestinal Infection Tests and a Respiratory Infection Test.
We also are developing the VERIGENE II System, having initiated clinical studies on the system and its first assay in 2018. We currently expect to commercially launch the VERIGENE II System in 2021.
In addition, we have improved the simplicity and ease-of-use of our xMAP-based multiplex products through the development of a version of our multiplex PCR technology. This NxTAG chemistry streamlines workflow without sacrificing throughput, preserving the ability to process 1 to 96 patient samples in a single batch. This throughput flexibility and capacity is a crucial aspect for tests like our NxTAG Respiratory Pathogen Panel (RPP), in which seasonality and local outbreaks can cause testing volumes to surge unpredictably. We continue to pursue projects such as development of consumables, automation, software and the expansion and enhancement of our multiplexing capabilities to advance our technologies and improve market acceptance.
We are working on the development of the xMAP INTELLIFLEX instrument, a next generation bead-based multiplexing system. This new system will provide the opportunity to address both expanding and evolving market needs, plus offer an opportunity for existing users to upgrade to a modernized version of bead-based multiplexing. We currently expect to commercially launch this system in the first half of 2021.
We have developed a full range of multiplexing instruments and consumables to cover a broad range of customer applications and budgets. We have developed, and continue to improve, our proprietary chemistries for our multiplex assays in areas such as infectious disease testing, human genetic testing and personalized medicine testing. All of these technology solutions provide our customers with a breadth of innovative solutions to meet their many testing needs.
We have plans to submit additional assays to regulatory authorities in 2021, including the FDA and foreign equivalents, for market authorization in order to comply with established guidelines across the jurisdictions in which we compete.
Additionally, we intend to expand our presence in the image-based, flow cytometry market with our proprietary technology that provides microscopy-quality images of individual cells. The new product will evolve our flagship Amnis ImageStream platform to deliver a simplified user experience with enhanced performance and functionality. The improvements made with this new product should both further advance scientific discovery and expand adoption. Advances in instrument design should also improve image definition, accelerate data acquisition, and increase system flexibility. Finally, new data analysis capabilities should improve system usability to enable a greater range of applications with less user effort.
•Actively pursue acquisitions to accelerate our business strategies
We actively assess potential acquisition targets to accelerate our business strategies in the key markets described above. This approach led to several successful acquisitions historically, including GenturaDx, which is the foundation of our ARIES System, Nanosphere, which is the foundation of the VERIGENE System and EMD Millipore Corporation’s flow cytometry portfolio. We actively evaluate opportunities to enhance our capabilities or our access to targeted markets and technologies, to provide us other advantages in executing our business strategies in our key markets.
•Continue to develop the partnership channel focused on select key markets
As of December 31, 2020, 54 of our 82 strategic partners have developed and commercialized xMAP-based assays and are paying royalties to us. We also have strategic partners who distribute Luminex products. During 2020, the 54 strategic partners who have commercialized xMAP-based assays accounted for approximately 31% of our total revenue and all of our strategic partners represented approximately 33% of our total revenue. Of these 54 strategic partners, 27 principally serve the clinical diagnostics market and 27 principally serve the life science research market. We intend to continue pursuing opportunities to expand market acceptance of xMAP technology through development, marketing and distribution partnerships with leading companies in the life sciences markets. By leveraging our strategic partners’ market positions and utilizing their distribution channels and marketing infrastructure, we believe we can continue to expand our installed instrument base.
Furthermore, our partners’ investments in research and development for xMAP applications provide customers vastly more assay solutions than we could develop and commercialize individually.
We continue to focus our commercialization efforts through our strategic partners covering large sectors of the life science research market, where Luminex believes it has competitive advantages over alternative technologies and approaches. We define strategic partners as those companies in the life sciences markets that develop and distribute assays and tests on xMAP technology or that may only distribute our xMAP technology-based systems and consumables. With our partners’ support and through our direct commercial efforts in the molecular diagnostics clinical laboratory segment, we have targeted major pharmaceutical companies, large clinical laboratories, research institutions and major medical institutions for our principal marketing efforts. We believe that these customers provide the greatest opportunity for maximizing the use of xMAP-based products and that continued adoption by these industry leaders will promote wider market acceptance of our xMAP technology.
Market Approach / Sales and Marketing
Our three primary focus areas for continued revenue growth, as well as our sales and marketing strategies to achieve such growth, are as follows:
1. Molecular Diagnostics: the development and sale of molecular diagnostic assays utilizing our proprietary MultiCode, xMAP and VERIGENE technologies for use on our installed base of automated and non-automated systems. Our molecular diagnostic assay sales and marketing strategy is to expand the installed base and utilization of xMAP, xTAG, NxTAG, ARIES and VERIGENE product lines. We sell the xTAG, NxTAG, MultiCode, ARIES and VERIGENE product lines primarily through a direct sales channel. Building a direct relationship with customers is a critical component of our sales and marketing strategy to launch innovative products such as our VERIGENE Systems, NxTAG Respiratory Pathogen Panel (RPP) and ARIES Systems. In addition, we market and sell our clinical diagnostics products to group purchasing organizations (GPOs) and integrated healthcare delivery networks. These efforts support and enable our selling efforts to individual laboratories, for example, by contracting with GPOs to provide standardized pricing and terms for member hospitals. Our assays are primarily focused on multiplexed applications for the human molecular clinical diagnostics market and are also focused on three segments of the molecular diagnostic testing market: infectious disease, human genetics and personalized medicine.
2. Licensed Technologies Group (LTG): the sustained expansion of our partnership revenues through the introduction of an innovative new xMAP system and continued fulfillment of our partner's needs in their respective fields of use, as well as supporting the kit development and testing services developed or performed by partners who generate royalties. Our strategic partners include market leaders in immune/clinical diagnostics, protein diagnostic, pharmaceutical and life sciences companies that develop applications and/or provide testing services using our xMAP technology platforms. Some partners also distribute xMAP Systems to their customers. Our LTG sales and marketing strategy also includes generating recurring revenues from the sale of Luminex developed assays, microspheres and other consumables,
We continue to work with these strategic partners as the primary distribution channel for our xMAP Systems, and we will continue to pursue new partnerships focusing on partners with market presence in the key partner segments described below. Some of our strategic partners develop application-specific kits for use on our xMAP Systems that they, in turn, sell to their customers, thereby generating royalties for us. Certain strategic partners also perform testing services for third parties using our xMAP products, which also result in royalty revenue. We also contract with distributors to purchase and resell xMAP Systems and consumables in geographic or application-specific areas not covered by strategic partners.
We update our LTG listing regularly to reflect partner consolidations resulting from mergers and acquisitions, commercial sales inactivity, as well as termination or expiration of existing non-performing partner agreements. We also believe our strategic partners provide us with complementary capabilities in product development, regulatory expertise and sales and marketing. By leveraging our strategic partners’ assay development capabilities, customer relationships and distribution channels, we believe that we can continue to achieve measurable market penetration and product adoption. Our current partners are in various stages of development and commercialization of products that incorporate our technology.
We also serve as an original equipment manufacturer (OEM) for certain strategic partners who choose to sell components of the xMAP product line as an embedded system under their own branding and marketing efforts. Luminex and these partners have sold more than 17,900 xMAP-based instruments in laboratories worldwide as of December 31, 2020, some of which may be retired or otherwise not in use.
3. Flow Cytometry: the continued innovation of our proprietary image-based flow cytometry technology, and expansion of all of our platforms into existing and additional markets. Our flow cytometry sales and marketing strategy is to become a global leader in flow cytometry, competing in all markets with disruptive and differentiated solutions by expanding our position in the research markets, building our diagnostic capabilities and increasing content generation. We are pursuing this strategy by leveraging our pipeline of new product launches and expanding our positions in the pharma, academic, diagnostics and industrial markets, which we believe will allow us to grow our recurring revenue in service, research and clinical reagents, and clinical trial solutions and drive geographic expansion in both established and developing markets.
We sell the Amnis and Guava Flow Cytometry Systems through a direct sales channel in developed markets in North America, Europe, the Middle East, Africa and the Asia-Pacific region, and through distribution partners in emerging markets in Southeast Asia, Africa and Latin America. Our flow cytometry business has built healthy relationships with its customer base and has a reputation for quality customer support through its sales team and field application scientists, as well as technical service and instrument repair teams. We anticipate continuing to leverage these strengths to expand our installed base of instruments and concomitant recurring sales of reagents, software licenses and services.
Products
The table below briefly describes our key systems and technologies:
SYSTEMS TECHNOLOGIES
Luminex 100/200 xMAP Technology
FLEXMAP 3D xMAP Technology
MAGPIX xMAP Technology
ARIES and ARIES M1 xTAG and MultiCode Technologies
VERIGENE NanoGrid Technology
Amnis FlowSight
Amnis CCD-TDI Technology
Amnis ImageStream
Amnis CCD-TDI Technology
Amnis CellStream
Amnis CCD-TDI Technology
Guava easyCyte Guava Microcapillary Technology
Muse Cell Analyzer Guava Microcapillary Technology
Products
xMAP Products
Our xMAP products are based on an open architecture, multiplexing technology that combines existing biological testing techniques with illumination, advanced digital signal processing, detection and proprietary software. This technology is multi-analyte and multi-format, flexible and scalable and able to analyze both proteins and nucleic acids on a single platform, all while providing high throughput utilizing a process that is designed to be simple to use and cost-effective for customers compared to competitive techniques and technologies. These products can simultaneously perform up to 500 tests in a single well, permitting up to 96,000 tests to be detected in approximately one hour with only a small amount of sample. We have a full range of instruments built on this technology, leveraging proprietary optics, digital signal processors and software to automate data acquisition and analysis in real-time. Our products based on this technology are currently used within various segments of the life sciences industries, including the fields of drug discovery and development, and for clinical diagnostics, COVID-19 testing, bio-defense, food safety and biomedical research.
xMAP Instruments
Luminex 100/200. Luminex 100/200 Systems are compact analyzers that integrate fluidics, optics and digital signal processing to measure up to 100 analytes simultaneously in a single tube or well of a microtiter plate using only a small amount of sample. By combining lasers with digital signal processors and microcontrollers, these systems perform rapid, multi-analyte profiles under the control of a Windows-based personal computer and our proprietary software.
MAGPIX. The MAGPIX System is a versatile multiplexing analyzer capable of performing qualitative and quantitative analyses of proteins and nucleic acids in a variety of sample matrices. This system can measure up to 50 analytes in a single reaction volume, reducing sample input, reagents and labor, while simultaneously improving productivity. The MAGPIX System is based on an innovative detection mechanism that uses LEDs and a charge-coupled device (CCD) imaging system, rather than the lasers and detection mechanisms used in our FLEXMAP 3D and Luminex 100/200 instruments.
FLEXMAP 3D. The FLEXMAP 3D System is intended for use as a general laboratory instrument in the life sciences, diagnostics, and associated markets. This device can simultaneously measure up to 500 analytes from a single sample and offers increased speed and enhanced ease-of-use and serviceability. Like our Luminex 100/200 Systems, the FLEXMAP 3D System combines lasers with digital signal processors and microcontrollers and these systems perform rapid, multi-analyte profiles under the control of a Windows-based personal computer and our proprietary software.
xMAP Consumables
MicroPlex Microspheres. Our Luminex 100/200, FLEXMAP 3D and MAGPIX Systems use polystyrene microspheres that are approximately 5.6 microns in diameter. We dye the microspheres in sets with varying intensities of a red and a near infrared dye to achieve up to 100 distinct color sets. Each microsphere can be coupled with proteins, nucleic acids or other molecules to enable biological assays.
MagPlex Microspheres. Our MagPlex microspheres feature super-paramagnetic properties that make them ideal for running automated xMAP-based assays. We dye the microspheres in sets with varying intensities of a red and a near infrared dye to achieve up to 500 distinct color sets. These microspheres can be moved or held in place by a magnetic field. Many automated systems utilize magnetic properties to automate the performance of the assay. Automating sample testing using MagPlex microspheres on a robotic sample preparation system decreases hands-on technician time, improves precision and streamlines workflow.
xTAG Microspheres. Our xTAG microspheres are dyed microspheres that are linked to a set of 100 proprietary nucleic acid capture sequences providing a “universal array” for DNA and RNA work. They are designed for conducting genotyping and other nucleic acid-based experiments in the life sciences, pharmaceutical and clinical diagnostic markets. When used in conjunction with our Luminex systems, xTAG microspheres are designed to simplify the molecular assay development process and increase assay flexibility. xTAG microspheres may be used by customers to develop LDT assays and are used in Luminex’s xTAG assay kits.
SeroMAP Microspheres. Our SeroMAP microspheres represent 100 distinct sets of microspheres that are designed for specific protein-based serological applications. Certain Luminex partners use this product for enhanced sensitivity in serum-based assays.
Calibration and Control Microspheres. Calibration microspheres are microspheres of known fluorescent light intensities used to calibrate the settings for the classification and reporter channel for the Luminex systems. Control microspheres are microspheres that are used to verify the calibration and optical integrity for both the classification and reporter channels for the various systems.
xMAP Software
xPONENT. Our xPONENT Software is included in all of our xMAP instruments and is designed to enhance both ease-of-use and automation capabilities, expanding xMAP functionality in our core markets. The software suite incorporates important features, all designed to simplify laboratory workflow and increase productivity, including enhanced security (21 CFR Part 11 compliance and electronic signatures), integration capabilities that allow customers to transmit and receive data from Laboratory Information Systems (LIS/LIMS), integration with the most popular automated sample preparation systems, the ability to run magnetic bead applications and touchscreen capability. xPONENT is sold on new Luminex 100/200, FLEXMAP 3D, and MAGPIX Systems and is available as an upgrade to existing Luminex systems in the marketplace.
TDAS. Our TDAS Software is an analysis program designed to complement our xTAG Technology, which uses a proprietary universal tag system that allows for the development and optimization of nucleic acid assays. TDAS Software simplifies workflow and increases productivity by helping to accurately identify pathogens associated with infectious diseases and genetic mutations. TDAS Software produces non-subjective results, which can be viewed in the software, integrated with LIS, and exported or printed into reports.
xTAG Assays and Product Family
Our xTAG family of products includes infectious disease panels and genetic testing panels that utilize Luminex xMAP bead-based detection platforms in combination with proprietary molecular chemistries. xTAG infectious disease IVD products enable our laboratory end users to identify the causative agent for respiratory and gastrointestinal infections, which are major causes of illness and mortality globally. xTAG Assays for genetic testing include several IVD kits for cystic fibrosis (CF) genotyping and a number of pharmacogenetic assays that may be used to profile genetic mutations related to drug metabolism. NxTAG chemistry, a streamlined version of the xTAG chemistry, described above, includes assays for both respiratory and gastrointestinal infections. This product family includes our FDA-cleared and CE-marked NxTAG CoV Extended Panel, NxTAG Respiratory Pathogen Panel (RPP), xMAP SARS-CoV-2 Multi-Antigen IgG Assay, xTAG CYP2C19 Kit v3, xTAG CYP2D6 Kit v3, xTAG Cystic Fibrosis (CFTR) 39 Kit v2, xTAG Cystic Fibrosis (CFTR) 60 Kit v2, xTAG Cystic Fibrosis (CFTR) 71 Kit v2, xTAG Gastrointestinal Pathogen Panel (GPP), xTAG Respiratory Viral Panel (RVP), and xTAG Respiratory Viral Panel (RVP) FAST v2.
ARIES Products
The ARIES System, available in single-module or double-module configurations, is our sample-to-answer real-time PCR platform for our MultiCode-RTx technology, including In Vitro Diagnostic (IVD) assays. The ARIES System is used with specific assays to measure multiple analytes indicative of infectious disease. The ARIES System uses internal barcode scanning and other advanced features to minimize operator errors. Each independent module supports from one to six cassettes, allowing both short turn around testing (STAT) and batch testing. The ARIES System can run IVD, MultiCode Analyte Specific Reagents (ASRs), and LDTs using the ARIES Exo+ Ready Mix and extraction cassettes with a common Universal Assay Protocol. An integrated touchscreen computer eliminates the need for a separate computer, stand-alone keyboard and mouse, thus maximizing valuable bench space.
SYNCT. Our SYNCT data management software solution can compile data from multiple ARIES Systems, or multiple MAGPIX Systems (NxTAG-enabled), assisting laboratories to better leverage their data to decrease laboratory costs and improve patient care. In addition, SYNCT Standard Curve Analysis Software enables labs to create quantitative LDTs.
ARIES Assays and Product Family
ARIES Cassettes. ARIES Cassettes are self-contained assay consumables designed to run a fully automated, sample-to-answer molecular assay on the ARIES System. The cassettes make use of proprietary injection-molded parts, as well as MultiCode and other reagents, to perform automated extraction, purification, elution, amplification and analysis of nucleic acid testing from a variety of different sample types.
Our ARIES product family includes our FDA-cleared and CE-marked ARIES HSV 1&2 Assay, ARIES Flu A/B & RSV Assay, ARIES Group B Streptococcus Assay, ARIES Group A Strep Assay, ARIES Bordetella Assay, ARIES Norovirus Assay, ARIES C. difficile Assay, and ARIES MRSA Assay in 2019. In addition, we launched an EUA-cleared SARS-CoV-2 Assay in 2020.
VERIGENE Products
The VERIGENE System is a semi-automated, multiplex, molecular analysis system for the clinical diagnostics market that rapidly and accurately detects infectious pathogens and drug resistance markers. The VERIGENE System consists of: (i) VERIGENE Test Cartridges, which are single-use, self-contained test units, and (ii) VERIGENE instruments, including the VERIGENE Processor SP, which is a modular benchtop analyzer, that combines automated nucleic acid extraction, purification, amplification (if needed), and hybridization in each module, as well as the VERIGENE Reader, which manages sample information and reads results from processed cartridges. Tests that run on the VERIGENE System are primarily designed to identify infections in the bloodstream, respiratory tract, and gastrointestinal tract. Customers using this system will have the ability to select both individual and groups of targets on assays using Flex pricing. This approach to target selection allows customers to save money by only paying for the targets they wish to see, which will often align with healthcare standard of care guidelines, where applicable. If these results do not provide a conclusive diagnosis, additional targets that were tested for but not released can immediately be viewed for an incremental charge.
VERIGENE Assays and Product Family
VERIGENE Cartridges. VERIGENE test cartridges are single-use, self-contained test units comprised of (i) a reagent pack, which is a microfluidic cassette that contains all of the hybridization reagents needed for a single test that also captures the waste materials generated during test processing, and (ii) a substrate holder, which contains a glass slide that serves as a solid support for the microarray used to capture targeted nucleic acids. Each test cartridge is designed for multiplex analyses of one patient sample.
Our VERIGENE product family includes our FDA-cleared and CE-marked VERIGENE Bloodstream Infection tests, VERIGENE Gastrointestinal Infection tests, including the VERIGENE C. difficile Test and the VERIGENE Enteric Pathogens Test, and the VERIGENE Respiratory Pathogens Flex Test, as well as other VERIGENE next generation assays in development.
Amnis/Guava Products
Our Amnis and Guava products provide technology that powers flow-based detection systems. Amnis Systems are a family of imaging flow cytometry products for cell-based analysis. FlowSight and ImageStream imaging flow cytometers combine the speed and sensitivity of flow cytometry with the functional detail and spatial information of microscopy. The Guava portfolio of products, which are versatile, easy-to-use cytometry systems based on microcapillary fluidics technology, include the Muse Cell Analyzer, a simple, compact, and affordable system for absolute cell counting, viability, and basic cell health analyses, and the Guava easyCyte System, a versatile benchtop platform for additional, multi-dimensional cell health and biological assessments.
Amnis FlowSight Imaging Flow Cytometer. The FlowSight imaging flow cytometer provides high-sensitivity flow cytometry and imagery with up to twelve 20X multi-color images of every cell, including side scatter and brightfield, at up to 5,000 events per second. It is upgradeable to 4 lasers, offers automated sample loading for walk-away operations and is supported with image analysis software with fluorescence compensation and analysis wizards.
Amnis ImageStream Mark II Imaging Flow Cytometer. The ImageStream System is a benchtop, multispectral, imaging flow cytometer designed for the acquisition of up to 12 channels of cellular imagery at up to 60X magnification. By collecting large numbers of digital images per sample and providing a numerical representation of image-based features, the ImageStream System combines the per cell information content provided by standard microscopy with the statistical significance afforded by large sample sizes common to standard flow cytometry. With the ImageStream System, fluorescence intensity measurements are acquired as with a conventional flow cytometer; however, the best applications for the ImageStream System take advantage of the system’s imaging abilities to locate and quantify the distribution of signals on, in or between cells.
Amnis CellStream. The CellStream Flow Cytometer delivers high sensitivity and flexibility for cell and particle analysis. This compact system may be configured with up to seven lasers to adapt to a wide range of analytical requirements. With highly sensitive and configurable optics, researchers benefit from multiparameter detection capabilities, while maintaining the flexibility to tailor and expand the system according to their research needs and budget.
Guava easyCyte Benchtop Flow Cytometer. The Guava easyCyte line includes compact benchtop flow cytometer models that offer up to 3 lasers and 14 parameters with excellent sensitivity and optional high throughput auto-sampling capabilities. Guava easyCyte Systems use patented, microcapillary, laser-based technology capable of detecting mammalian and microbial cells, particles and beads. The instruments are supported by a line of 13 reagent FlowCellect Kits and elegant InCyte acquisition and analysis software.
Muse Cell Analyzer. The Muse Cell Analyzer is a simple, compact, easy-to-use benchtop device that uses patented miniaturized fluorescent detection and microcapillary technology to deliver accurate, precise and quantitative cell analysis. It is versatile enough to analyze both suspension and adherent cells 2-60 μm in diameter and includes a user-friendly touchscreen interface, intuitive software and optimized “Mix-and-Read” assays.
IDEAS. Our IDEAS image analysis software for our Amnis Flow Cytometers provides detailed analysis of intensity, location and co-location of probes. IDEAS offers powerful tools for high content, statistically robust analysis of images, as well as standard flow cytometry graphing tools and statistics for hundreds of morphological features in addition to intensity.
Customers
In 2020, top five customers accounted for 22% of our total revenues as compared to 30% in 2019 and approximately 43% in 2018. No other customer or partner accounted for more than 3% of our total revenues in 2020, 2019 and 2018.
International Operations
We currently ship products to a number of customers outside the United States, primarily including customers in Canada, Europe and the Asia-Pacific region. For the annual periods ended December 31, 2020, 2019 and 2018, foreign shipments to customers totaled $91.6 million, $82.3 million and $54.1 million, respectively, representing 22%, 25% and 17%, respectively, of our total revenues for such periods. We have foreign subsidiaries in Canada, the Netherlands, the United Kingdom, Germany, France the People’s Republic of China, Japan, and Hong Kong, which increase our international support, service and marketing capabilities. Sales to territories outside of the U.S. are primarily denominated in U.S. dollars. We believe that our activities in some countries outside the U.S. involve greater risk than our domestic business due to foreign economic conditions, exchange rate fluctuations, local commercial and economic policies and political uncertainties. See Note 16 to our Consolidated Financial Statements.
Customer Operations
Our Customer Operations Group provides technical support, field service and assistance to our customers, our distributors, our strategic partners and their customers. Most of our customer operations personnel have experience as biologists, biochemists or electrical engineers and have extensive experience in academic, industrial and commercial settings. Cross-training is a major focus, as is empowering group members to solve problems outside of their primary assignment.
Remote Support
Our Technical Support department assists users primarily through a toll-free hotline, internet interface and e-mail communications. We deliver “24/7” remote technical support with our staff based at our Austin, Northbrook and Toronto locations and from our European, Chinese and Japanese subsidiaries to better serve our customer base. Personnel assist our distributors, strategic partners and customers in inquiry and complaint management related to Luminex products, system implementation and development of their assays. A comprehensive software and database system is utilized to track customer interactions, follow trends and measure utilization. The information is categorized and presented to management for regular review.
Training
We offer comprehensive programs in basic system training, advanced assay development, instrument field service and technical support functions. A portion of our training material is web-based and available online. Customers have the option to receive training on-site at their location or locally, with our staff based at our Austin, Texas, Northbrook, Illinois, European, Chinese or Japanese offices.
Field Support
We currently have field service and field application personnel based across North America, Europe, China and Japan in areas of our more significant system concentration. In addition, several of our distributors and strategic partners provide their own field service and field application support. As we continue to expand our installed base, we believe a strong, reliable, efficient field support organization is crucial to maintaining a high level of customer satisfaction.
Research and Development
Our research and development groups work to develop next generation systems, chemistries, assays and software to provide new, innovative products to our customers. Our research and development expense for the years ended December 31, 2020, 2019 and 2018, was $53.7 million, $56.2 million and $47.2 million, respectively.
Our current research and development projects include:
•New platform and technology development
We are working on the development of the next generation, sample-to-answer, molecular diagnostic, automated VERIGENE II platform. This involves the final design and development of the instrument, consumables and software as well as the development of a menu of assays for this system. We currently expect to commercially launch the VERIGENE II System in 2021.
•New sample-to-answer menu development
We have a pipeline of new syndromic assays for use on the next generation VERIGENE II platform. These automated assays are primarily in the area of infectious disease testing.
•xMAP INTELLIFLEX system
Our Next-Generation xMAP system is nearing testing with partners and we expect will be ready for commercial launch in the first half of 2021. Among other activities, our partners will need to validate the backward capability of previously developed kits and plan their launches of new kits that will be able to take advantage of the increased sensitivity of this next generation xMAP System.
Manufacturing
We have approximately 150,000 square feet of leased manufacturing space, including space located at our principal executive offices in Austin, Texas (84,000 square feet), in Madison, Wisconsin (13,000 square feet), in Toronto, Canada (10,000 square feet), in Northbrook, Illinois (34,000 square feet) and in Seattle, Washington (10,000 square feet). In addition, we have signed a purchase agreement for the building in Northbrook, Illinois that is expected to close in the first quarter of 2021 and a lease agreement for an additional 50,000 square feet of manufacturing space in Austin, Texas to commence in the middle of 2021.
We initially certified our Quality Management System (QMS) to the ISO 9001:2000 standard and in 2010 updated our certification to ISO 9001:2008. ISO is an internationally recognized standard for quality management systems. Subsequent audits by the registrar have been and will continue to be carried out at regular intervals to ensure we are maintaining our system in compliance with ISO standards. Recertification is required every three years and we have been successfully recertified in each applicable year since obtaining our original ISO certification. Also, we have our QMS certified to the ISO 13485:2012 Quality Management Standard and the Canadian Medical Devices Regulation (CMDR). These standards include a special set of requirements specifically related to the supply of medical devices and related services. Additionally, we manufacture to current FDA “Good Manufacturing Practice” requirements and our QMS is implemented in accordance with FDA Quality System Regulations (21 CFR 820).
Supply Chain
We have historically purchased many of the components and raw materials used in our products from numerous suppliers worldwide. For reasons of quality assurance, sole source availability and cost-effectiveness, certain components and raw materials used in the manufacture of our products are available only from one supplier. We have worked closely with our suppliers to develop contingency plans to assure continuity of supply while maintaining high quality and reliability, and in some cases, we have established long-term supply contracts with our suppliers. Due to the high standards and FDA requirements applicable to the manufacturing of our products, we may not be able to quickly establish additional or replacement sources for certain components or materials. In the event that we are unable to obtain sufficient quantities of raw materials or components on commercially reasonable terms or in a timely manner, our ability to manufacture our products on a timely and cost-competitive basis may be compromised, which may have a material adverse effect on our business, financial condition and results of operations.
Instruments
Component suppliers and contract manufacturers provide certain components and component assemblies of our xMAP and ARIES Systems. The remaining assembly and manufacturing of our systems are performed at our facilities in Austin, Texas and Northbrook, Illinois. The quality control and quality assurance protocols are all performed at our facilities. Parts and component assemblies that comprise our technology systems are obtained from a number of sources. We have identified alternate sources of supply for several of our strategic parts and component assemblies. Additionally, we have entered into supply agreements with most of our suppliers of strategic parts and component subassemblies to help ensure component availability and flexible purchasing terms with respect to the purchase of such components. As of December 31, 2020, approximately 17,900 Luminex multiplexing analyzers have been shipped since 1999, some of which may be retired or otherwise not in use.
Microspheres
We procure our undyed, standard MicroPlex microspheres and manufacture our magnetic MagPlex carboxylated polystyrene microspheres. We synthesize our dyes and manufacture our dyed microspheres using a proprietary method in our Austin, Texas manufacturing facility in large lots. We dye the microspheres with varying intensities of red and near infrared dyes to produce our distinctly colored microsphere sets. We currently purchase the standard polystyrene microspheres from one supplier, in accordance with a supply agreement. We believe this agreement will help ensure microsphere availability and flexible purchasing terms with respect to the purchase of such microspheres. While we believe the microspheres will continue to be available from our supplier in quantities sufficient to meet our production needs, we believe our in-house manufacturing capabilities along with other potential suppliers would provide sufficient microspheres for us if given adequate lead-time to manufacture the microspheres to our specifications.
Assays and Reagents
Component suppliers and contract manufacturers produce certain components of our developed reagents. The remaining assembly and manufacturing of our on-market kits are performed at one of our facilities in Austin, Texas, Toronto, Canada, Madison, Wisconsin, Northbrook, Illinois, or Seattle, Washington. The quality control and quality assurance protocols are all performed at our facilities. Reagents, consumables and other raw material that comprise our kits are obtained from a number of sources.
In addition to developed assay kits, increasing regulatory requirements coupled with rising demand for new clinical applications are driving demand for laboratory developed tests. Our proprietary technologies and platforms offer a unique combination of flexibility and throughput, as our systems’ open architecture, software and standard protocols allow our customers the ability to use our proprietary reagents to validate and verify a new test, while being able to utilize the same system to handle increasing volumes once the assay is commercialized.
Competition
We design our xMAP Systems and consumables for use by customers across the various segments of the life sciences, pharmaceutical and clinical diagnostic industries. Our xTAG, NxTAG, MultiCode, ARIES and VERIGENE products are developed specifically for the molecular diagnostic segment. Our competition includes companies marketing conventional testing products based on established technologies such as ELISA, real-time PCR, mass spectrometry, gene sequencing, biochips, arrays and flow-based technologies, as well as next generation sequencing and companies developing their own advanced testing technologies.
The pharmaceutical industry is a large market for the genomic, protein and high-throughput screening applications supported by xMAP Technology. In each application area, Luminex faces a different set of competitors. Genomic and protein testing can be performed by products available from Affymetrix, Inc. (a Thermo Fisher Scientific Inc. brand), Life Technologies Corporation (a Thermo Fisher Scientific Inc. brand), Becton, Dickinson and Company, Illumina, Inc., Qiagen N.V., Meso Scale Discovery (a division of Meso Scale Diagnostics LLC), Quanterix Corporation, PerkinElmer, Inc., Bio-Rad Laboratories, Inc., and others.
Our diagnostic market competitors include, among others, Abbott Laboratories, Life Technologies Corporation (a Thermo Fisher Scientific Inc. brand), BioFire Diagnostics, LLC (a bioMérieux company), Cepheid (a Danaher Corporation company), GenMark Dx, Roche Diagnostics, Siemens Medical Solutions, Hologic, Inc., Alere (now part of Abbott Laboratories), Quidel Corporation, Focus Diagnostics (DiaSorin S.p.A), T2 Biosystems, Inc., Accelerate Diagnostics, Inc., Meridian Bioscience, Inc., and Illumina, Inc. Some of these companies have technologies that can run a variety of established assays. In addition, certain of these companies offer integrated systems and laboratory automation that are designed to meet the need for improved work efficiencies in the clinical laboratory.
Competition within the academic biomedical research market is highly fragmented. There are hundreds of suppliers to this market including, among others, Amersham Pharmacia Biotech, a part of GE Healthcare, Life Technologies Corporation (a Thermo Fisher Scientific Inc. brand) and Becton, Dickinson and Company.
Flow cytometry is a well-established field that has grown into a multi-billion dollar market, including research and clinical systems and applications. Competition for our flow cytometry systems is expanding as established competitors consolidate their positions and new competitors and technologies enter and grow within the field. BD Biosciences and Beckman Coulter are long-time leaders in the field and hold the majority of the market share. Mid-term competitors include Miltenyi Biotec, Bio-Rad, Sony Biotechnology, and Attune (part of ThermoFisher Scientific). Newer competitors include ACEA Biosciences, Cytek Biosciences. Our imaging flow cytometry systems cross over into both imaging and microscopy areas and face a number of competitors in these fields, as well as new competitors developing imaging-in-flow systems.
Intellectual Property
To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality agreements. We have filed for registration or obtained registration for trademarks used with our products and key technologies.
We have implemented a strategy designed to optimize our intellectual property rights. For core intellectual property, we are pursuing patent coverage in the United States and those foreign countries that correspond to the majority of our current and anticipated customer base. We currently own 821 issued patents worldwide directed to various aspects and applications of our products and technology, including 237 issued patents in the United States. Other countries in which we have issued patents directed to various aspects and applications of our products and technology include, among others, France, Germany, the United Kingdom, Australia, Japan, the Netherlands, Canada, Hong Kong, China and South Korea. Our patent portfolio also includes 110 pending patent applications in the United States and other foreign jurisdictions. We believe our patents and pending patent applications provide, or will provide, protection for systems and technologies that allow real-time multiplexed analytical techniques for the detection and quantification of many analytes from a single sample. We also hold patents covering the fluorescently dyed, magnetically responsive microspheres. In addition, multiple granted patents and pending applications describe aspects of MultiCode technology, xTAG technology, nanoparticle technology, the ARIES and VERIGENE Systems, NxTAG technology, imaging flow cytometry technology and capillary flow cytometry technology.
The source code for our proprietary software is protected as a trade secret and/or as a copyrighted work. Aspects of the software also are covered by issued patents.
We also rely on trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with strategic partners, third parties, employees and consultants. Our employees and third-party consultants also sign agreements requiring that they assign to us their interests in inventions and original works of expression and any corresponding patents and copyrights arising from their work for us. See Item 1A, Risk Factors - “The property rights we rely upon to protect the technologies underlying our products may not be adequate to maintain market exclusivity. Inadequate intellectual property protection could enable third parties to exploit our technologies or use very similar technologies and could reduce our ability to distinguish our products in the market.”
Government Regulation
Our products are generally considered medical devices and are subject to regulation by numerous government agencies, including the FDA and similar agencies outside the United States. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of our medical devices. Our business is also affected by the United States and foreign patient privacy laws, cost containment initiatives and environmental health and safety laws and regulations. The primary laws and regulations that are particularly relevant to our business are described below.
Food and Drug Administration
In general, the products that we manufacture are considered to be medical devices and are subject to regulation in the United States by the FDA. We also manufacture versions of the Luminex instruments for use with diagnostic assay kits that are available through our strategic partners. For FDA purposes, Luminex systems are considered components of our partners’ kit products. Kits manufactured by our strategic partners used in conjunction with our technology may be subject to clearance or approval requirements and other FDA regulations.
The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification, or 510(k), and receive clearance from the FDA, which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a premarket approval application (PMA) is submitted to and approved by the FDA.
510(k) Clearance Pathway
To obtain 510(k) clearance, a sponsor must submit to the FDA a premarket notification demonstrating that the device is substantially equivalent (SE) to a device legally marketed in the U.S. for which a PMA was not required. The FDA is supposed to make a SE determination within 90 days of FDA’s receipt of the 510(k), but it often takes longer if the FDA requests additional information. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or possibly a pre-market approval.
Emergency Use Authorization
In emergency situations, such as a pandemic, the FDA has the authority to allow unapproved medical products or unapproved uses of cleared or approved medical products to be used in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by chemical, biological, radiological or nuclear warfare threat agents when there are no adequate, approved and available alternatives.
Under this authority, the FDA may issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Evidence of effectiveness includes medical devices that “may be effective” to prevent, diagnose or treat the disease or condition identified in a declaration of emergency issued by the Secretary of the Department of Health and Human Services, or HHS. The “may be effective” standard for EUAs requires a lower level of evidence than the “effectiveness” standard that the FDA uses for product clearances or approvals in non-emergency situations. The FDA assesses the potential effectiveness of a possible EUA product on a case-by-case basis using a risk-benefit analysis. In determining whether the known and potential benefits of the product outweigh the known and potential risks, the FDA examines the totality of the scientific evidence to make an overall risk-benefit determination. Such evidence, which could arise from a variety of sources, may include (but is not limited to) results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence.
Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product.
The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety.
On January 31, 2020, the Secretary of HHS issued a declaration of a public health emergency related to COVID-19. On February 4, 2020, HHS determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 24, 2020, that circumstances exist to justify the authorization of emergency use of medical devices, including alternative products used as medical devices, during the COVID-19 pandemic, subject to the terms of any authorization as issued by the FDA. On February 29, 2020, the FDA issued an immediately in effect guidance with policy specific to development of in vitro diagnostic tests during the COVID-19 public health emergency. This guidance was updated on March 16, 2020, May 4, 2020 and May 11, 2020.
Clinical Trials
Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption application (IDE) and obtains approval of the IDE from the FDA. These clinical trials are also subject to the review, approval and oversight of an institutional review board (IRB) at each clinical trial site. The clinical trials must be conducted in accordance with the FDA’s IDE regulations and good clinical practices. A clinical trial may be suspended by the FDA, the sponsor or an IRB at its institution at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device to the satisfaction of the FDA, or may be equivocal or otherwise not be sufficient to obtain approval of a device.
FDA Enforcement
After a medical device is placed on the market, numerous regulatory requirements apply. These include among other things:
•establishment registration and device listing;
•the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
•labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities;
•medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur;
•corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the Federal Food, Drug and Cosmetic Act (FDC Act) that may present a risk to health; and
•post-market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions, including but not limited to, warning letters; fines, injunctions, consent decrees and civil penalties; recall or seizure of the device; operating restrictions, partial suspension or total shutdown of production; refusal to grant 510(k) clearance or PMA approvals of new devices; withdrawal of 510(k) clearance or PMA approvals; and civil or criminal prosecution.
On June 26, 2020, the Company received a warning letter (Warning Letter) from the FDA relating to the operations of the Company’s Austin, Texas and Northbrook, Illinois facilities (Facilities) and the Company’s VERIGENE Processor SP System. The Warning Letter resulted from inspections held at the Facilities from February 10, 2020 to February 14, 2020. The company submitted a comprehensive response to each of these inspections. The subsequently issued Warning Letter primarily relates to the Company’s VERIGENE SP instrument and its hybridization heater in connection with certain FDA requirements under the Quality System Regulation (21 C.F.R. Part 820) and the regulation of Medical Device Corrections and Removals (21 C.F.R. Part 806).
The Company timely submitted a response and corrective action plan to the FDA regarding the issues raised in the Warning Letter, as requested by the FDA, and continues working diligently and expeditiously to resolve the issues raised by the FDA. The Warning Letter did not restrict the manufacture, production or shipment of any of the Company’s products, nor require the withdrawal of any product from the marketplace. The Company believes it has taken, and is continuing to take, appropriate measures to address the items identified by the FDA with respect to the VERIGENE SP instrument and its hybridization heater, and the Company included communication of these measures in its response to the Warning Letter. Specifically, we recalled affected products from the field and replaced them with new units. Additionally, we are executing a field action to re-calibrate all VERIGENE SP instruments deployed in the field with in-house built and verified temperature verification fixtures by March 18, 2021. In addition, the Company continues to evaluate what further corrective or preventive actions may be required.
The Company has responded to the FDA’s concerns raised in the Warning Letter but cannot give assurances that the FDA will be satisfied with its response to the Warning Letter or that such actions will sufficiently resolve the issues identified in the Warning Letter. Failure to promptly and fully address the issues raised in the Warning Letter to the FDA’s satisfaction or to comply with U.S. medical device regulatory requirements in general could result in further regulatory and enforcement actions being initiated by the FDA. These actions could result in, among other things, product recalls, product seizures, injunctions, civil monetary penalties, further delays in obtaining marketing authorization for products, an impact on federal contracts, limitations on our ability to export products and criminal enforcement actions. Any such actions could disrupt our ongoing business and operations and potentially have a material adverse effect on our business, financial condition and results of operations.
Research Use Only Products
Some of our products are currently intended for research use only (RUO) applications, although our customers may use our products to develop their own products that are separately subject to regulation by the FDA. Although most products intended for RUO are not currently subject to clearance or approval by the FDA, RUO products fall under the FDA’s jurisdiction if they are used for clinical rather than research purposes. Consequently, these products are labeled “For Research Use Only.”
On November 25, 2013, the FDA issued Final Guidance for Industry and Food and Drug Administration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only,” (the RUO/IUO Guidance). The purpose of an FDA guidance document is to provide the FDA’s current thinking on when IVD products are properly labeled for RUO or for Investigational Use Only (IUO), but as with all FDA guidance documents, this guidance does not establish legally enforceable responsibilities and should be viewed as recommendations unless specific regulatory or statutory requirements are cited. The RUO/IUO Guidance explains that the FDA will review the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including a labeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarket approval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be used for clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance in clinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinical laboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling. Consequently, these Luminex products are labeled “For Research Use Only” and meet the intent of the RUO/IUO Guidance.
Clinical Laboratory Improvement Amendments of 1988
Laboratories that purchase certain of our products are subject to extensive regulation under the Clinical Laboratory Improvement Amendments of 1988 (CLIA), which applies to all clinical laboratory testing performed on humans in the United States (with the exception of clinical trials and basic research). A clinical laboratory is defined by CLIA as any facility that performs laboratory testing on specimens obtained from humans for the purpose of providing information for health assessment or for the diagnosis, prevention, or treatment of disease. CLIA requires laboratories to meet specified standards in areas such as personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. Certification through the CLIA program is generally a prerequisite to be eligible to bill state and federal health care programs, as well as many private insurers, for laboratory testing services. As a condition of CLIA certification, laboratories are subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by the Centers for Medicare & Medicaid Services (CMS), a CMS agent (typically a state agency), or a CMS-approved accreditation organization. High complexity, CLIA-certified laboratories frequently develop testing procedures to provide diagnostic results to customers.
These tests have been traditionally offered by nearly all complex laboratories for the last few decades as LDTs, which are subject to CMS oversight through its enforcement of CLIA. The FDA also has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by high complexity laboratories, and has not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it had decided to exercise regulatory authority over these LDTs, and that it planned to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it would be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final guidance at that time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach. On January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LDTs, rather than the FDA addressing the issue through administrative proposals. Several legislative proposals have been described in separate bills (including, for example, the Diagnostic Accuracy and Innovation Act (DAIA) in 2017 and the Verifying Accurate, Leading-edge IVCT Development (VALID) Act in 2018), but none of these legislative approaches have been enacted. We cannot predict the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change.
Radiological Health Regulations
Certain of our instruments use lasers to detect assay results. Therefore, we are required to ensure that these products comply with FDA regulations pertaining to the performance of laser products. The Radiation Control for Health and Safety Act, administered by the FDA, imposes performance standards and record keeping, reporting, product testing and product labeling requirements for devices that emit radiation. These regulations are intended to ensure the safety of laser products by establishing standards to prevent exposure to excessive levels of laser radiation. There can be no assurance that the FDA will agree with our interpretation and implementation of these regulations.
Foreign Jurisdictions
Our products are also subject to certification or approval and regulation by foreign regulatory, safety agencies and notified bodies. For example, the EU has adopted the In Vitro Diagnostic Regulation (IVDR), which is scheduled to go into effect on May 26, 2022. This new regulation will impose stricter requirements for the marketing and sale of in vitro diagnostic medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. As of now, manufacturers of currently approved in vitro diagnostic medical devices will have until May 26, 2022 to meet the IVDR. Complying with the requirements of this regulation may require us to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements.
Medical device laws and regulations are also in effect in many countries outside of the United States, ranging from comprehensive pre-approval or pre-certification requirements for medical products, to simpler requests for product data or certification. The number and scope of these requirements is increasing. There can be no assurance that we, and our strategic partners, will be able to obtain any approvals that may be required to market xMAP or other technology products outside the United States. In addition, we may incur significant initial and/or ongoing costs in obtaining or maintaining our foreign regulatory approvals or certifications. Further, the export by us of products that have not yet been cleared for domestic commercial distribution is subject to FDA and other export requirements and/or restrictions.
We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. A failure to comply with these regulations could result in suspension of these contracts, or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government contracts and programs.
We produce CE marked products, which are subject to a number of different EU Directives, including, but not limited to, the In Vitro Diagnostic Medical Devices Directive 98/79/EC (IVDD). CE marking of our products is currently by self-assessment based on the intended uses of our products. There is currently no need for intervention in the assessment process by a notified body. A product that is not CE marked is non-compliant with applicable EU rules. Enforcement is ensured through market surveillance by the competent authorities of the EEA Member States. Imported products into the EU are checked for compliance at customs offices.
EU Regulation of Medical Devices
As a general rule, demonstration of conformity of medical devices and their manufacturers with the Essential Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use and that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can be obtained from results of domestic and foreign clinical trials, in vivo efficacy data from animal models, in vitro data, as well as the quality and quantity of the available evidence. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These may include the requirement of prior authorization by the Competent Authorities of the country in which the study takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can be expensive and time-consuming.
On May 26, 2021, the current EU legislation applicable to medical devices is scheduled to be replaced by the Medical Device Regulation (Regulation (EU) 2017/745) (MDR).
EU Regulation of In Vitro Diagnostic Medical Devices
In the EEA, in vitro diagnostic medical devices (IVDs) are regulated under the In Vitro Diagnostic Medical Devices Directive 98/79/EC (the IVDD). IVD manufacturers are required to comply with the Essential Requirements laid down in Annex I to the IVDD. Compliance with these requirements entitles manufacturers to affix the CE mark on products, without which they cannot be placed on the EU market. To demonstrate compliance with the Essential Requirements laid down in Annex I to the IVDD and obtain the right to affix the CE mark, IVD manufacturers must undergo a conformity assessment procedure, which varies according to the type of IVDs. The IVDD groups IVDs into four categories based on the risks associated with relative dangers to public health and / or patient treatment by an IVD failing to perform as intended:
•General IVDs;
•IVDs for self-testing;
•IVDs falling within the scope of Annex II, List A;
•IVDs falling within the scope of Annex II, List B.
Following determination of the appropriate category for an IVD, manufacturers are required to follow the related conformity assessment procedures laid down in Article 9 of the IVDD.
For general IVDs, a self-assessment process in accordance with Annex III of the IVDD and a related Declaration of Conformity by the manufacturer prior to affixing the CE mark is sufficient. In the Declaration of Conformity, the manufacturer certifies that its product complies with the Essential Requirements provided for in Annex I to the IVDD.
For IVDs for self-testing and those falling within List A or B of Annex II to the IVD, a notified body must undertake an assessment of the conformity of the manufacturer and/or the device with the applicable provisions of the IVDD.
The notified body will commonly audit and examine a product's Technical File and the quality management system for the manufacture, design, and final inspection of a medical device before issuing a CE Certificate of Conformity demonstrating compliance with the requirements of the IVDD. Following the issuance of a CE Certificate of Conformity, manufacturers can draw up the Declaration of Conformity and affix the CE mark to the products covered by the CE Certificate of Conformity and the Declaration of Conformity.
CE marking of our products is currently by self-assessment, not issued by a third party, based on the intended uses of our products. The involvement of a notified body during the conformity assessment procedure is not, therefore, currently required. This situation may, however, change with the new Regulation on In Vitro Diagnostic Medical Devices (IVDR), which are scheduled to go into effect May 26, 2022. The Regulation, which will replace the previous IVDD, will substantially impact IVD manufacturers.
There can be no assurance that the Competent Authorities of the EEA Member States will agree with our interpretation and implementation of these regulations as it pertains to classification of our products. The failure by us or our strategic partners to comply with the IVDD could have a material adverse effect on our business.
Regulation of our products in China
The State Food and Drug Administration, P.R. China (SFDA), is the government regulation authority in charge of safety management of drug, food, health food and cosmetics for the People’s Republic of China. The SFDA issues certificates that are required for registration and approval to import our products into China. Certificates are also subject to periodic recertification requirements. We have received certificates for the “Luminex System,” which combines the Luminex 100 and Luminex 200 into one product, and for our MAGPIX System.
Failure by us, or our strategic partners, to comply with applicable current federal, state and foreign medical product laws and regulations could have a material adverse effect on our business. Federal, state and foreign regulations regarding the manufacture and sale of medical devices and components of such devices are continually subject to future changes. We cannot predict what impact, if any, such changes might have on our business, but any such changes could have a material impact.
WEEE
Directive 2012/19/EU on Waste Electrical and Electronic Equipment (WEEE Directive) outlines the responsibility for the disposal of waste electrical and electronic equipment. Compliance with the WEEE Directive is placed with the manufacturers of such equipment. Those manufacturers are required to establish an infrastructure for collecting WEEE, in such a way that users of electrical and electronic equipment from private households should have the ability of returning WEEE at least free of charge. All Luminex-manufactured equipment is in compliance with this directive. Since August 13, 2005, we have been in compliance with the requirements regarding the labeling and disposal of our products containing electronic devices in each of the EEA Member States where our regulated products are distributed.
RoHS
Directive 2011/65/EU on the restriction of the use of certain hazardous substances in electrical and electronic equipment (RoHS Directive) restricts the placing on the EU market of electrical and electronic equipment (EEE) containing specific hazardous substances in quantities above the maximum concentrations specified in Annex II to the RoHS Directive. Restricted substances include lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE). Maximum concentration levels have also been set for Bis(2-ethylhexyl) phthalate (DEHP), Butyl benzyl phthalate (BBP), Dibutyl phthalate (DBP), Diisobutyl phthalate (DIBP) following Commission Delegated Directive (EU) 2015/863 of 31 March 2015 amending Annex II to Directive 2011/65/EU as regards the list of restricted substances The restriction of DEHP, BBP, DBP and DIBP will be applicable to in vitro medical devices from July 22, 2021.
The Directive directly affects manufacturers, importers and distributors of EEE placing their products on the EEA market. The Directive applies to EEE falling within the categories set out in Annex I to the RoHS Directive, including medical devices and IVDs. Manufacturers of EEE are required to comply with the requirements set out in Article 4 of the RoHS. Article 4 of the RoHS Directive restricts the presence of substances referred to in Annex II to the RoHS Directive above the maximum concentrations detailed for each substance in Annex II to the RoHS Directive in EEE. Exemptions for applications are provided in Annex III to the RoHS Directive. Further exemptions for specific applications to medical devices and monitoring and control instruments are set out in Annex IV to the RoHS Directive.
In the EEA, EEE manufacturers must comply with the requirements of Article 4 of the RoHS Directive. Compliance with these requirements entitles manufacturers to affix the CE mark on products, without which they cannot be placed on the EU market. To demonstrate compliance with the requirements of Article 4 of the RoHS Directive and obtain the right to affix the CE mark on products, manufacturers must undergo a conformity assessment procedure. For EEE, a self-assessment process in accordance with module A of Annex II to Decision No 768/2008/EC and a related Declaration of Conformity by the manufacturer prior to affixing the CE mark is sufficient. In the Declaration of Conformity, the manufacturer certifies that its product complies with the requirements of Article 4 of the RoHS Directive.
If the EEE also falls under other EU legislation requiring the application of a conformity assessment procedure which is at least as stringent, compliance with the requirements of Article 4 of the RoHS Directive may be demonstrated within the context of that procedure and a single technical documentation may be drawn up.
Environmental
We are subject to federal, state and local laws and regulations relating to the protection of human health and the environment. In the course of our business, we are involved in the handling, storage and disposal of certain chemicals and biohazards. The laws and regulations applicable to our operations include provisions that regulate the discharge of materials into the environment. Some of these environmental laws and regulations impose “strict liability,” rendering a party liable without regard to negligence or fault on the part of such party. Such environmental laws and regulations may expose us to liability for environmental contamination, including remediation costs, natural resource damages and other damages as a result of the conduct of, or conditions caused by, us or others or for acts that were in compliance with all applicable laws at the time such acts were performed. In addition, where contamination may be present, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs. Although it is our policy to use generally accepted operating and disposal practices in accordance with applicable environmental laws and regulations, hazardous substances or wastes may have been disposed or released on, under or from properties owned, leased or operated by us or on, under or from other locations where such substances or wastes have been taken for disposal. These properties may be subject to investigation, remediation and monitoring requirements under federal, state and local environmental laws and regulations. We believe that our operations are in substantial compliance with applicable environmental laws and regulations. However, failure to comply with these environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties or other liabilities. We do not believe that we have been required to expend material amounts in connection with our efforts to comply with environmental requirements or that compliance with such requirements will have a material adverse effect upon our capital expenditures, results of operations or competitive position. Because the requirements imposed by such laws and regulations may frequently change and new environmental laws and regulations may be adopted, we are unable to predict the cost of compliance with such requirements in the future, or the effect of such laws on our capital expenditures, results of operations or competitive position. Moreover, the modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations or the adoption of new environmental laws or regulations may also negatively impact our strategic partners, which in turn could have a material adverse effect on us and other similarly situated component companies.
Other Government Regulations
Our operations in the United States are subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the Eliminating Kickbacks in Recovery Act of 2018, and state and federal marketing compliance laws. These laws may impact our operations directly or indirectly through our customers and may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to or impacted by patient and consumer privacy regulation by both the federal government and the states in which we conduct our business. We are also subject to statutes in foreign jurisdictions that prohibit commercial bribery and certain activities with customers or potential customers. The laws that may affect our ability to operate include the following foreign laws, federal laws and their counterparts at the state level in addition to various implementing regulations:
•the federal Anti-Kickback Statute and state anti-kickback prohibitions;
•the federal physician self-referral prohibition, commonly known as the Stark Law, and state equivalents;
•the federal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing privacy, security and breach notification regulations, and similar state laws;
•the Civil Monetary Penalties Law and related exclusion provisions;
•the federal False Claims Act and state equivalents;
•the U.K. Bribery Act of 2010;
•the Foreign Corrupt Practices Act, which applies to our international activities; and
•the Physician Payment Sunshine Act.
The legislative and regulatory landscape for privacy and data security continues to evolve. There has been increased attention to privacy and data security issues that could potentially affect our business, including the EU General Data Protection Regulation (GDPR), which entered into effect on May 25, 2018 and imposes penalties up to 4% of annual global turnover. In addition, laws and regulations enacted in the United States, Europe, Asia and Latin America, including the new California Consumer Privacy Act of 2018, which went into effect January 1, 2020, increases potential enforcement and litigation activity.
In the event we enroll subjects in our ongoing or future clinical investigations in the EEA, we may be subject to additional privacy restrictions, including restrictions relating to the collection, use, storage, transfer, and other processing of personal data, including personal health data, regarding individuals in the European Economic Area as governed by the General Data Protection Regulation, or GDPR. The GDPR imposes several requirements on companies that process personal data, strict rules on the transfer of personal data out of the European Economic Area, including to the U.S and fines and penalties for failure to comply with the requirements of the GDPR and the related national data protection laws of the EU Member States. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. The obligations under the GDPR may be onerous and adversely affect our business, financial condition, results of operations and prospects. Compliance with the GDPR will be a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with any European activities. Furthermore, the United Kingdom’s exit of the EU, often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. In particular, it is unclear how data transfers to and from the United Kingdom will be regulated.
Because of the remote work policies we implemented due to the COVID-19 pandemic, information that is normally protected, including company confidential information, may be less secure. Cybersecurity and data security threats continue to evolve and raise the risk of an incident that could affect our operations or compromise our business information or sensitive personal information, including health data.
We may also need to collect more extensive health-related information from our employees to manage our workforce. If we or our third-party partners fail to comply or are alleged to have failed to comply with applicable data protection and privacy laws and regulations, and related employment rules, or if we were to experience a data breach involving personal information, we could be subject to government enforcement actions or private lawsuits.
In addition, our business could be adversely impacted if our ability to transfer personal data outside of the EEA or Switzerland is restricted, which could adversely impact our operating results. For example, in July 2020, the Court of Justice of the European Union, or the Court of Justice, declared the Privacy Shield Decision (Decision 2018/1250) invalid, which could adversely impact our ability to transfer personal data from the EU to the U.S. The Court of Justice further ruled that in order to transfer data outside of the EU, under the existing mechanism known as the Standard Contractual Clauses, or SCCs, the importing country’s level of protection must be adequate.
On September 8, 2020, the Federal Data Protection and Information Commissioner, or FDPIC, of Switzerland issued an opinion concluding that the Swiss-U.S. Privacy Shield Framework does not provide an adequate level of protection for data transfers from Switzerland to the United States. The FDPIC also found that SCCs may still be legally adequate at an individual level, provided that they can pass a risk assessment conducted by the FDPIC. If the level of protection in the U.S. or any other importing country is called into question under the SCCs, this could further impact our ability to transfer data outside of the EU or Switzerland.
Health Care Reform
Over the last decade, the U.S. Congress and certain state legislatures have introduced and passed a large number of laws and regulations designed to make major changes in the healthcare system, including changes intended to increase access to health insurance. The most prominent of these efforts, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (Affordable Care Act), has resulted in extensive changes across the healthcare system and affects how healthcare services are covered, delivered and reimbursed. However, there is substantial uncertainty regarding the future of the Affordable Care Act. The law has been subject to legislative and regulatory changes and court challenges, and certain members of Congress have expressed their intent to repeal or make significant changes to the Affordable Care Act, its implementation or its interpretation. Effective January 2019, Congress eliminated the financial penalty associated with the individual mandate to maintain health insurance coverage. As a result of this change, a federal court in Texas ruled that the individual mandate was unconstitutional, and determined that the rest of the law was, therefore, invalid. In December 2019, the Fifth Circuit Court of Appeals upheld this decision with respect to the individual mandate, but remanded for further consideration of how this affects the rest of the law. The law remains in place pending appeal. It is possible that the Affordable Care Act, uncertainty regarding its repeal, the ultimate outcome and impact of court challenges, significant changes to the law or other health reform efforts, such as single-payor proposals, will adversely affect our customers and strategic partners, which could cause them to reduce or delay the purchase of our systems or to demand reduced fees.
Human Capital Management
Our People
We believe that our talented workforce and culture of collaboration is one of our key strengths and that our continued success is built on the empowerment of our employees to develop and deliver reliable products for the diagnostic and life science industries we serve. As a global company in a highly competitive industry, we have designed our human capital strategy, including our employee compensation programs, to attract, develop, engage and retain talented employees who will allow us to continue to deliver on our business strategy.
As of December 31, 2020, we employed approximately 1,325 team members in 18 countries. 1,058 of our team members are employed in the United States and the remaining 267 are employed in foreign countries, primarily in Canada, China, Japan, The Netherlands, Germany and the United Kingdom. Nearly 90% of our team members work full time, while approximately 7% are limited assignment team members who work primarily in our manufacturing facilities. Less than 5% are part-time workers. In 2020 we classified less than 5% of our turnover as “regrettable,” which is the classification term we use generally to describe an employee who voluntarily resigns without any associated disciplinary or performance issues pending. None of our team members in the United States are subject to collective bargaining agreements.
Culture of Inclusion
Creating a culture where all colleagues feel supported and valued is paramount to our corporate values. We encourage all of our team members to bring their entire self to Luminex and to feel valued for the distinct contributions they bring to the growth of our business. As a global company, we embrace diversity and collaboration in our workforce and in how we operate. Our talent strategy is focused on attracting the best diverse talent, as well as developing and rewarding our team members' performance to increase retention and performance. We are an affirmative action employer and in addition to our focus on diversity, we prioritize the hiring of our veterans and seek out ways to provide opportunities for our disabled team members. Our recruiters are trained in diversity sourcing strategies and partner with external organizations that develop and supply diverse talent. As of December 31, 2020, approximately 40% of our workforce self-identified as female and approximately 35% of our workforce self-identified as racial minorities. The average age of our team members is forty-two and 21% of our workforce are managers.
In addition to our focus in hiring, we seek to foster a diverse and inclusive workplace that encourages engagement and development of our team members and drives retention. We provide diversity and inclusion training for leaders across our organization and utilize Employee Resource Groups (“ERG”) programs, which are staffed by volunteer team members with diverse backgrounds, experiences, or characteristics who share a common interest in professional development, improving corporate culture and delivering sustained business results.
We currently have four ERGs:
1.xTreme Team, which promotes and organizes events to keep all team members engaged with Luminex and keep it a fun environment where employees want to be part of a great team;
2.Women@Luminex, which focuses on the growth and development of our female team members by providing educational opportunities, mentoring programs and other activities to provide growth and development of our talented women and to encourage community development for women and girls to choose a career in life sciences;
3.Diversity Council, which embraces the diversity and inclusion of our team members, customers, partners and stakeholders, including their unique backgrounds, experiences, thoughts and talents; and
4.Community Involvement Committee, which promotes our commitment to corporate social responsibility and improving the world for current and future generations, as well as our collective values rooted in trust, respect, innovation and execution.
We believe that our rich culture of diversity and inclusion and our continuous focus on developing and training our global workforce, enable us to create, develop and fully leverage the strengths of our workforce to exceed customer expectations.
Compensation
The primary objective of our compensation programs, which we design with oversight from senior management and the compensation committee of our board of directors, as appropriate, is to provide incentives that attract, retain, motivate and reward superior performance by team members who must perform in a highly competitive and technologically challenging environment. The compensation programs for our team members align with the compensation programs for our executives, which the compensation committee of our board of directors reviews annually. We seek to identify top talent and then provide incentives for these talented team members to grow their careers with us. We review total compensation and benefits with reference to both external comparisons and internal comparisons and believe that our compensation programs support our corporate strategic priorities and align our team members’ economic interests with those of our stockholders. We base annual changes in compensation on our overall performance, as well as each individual’s contribution to the results achieved, and we grant equity awards, not only to our executives but also to our key team members and certain top performers. Annual bonus decisions are significantly tied to our overall achievement of financial goals and key development projects so that our employees’ incentives track our performance and align with our key business priorities. We believe that our compensation programs encourage an innovative, collaborative working environment and incentivize our team members to drive our overall success.
Compliance and Ethics
Compliance and ethics are deeply embedded in our values and business processes. Our compliance programs are designed around global standards with appropriate variations addressing the multiple jurisdictions in which we operate. We strive to create a culture of compliance for every team member, with a responsibility to always “do the right thing.” We have a Code of Compliance that applies to all of the team members, officers and directors and regularly conduct compliance and regulatory training at all of our locations. We also maintain an ethics reporting hotline for both team members and customers to provide any compliance, regulatory or discrimination concerns. We believe that fostering a workforce committed to compliance and ethics is an important part of our overall success.
Wellness and Safety
We strive to ensure the health, safety and general well-being of all of our team members. We maintain a safety environment that seeks to eliminate workplace incidents, risk, hazards and transmission of any illnesses. We also continue to evolve our programs to meet our team members’ health and wellness needs, which we believe is essential to attract and retain high-caliber employees. In addition, as we have sought to manage the impact of the COVID-19 pandemic on our workforce, we have undertaken a number of new initiatives, including working remotely when possible, increasing the amount of communication from senior management, providing mental health programs and online training for our remote employees and offering COVID-19 and serology testing to our manufacturing and R&D team members and their support organizations who must physically report to the office.
We also monitor the overall engagement of our team members with the use of on-boarding surveys and recently implemented a new tool to allow more frequent surveys to measure the morale and ongoing concerns of our team members. We understand that the work environment has changed because of the COVID-19 pandemic and are committed to working in tandem with our leaders and team members to assess how the shifts brought on by the pandemic may change our flexible working policies in the future.
Seasonality
Worldwide sales, including U.S. sales, do not reflect any significant degree of seasonality; however, sales of our Respiratory Viral products have demonstrated seasonal fluctuations consistent with the onset and decline of influenza-like illnesses.
Financial information relating to our business for the years ended December 31, 2020, 2019 and 2018 can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.”
Available Information
Our shares of common stock are traded on the Nasdaq Global Select Market under the symbol “LMNX.” Our principal executive offices are located at 12212 Technology Blvd., Austin, Texas 78727, and our telephone number is (512) 219-8020. Our website address is luminexcorp.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge through our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Information contained or accessible on our website is not incorporated by reference into this report and such information should not be considered to be part of this report except as expressly incorporated herein. The public may read and copy these materials on the SEC’s website at www.sec.gov. The SEC’s website contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Luminex was incorporated under the laws of the State of Texas in May 1995 and reincorporated in the State of Delaware in February 2000.
Information About Our Executive Officers
Name Age Position
Nachum Shamir 67 Chairman, President and Chief Executive Officer
Harriss T. Currie 59 Chief Financial Officer, Senior Vice President, Finance and Treasurer
Todd C. Bennett 51 Senior Vice President, Global Sales and Customer Operations
Chuck Collins 44 Senior Vice President, Research and Development
Nancy M. Fairchild 67 Senior Vice President, Human Resources
Randall J. Myers 59 Senior Vice President, Global Manufacturing and Quality
Richard W. Rew II 53 Senior Vice President, General Counsel and Corporate Secretary
Eric S. Shapiro 57 Senior Vice President, Global Marketing
Nachum Shamir. Mr. Shamir joined the Company on October 14, 2014 as President and Chief Executive Officer and was elected to our Board. Mr. Shamir assumed the responsibilities of Chairman of the Board on August 3, 2020. From 2006 to 2014, Mr. Shamir was the President, Chief Executive Officer and Director of Given Imaging Ltd. (Given), a developer of the PillCam capsule and manufacturer and marketer of diagnostic products for the visualization and detection of disorders of the gastrointestinal tract, which was acquired by Covidien PLC in early 2014. Mr. Shamir currently serves on the board of directors of Strata Skin Sciences, Inc. (Nasdaq: SSKN), a medical technology company which focuses on the dermatology market. Mr. Shamir holds a Bachelor of Science from the Hebrew University of Jerusalem and a Masters of Public Administration from Harvard University.
Harriss T. Currie. Mr. Currie served the Company as Vice President, Finance, Treasurer and Chief Financial Officer since October of 2002 and was appointed Senior Vice President, Finance (as well as Chief Financial Officer and Treasurer) of the Company in March 2013. Since joining the Company in November of 1998, Mr. Currie previously served in the capacities of Controller and Treasurer. Prior to joining us, he was employed as the chief financial officer, secretary and treasurer of SpectraCell Laboratories, a specialized clinical testing laboratory company, from 1993 to 1998 where he also served as vice president of finance for two subsidiary companies. Mr. Currie earned his B.B.A. from Southwestern University and his M.B.A. in Finance and Marketing from the University of Texas at Austin. Prior to returning to graduate school for his M.B.A., Mr. Currie was a certified public accountant with Deloitte & Touche LLP.
Todd C. Bennett. Mr. Bennett joined the Company in October 2012 as General Manager, Americas. Mr. Bennett was promoted to Vice President, Global Sales and Customer Operations in July 2015 and to Senior Vice President, Global Sales and Customer Operations in November 2016. From January 2007 through March 2012, Mr. Bennett was the Vice President of Sales and then promoted to Vice President of Commercial Operations at Immucor, Inc., a provider of transfusion and transplantation products, where he was responsible for Commercial Operations (Sales, Global Marketing, Customer Service functions). Prior to Immucor, Mr. Bennett held various commercial leadership roles at Roche Diagnostics and Abbott Laboratories dating to 1994. Mr. Bennett holds a B.S. in Business Administration with an emphasis in finance from the Max M. Fisher College of Business at The Ohio State University in Columbus, Ohio.
Chuck Collins. Dr. Collins joined the Company in January 2006 as Senior Scientist. Dr. Collins was promoted to Director, Advanced Technology Group in January of 2008, and to Senior Director, Advanced Technology Group in August 2010. Dr. Collins then expanded his role with a promotion to Vice President, Systems R&D in May of 2012 and to Senior Vice President, R&D in January 2018. From August 2002 to January 2006, Dr. Collins was a Research Scientist at The U.S. Army Research Laboratory, developing ultraviolet LEDs, laser diodes, and photodetectors. Dr. Collins earned his BS in Electrical Engineering from Trinity University and received his Masters and PhD degrees in Electrical Engineering from The University of Texas at Austin.
Nancy M. Fairchild. Ms. Fairchild joined the Company as Senior Director, Human Resources in March 2010. She was promoted to Vice President, Human Resources in August 2012 and to Senior Vice President, Human Resources in January 2015. Prior to joining the Company, Ms. Fairchild served from 2006 to 2010 as Chief Administrative Officer and Vice President of Human Resources and Organizational Development for the Electric Reliability Council of Texas, which provides the energy grid services for Texas. In this role, she managed Strategic Planning, Project Management, Facilities and Human Resources. Earlier in her career, she served as Vice President, Human Resources for Esoterix, Inc., an international healthcare company specializing in laboratory services, from 2001 to 2006, the Senior Vice President of Human Resources for Southern Union Company, a large natural gas conglomerate, from 1989 to 2001, and President of EnergyWorX, a training subsidiary, from 1996 to 2000. Ms. Fairchild is currently a member of the Board of Directors and Chair of the Audit Committee for Workforce Solutions, a local workforce development board in Texas, representing the biotech sector. She graduated with highest honors from Texas State University with a B.S. degree in Math Education and an M.S. degree in Counseling.
Randall J. Myers. Mr. Myers joined the Company as Senior Vice President, Global Manufacturing and Quality, in March 2015. Prior to joining the Company, Mr. Myers accepted an early retirement from Applied Materials, Inc. (Applied Materials), a supplier of equipment services and software to enable the manufacture of semiconductor, flat panel display, glass, WEB and solar products, in 2012 and had been consulting in supply chain and manufacturing operations since that time. Prior to his retirement from Applied Materials, Mr. Myers held various positions at Applied Materials in manufacturing and operations from 1995-2012. In his final position with Applied Materials, Mr. Myers was Vice President of the Silicon Systems Group Global Planning & Business Operations. Mr. Myers attended Kettering University where he obtained a B.S. in Electrical Engineering.
Richard W. Rew II. Mr. Rew joined the Company as Senior Vice President, General Counsel and Corporate Secretary in March 2015. Prior to joining the Company, Mr. Rew served as Senior Vice President, General Counsel and Secretary at ArthroCare Corporation (ArthroCare), a medical device company, from December 2008 until it was acquired by Smith & Nephew in 2014. Mr. Rew joined ArthroCare in 2006 as its Vice President, Legal Affairs. Mr. Rew previously served as General Counsel of Activant Solutions Inc. from 2000 to 2006 and as General Counsel of EZCORP, Inc. from 1996 to 2000. Mr. Rew earned a B.A. in the Plan II Honors Program from the University of Texas at Austin and a J.D. from the University of Oklahoma College of Law. Mr. Rew is a member of the State Bar of Texas.
Eric S. Shapiro. Mr. Shapiro joined Luminex in October 2015 as the Vice President of Global Marketing, and was promoted to Senior Vice President, Global Marketing in February 2018. Prior to joining the Company on a full-time basis, Mr. Shapiro was the Principal at ESS Strategic Consulting, LLC, which he founded in 2014. In his role there, he worked on a variety of global strategic and operational projects, including serving as the General Manager for the Market Launch of ARIES and NxTAG RPP, from May 2015 to September 2015. Mr. Shapiro has previously served as a Vice President of Marketing for Given, from 2009 to 2014, and held numerous leadership positions at Kinetic Concepts, Inc., from 1993 to 2007, including Vice President of Marketing, Vice President of Patient Administration, Director of Corporate Development, and Director of Mergers and Acquisitions. Mr. Shapiro began his career working in both office and hospital-based Sales positions with Merrell Dow and Marion Merrell Dow. Mr. Shapiro holds a B.S. degree from Syracuse University, with an emphasis in Marketing and Telecommunications Management, and an M.B.A. from the J.L. Kellogg Graduate School of Management, with an emphasis in Marketing, Healthcare, Organizational Behavior, and Economics.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Risk Factor Summary
We are providing the following summary of the risk factors contained in this Annual Report on Form 10-K to enhance the readability and accessibility of our risk factor disclosures. We encourage you to carefully review the full risk factors contained in this Annual Report on Form 10-K in their entirety for additional information. Our business is subject to numerous risks and uncertainties, discussed in more detail in the following section. These risks include, among others, the following:
•Our business relies upon our ability to maintain the technological advances and resources to compete in the rapidly-changing life sciences and diagnostics industry. Our profitability in this industry depends on many other industry-related factors, including the success of our acquisition strategy, maintenance and expansion of our manufacturing operations, protection of cybersecurity and proprietary rights, development of our technology infrastructure and the success of our products in the market, all of which are unpredictable and may adversely impact our business.
•Our business and products, as well as those of our strategic partners and suppliers, are subject to extensive regulation by the FDA and may require other industry clearances and approvals. Changes to U.S. legislative, FDA or global regulations may make it more difficult for us to obtain regulatory approval of our products and/or manufacture our products. We are subject to evolving legislative, regulatory, judicial and ethical standards on use of technology and biotechnology.
•Our revenue depends significantly upon a limited number of direct customers and strategic partners, as well as the establishment and maintenance of relationships with other direct customers and strategic partners. Our business also depends on our ability to attract and retain our management and staff.
•If our products contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage. If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply.
•We face business disruption and related risks resulting from the recent pandemic of the novel coronavirus 2019 virus (COVID-19) and related preventative vaccines, which could have a material adverse effect on our business. Uncertain economic conditions, particularly during the COVID-19 pandemic, may adversely affect our business. We expect our operating results, sales and stock price to fluctuate from quarter to quarter.
•Our effective tax rate may fluctuate and we may incur obligations in tax jurisdictions in excess of amounts that have been accrued. We hold cash and cash equivalents at various foreign subsidiaries that may not be readily available to meet domestic cash requirements.
•We incurred indebtedness by issuing Notes and entering Convertible Note Hedge and Warrant Transactions, which may affect our cash, financial condition and operating results and value of our common stock and other securities
Risk Factors Relating to Growth and Profitability of Our Business
The life sciences and diagnostics industries are highly competitive and subject to rapid technological change, and we may not have the technologies and resources necessary to compete successfully.
We compete with companies in the United States and abroad that are engaged in the development and production of similar products. We will continue to face intense competition from existing competitors and other companies seeking to develop and commercialize new technologies. Many of our competitors have access to greater financial, technical, scientific, research, marketing, sales, distribution, service and other resources than we do and may have longer operating histories or more recognizable brand names. These companies may develop technologies that are superior alternatives to our technologies or may be more effective at commercializing their technologies in products.
The life sciences and diagnostics industries are characterized by rapid and continuous technological innovation. We may need to develop new technologies for our products to remain competitive. One or more of our current or future competitors could render our present or future products or those of our partners obsolete or uneconomical by technological advances, including the introduction or existence of, competing products or technologies that may be more effective, cheaper or easier to use than our products and technologies. In addition, the introduction or announcement of new products by us or others could result in a delay of or decrease in sales of existing products as we await regulatory approvals, while customers evaluate these new products, or if customers choose to purchase the new products instead of legacy products. We may also encounter other problems in the process of delivering new products to the marketplace such as problems related to design, development, supply chain or manufacturing of such products, and as a result, we may be unsuccessful in selling such products. Our future success depends on our ability to compete effectively against current technologies, as well as to respond effectively to technological advances by developing and marketing products that are competitive in the continually changing technological landscape.
Several companies provide systems and reagents for DNA amplification or detection. Life Technologies Corporation (a Thermo Fisher Scientific Inc. brand) and F. Hoffman-La Roche Ltd. (Roche) sell systems integrating DNA amplification and detection (sequence detection systems) to the commercial market. Life Technologies Corporation (a Thermo Fisher Scientific Inc. brand), Roche, Abbott Laboratories, Becton Dickinson and Company, Danaher Corporation, Qiagen N.V., Hologic, Inc., Meridian Bioscience, Inc., bioMérieux S.A., Illumina, Inc. and Quidel Corporation sell sequence detection systems, some with separate robotic batch DNA purification systems, and they also sell reagents to the clinical diagnostics market. Other companies offer molecular diagnostic tests. Additionally, we anticipate that in the future, additional competitors will emerge and offer a broad range of competing products, including increasing adoption of competitive products based on mass spectrometry and next generation sequencing test technologies.
There are also a number of companies that provide flow cytometry instruments and reagents for research and clinical flow cytometry applications. BD Biosciences and Beckman Coulter sell systems for cell analysis and cell sorting in both the clinical and research markets. Miltenyi Biotec markets systems focused on cell separation, some of which integrate their magnetic separation technology for cell enrichment/depletion. Bio-Rad sells flow analyzers and sorters designed and manufactured by Propel Labs. Attune (part of ThermoFisher Scientific) markets flow cytometers that use acoustic focusing for high cell throughput for rare event analysis. Sony Biotechnology sells cell sorters and analyzers and has recently developed a spectral flow cytometry system that expands the detection of simultaneous fluorescent parameters. Cytek Biosciences has grown from a third-party field service provider to launch its own spectral flow cytometry system. ACEA Biosciences is a relatively new provider of benchtop flow cytometry analyzers. A few companies are reportedly working on systems to compete directly with our Amnis imaging flow cytometers. We anticipate additional competitors will emerge in the future who will offer a broad range of competing products, which will likely both increase awareness and adoption of spectral flow cytometry and imaging flow cytometry.
If we do not introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth targets.
We sell many of our products in industries characterized by rapid technological change, frequent new product and service introductions and evolving customer needs and industry standards. Many of the businesses competing with us in these industries have significant financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and established distribution channels to deliver products to customers. Our products could become technologically obsolete over time, or we may invest in technologies that do not lead to revenue growth or continue to sell products for which the demand from our customers is declining, in which case we may lose market share or not achieve our revenue growth targets. The success of our new product offerings will depend upon several factors, including our ability to:
•accurately anticipate customer needs;
•innovate and develop new technologies and applications;
•obtain required regulatory clearances;
•successfully commercialize new technologies in a timely manner;
•price our products competitively, and manufacture and deliver our products in sufficient volumes and on time; and
•differentiate our offerings from our competitors’ offerings.
Many of our products are used by our customers to develop, test and manufacture their products. We must anticipate industry trends and consistently develop new products to meet our customers’ expectations. In developing new products, we may be required to make significant investments before we can determine the commercial viability of a new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenue. We may also suffer a loss in market share and potential revenue if we are unable to commercialize our products in a timely and efficient manner.
We may be unsuccessful in implementing our acquisition strategy. We may face difficulties integrating acquired entities with our existing businesses. Our business may be harmed by prior or future acquisitions.
Acquisitions of assets or entities designed to accelerate the implementation of our strategic plan are an important element of our long-term strategy. We may be unable to identify and complete appropriate future acquisitions in a timely manner, or at all, and no assurance can be provided that the market price of potential business acquisitions will be acceptable. In addition, many of our competitors have greater financial resources than we have and may be willing to pay more for these businesses or selected assets. In the future, should we identify suitable acquisition targets, we may be unable to complete acquisitions or obtain the financing, if necessary, for these acquisitions on terms favorable to us. Potential acquisitions pose a number of risks, including, among others, that:
•we may not be able to accurately estimate the financial effect of acquisitions on our business;
•future acquisitions may require us to incur debt or other obligations, issue additional securities, incur large and immediate write-offs, issue capital stock potentially dilutive to our stockholders or spend significant cash, or may negatively affect our operating results and financial condition;
•if we spend significant funds or incur additional debt or other obligations, our ability to obtain financing for working capital or other purposes could decline, and we may be more vulnerable to economic downturns and competitive pressures;
•technological advancement or worse than expected performance of acquired businesses may result in the impairment of intangible assets;
•we may be unable to realize the anticipated benefits and synergies from acquisitions, as a result of inherent risks and uncertainties, including difficulties integrating acquired businesses or retaining their key personnel, partners, customers or other key relationships, entering market segments in which we have no or limited experience, and risks that acquired entities may not operate profitably or that acquisitions may not result in improved operating performance;
•we may fail to successfully obtain appropriate regulatory approval or clearance for products under development of our acquired businesses;
•we may be assuming liability for unresolved regulatory risks of our acquired businesses;
•we may fail to effectively enhance acquired technologies and products to develop new products relating to acquired businesses;
•our customers may not accept products of our acquired businesses;
•we may fail to effectively coordinate sales and marketing efforts of our acquired businesses;
•we may fail to combine product offerings and product lines of our acquired businesses quickly and effectively;
•we may fail to successfully manage relationships with customers, distributors and suppliers of our acquired businesses;
•an acquisition may involve unexpected costs or liabilities, including as a result of pending and future shareholder lawsuits relating to acquisitions or exercise by shareholders of their statutory appraisal rights, or the effects of purchase accounting may be different from our expectations;
•an acquisition may involve significant contingent payments that may adversely affect our future liquidity or capital resources;
•acquisitions and subsequent integration of these companies may disrupt our business and distract our management from other responsibilities; and
•the costs of unsuccessful acquisition efforts may adversely affect our financial performance.
Other risks of integration of acquired businesses include:
•disparate information technology, internal control, financial reporting and record-keeping systems;
•differences in accounting policies, including those requiring judgment or complex estimation processes;
•new partners or customers who may operate on terms and programs different than ours;
•additional employees not familiar with our operations;
•unanticipated additional transaction and integration-related costs;
•our current and prospective customers and suppliers may experience uncertainty associated with an acquisition, including with respect to current or future business relationships with us, and may attempt to negotiate changes in existing business;
•facilities or operations of acquired businesses in remote locations or potentially foreign jurisdictions and the inherent risks of operating in unfamiliar legal and regulatory environments; and
•new products, including the risk that any underlying intellectual property associated with such products, may not have been adequately protected or that such products may infringe on the proprietary rights of others.
Epidemic diseases could negatively affect various aspects of our business, make it more difficult to meet our obligations to our customers, and could result in reduced demand from our customers. These could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Parts of our business have been and continue to be adversely affected by the effects of the COVID-19 pandemic and may be further affected by the recent availability and distribution of a preventative vaccines. In an effort to halt the outbreak of COVID-19, many countries have placed significant restrictions on travel and congregation, including “shelter-in-place” or similar orders, leading to extended business closures. Individuals who contract the virus may be unavailable to work, and in certain jurisdictions, individuals exposed to the virus, as well as their families and co-workers, may be placed in mandatory quarantines. The spread of the virus, as well as restrictions and business closures implemented in an effort to minimize its spread, can adversely impact our operations, including delaying or suspending our ability to sell or distribute our products, causing temporary closures of our offices and manufacturing operations, or those of our suppliers, customers, distributors and other business partners. Any disruption of our suppliers, customers or distributors could continue to adversely impact our global sales and operating results and harm our reputation. While many businesses have re-opened as the pandemic eased in particular locations, a resurgence of COVID-19 cases in those geographies could cause additional closures. Likewise, we may be subject to public and private litigation based upon, arising out of or related to COVID-19 and our actions and responses thereto, including any determinations that we may make to continue to operate or to re-open our facilities where permitted by local law. We cannot at this time accurately predict what effects these conditions will continue to have on our operations longer-term due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, the extent and effectiveness of responsive actions by authorities of impacted countries and the impact of these and other factors on our employees, customers and suppliers. In addition, a significant outbreak of a contagious disease in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries for an extended period of time, resulting in economic uncertainty and volatility that could affect demand for our products, and likely adversely impact our business, operations, financial conditions and results of operations for an indefinite period of time.
Despite the authorization and distribution of preventative COVID-19 vaccines, there are still uncertainties surrounding the effectiveness, availability and extent of distribution of such vaccines. We cannot predict the effect of such vaccines on us and our vendors, suppliers, and potential sublicensees; the global economy and political conditions; and the health of our personnel, consultants, and their families; all of which will affect how quickly and to what extent normal economic and operating activities can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse effect on our business as a result of its global economic impact, including any resulting and ongoing recession. All of these circumstances likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and sublicensees. As a result, we have made adjustments to, and will need to continue to adjust, our business and expenditures in an effort to correlate our activities with business exigencies, including restrictions of executive and employee travel, hiring freezes or delays, and limitations on marketing. The ultimate financial impact and duration of all of the foregoing cannot now be predicted and may well exceed our expectations or our ability to cope with them. Any, or all, of the foregoing uncertainties could continue to have a material adverse effect on our business, operations, financial conditions and results of operations for an indefinite period of time.
Risks Affecting Our Product Development and Manufacturing Operations
As we continue to expand our business, we may experience problems in scaling our manufacturing operations, or delays or component shortages that could limit the growth of our revenue.
As we continue to expand our manufacturing capabilities in order to meet our growth objectives, we may not be able to produce sufficient quantities of products or maintain consistency between differing lots of consumables. If we encounter difficulties in scaling our manufacturing operations as a result of, among other things, quality control and quality assurance issues and availability of components and raw material supplies, we will likely experience reduced sales of our products, increased repair or re-engineering costs due to product returns and defects and increased expenses due to switching to alternate suppliers, any of which could reduce our revenues and gross margins.
Our ability to continue to operate without any significant negative operational impact from the COVID-19 pandemic will, in part, depend on our ability to protect our employees and maintain our supply chain. Continued rapid expansion of capacity may be constrained by long lead-time purchased items and capital equipment needs. We continue to endeavor to follow the recommended actions of government and health authorities to protect our employees, with particular measures in place for employees who manufacture our products. However, the complications resulting from the pandemic could result in unforeseen disruptions to our workforce and supply chain, including an inability of a key supplier or transportation supplier to source, transport and supply materials to the Company that are necessary for continued operations, that could individually or in combination with other factors, have a material adverse effect on our business, operations, financial conditions and results of operations.
We presently outsource certain aspects of the assembly of our systems to contract manufacturers. Because of a long lead-time to delivery, we are required to place orders for a variety of items well in advance of scheduled production runs. We have increased our flexibility to purchase strategic components within shorter lead times by entering into supply agreements with the suppliers of these components. Although we attempt to match our parts inventory and production capabilities to estimates of marketplace demand, to the extent system orders materially vary from our estimates, we may experience continued constraints in our systems production and delivery capacity, which could adversely impact revenue in a given fiscal period. Should our need for raw materials and components used in production continue to fluctuate, we could incur additional costs associated with either expediting or postponing delivery of those materials. In an effort to control costs, we have implemented a lean production system. Managing the change from discrete to continuous flow production requires time and management commitment. Lean initiatives and limitations in our supply chain capabilities may result in parts shortages that delay shipments and cause fluctuations in revenue.
We currently purchase certain key components of our product line from a limited number of outside sources and, in the case of some components, a single source, and these components may only be available through a limited number of providers. We do not have agreements with all of our suppliers. While we currently believe that we will be able to satisfy our forecasted demand for our products, the failure to find alternative suppliers in the event of any type of supply failure at any of our current vendors at reasonably comparable prices could have a material adverse effect on our business, financial condition and results of operations. Additionally, we have entered into supply agreements with most of our suppliers of strategic reagents and component subassemblies to help ensure component availability, and flexible purchasing terms with respect to the purchase of such components. If our suppliers discontinue production of a key component, we will be required to revalidate an affected product and may be required to resubmit a previously cleared product. Our reliance on our suppliers and contract manufacturers exposes us to risks including:
•the possibility that one or more of our suppliers or our assemblers that do not have supply agreements with us could terminate their services at any time without penalty;
•natural disasters such as earthquakes, tsunamis and floods that impact our suppliers;
•the potential obsolescence and/or inability of our suppliers to obtain required components;
•the potential delays and expenses of seeking alternate sources of supply or manufacturing services;
•the inability to qualify alternate sources without impacting performance claims of our products;
•reduced control over pricing, quality and timely delivery due to the difficulties in switching to alternate suppliers or assemblers; and
◦increases in prices of raw materials and key components.
Consequently, in the event that supplies of components or work performed by any of our assemblers are delayed or interrupted, our ability to produce and supply our products could be impaired.
If a catastrophe strikes our manufacturing or warehousing facilities, we may be unable to manufacture or distribute our products for a substantial amount of time and we may experience inventory shortfalls, which would cause us to experience lost revenues.
Our manufacturing facilities are located in Austin, Madison, Northbrook, Toronto and Seattle. Although we have business interruption insurance, our facilities and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead time. Various types of disasters, including tornadoes, fires, floods and acts of terrorism, may affect our manufacturing facilities. In the event our existing manufacturing facilities or equipment are affected by man-made or natural disasters, we may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or ceased, it would seriously harm our business.
The property rights we rely upon to protect the technologies underlying our products may not be adequate to maintain market exclusivity. Inadequate intellectual property protection could enable third parties to exploit our technologies or use very similar technologies and could reduce our ability to distinguish our products in the market.
Our success depends, in part, on our ability to obtain, protect and enforce patents on our technologies and products and to protect our trade secrets, including the intellectual property of entities we may acquire. Any patents we own may not afford full protection for our technologies and products. Other parties may challenge the validity of our patents and, as a result, our patents could be narrowed or invalidated in administrative or judicial proceedings. In addition, our current and future patent applications may not result in the issuance of patents in the United States or foreign countries. Competitors may develop products that are not covered by our patents. Furthermore, there is a substantial backlog of patent applications at the U.S. Patent and Trademark Office and certain patent offices in foreign jurisdictions, and the approval or rejection of patent applications may take several years.
We currently own 821 issued patents worldwide, including 237 issued patents in the United States. Other countries in which we have issued patents directed to various aspects and applications of our products and technologies include France, Germany, the United Kingdom, Australia, Japan, Netherlands, Canada, Hong Kong, China and South Korea, amongst others. In addition, our patent portfolio includes 110 pending patent applications in the United States and other foreign jurisdictions. We also have patents covering key aspects of MultiCode technology, xTAG technology, and nanoparticle technology, utilized in our assays as well as our ARIES and VERIGENE Systems, NxTAG technology imaging flow cytometry technology and capillary flow cytometry technology.
We seek to require employees, consultants, strategic partners and other third parties to execute confidentiality agreements. Our employees and third-party consultants also sign agreements requiring that they assign to us their interests in inventions and original expressions and any corresponding patents and copyrights arising from their work for us. In addition, we have implemented a patent process to file patent applications on our key technologies. However, we cannot guarantee that these agreements or this patent process will provide us with adequate ownership rights, protection against improper use of our intellectual property, or disclosure of confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisers have prior employment or consulting relationships. Further, others may independently develop substantially equivalent proprietary technologies, techniques and products or counterfeit versions of our products or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to distinguish our products in the market.
In order to protect or enforce our patent rights, we may have to initiate legal proceedings against third parties, such as infringement suits or interference proceedings. These legal proceedings could be expensive, take significant time and/or divert management’s attention from other business concerns. These proceedings may cause us to lose the benefit of some of our intellectual property rights, the loss of which may inhibit or preclude our ability to distinguish our products in the market. These proceedings also may provoke these third parties to assert claims against us. Moreover, a series of decisions from the Supreme Court of the United States have arguably weakened United States patent rights, including the Impression Products v. Lexmark case, which expands the scope of the patent exhaustion doctrine to sales of patented products outside of the United States and limits a patent holder’s ability to enforce post-sale restrictions under patent law. The patent position of companies like ours generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under patents like ours.
If our current products and our products under development do not become widely used in the life sciences and clinical diagnostics industries, we may not be able to maintain or increase profitability.
Life sciences and clinical diagnostic service provider companies have historically conducted biological tests using a variety of technologies, including bead-based analysis. The commercial success of our products depends upon widespread adoption of our systems as methods to perform assays. In order to be successful, we must convince potential partners and customers to utilize our systems instead of other competing products. Market acceptance depends on many factors, including our ability to:
•timely and successfully launch our products under development;
•manage trends relating to, or the introduction or existence of, competing products or technologies that may be more effective, cheaper or easier to use than our products and technologies;
•operate in a highly competitive marketplace, including in the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks;
•convince prospective strategic partners and customers that our products are an attractive alternative to others for research, clinical, biomedical and genetic testing and analysis;
•encourage these partners to develop and market products using our technologies;
•manufacture products in sufficient quantities with acceptable quality and at an acceptable cost;
•obtain and maintain sufficient pricing and royalties from partners on such Luminex products; and
•place and service sufficient quantities of our products at the level of service required in the life science and clinical diagnostics market segments.
In the molecular diagnostics sector, we must recognize significant market uptake in order to gain operational efficiencies and reduce costs based on increased volume.
Because of these and other factors, our products may not gain or sustain sufficient market acceptance to maintain or increase profitability. Additionally, we may have to write off excess or obsolete inventory if sales of our products are not consistent with our expectations or if the demand for our products changes.
Risks Related to Customers and Partners
Currently, a limited number of customers account for a significant portion of our revenue and the loss of any one of these or their inability to perform to expectations could have a material adverse effect on our business, financial condition, and results of operations. Our success depends significantly on the establishment and maintenance of successful relationships with our customers.
Our two largest customers accounted for 14% of total revenue in the twelve months ended December 31, 2020, with one of the customers accounting for 10%. In the twelve months ended December 31, 2019 and 2018, our two largest customers accounted for 17% and 29% of total revenue, respectively. No other customer accounted for more than 4% of total revenue during the twelve months ended December 31, 2020. In total, for the years ended December 31, 2020 and 2019, our top five customers accounted for 22% and 30%, respectively, of our total revenue. The loss of any of our significant direct customers, strategic partners, or the loss of a material portion of the sales to these customers or partners could have a material adverse effect on our growth and future results of operations.
If third-party payors continue to increasingly restrict payments for healthcare expenses or fail to adequately pay for multi-analyte testing, we may experience reduced sales, which would hurt our business and our business prospects.
Third-party payors, government-sponsored healthcare programs (e.g., Medicare, Medicaid and Tricare), health maintenance organizations, preferred provider organizations and other private or commercial insurers are continually seeking to reduce healthcare expenses. Payors are challenging the utilization of, and prices charged for, medical services, including clinical diagnostic tests. The federal government has implemented cost-cutting strategies for government-sponsored healthcare programs, including coverage limitations and reimbursement rate reductions required by the Affordable Care Act. As a result of regulations issued pursuant to the Protecting Access to Medicare Act, payment rates for most tests included in the Clinical Laboratory Fee Schedule used by Medicare are based on commercial insurance rates, which certain laboratories are required to report. The payment reductions resulting from this revised reimbursement methodology are capped at 10% for 2020 and 15% for each of 2021 through 2023. We expect reimbursement rates to trend down over time. Coverage and reimbursement from commercial payors may also reflect these reductions.
Further cost containment initiatives by governmental or educational entities or programs may reduce funding for genetic research and development activities and slow the growth of the genetic testing market. Lack of adequate coverage or reimbursement for our products could affect consumer demand, reducing volumes or adding additional cost pressures, resulting in lowered prices for our products. Efforts by group purchasing organizations and other large purchasers to reduce costs may also result in lowered prices or deeper discounts on our products. Reduced sales or margins by us, or our direct customers, and strategic partners, would adversely affect our business, profitability and business prospects. In addition, failure to secure appropriate reimbursement in foreign jurisdictions could severely limit our ability to expand sales within these markets.
Delays in implementation, delays in obtaining regulatory approval, changes in strategy, or the financial difficulty of our strategic partners for any reason could have a material adverse effect on our business, financial condition, and results of operations.
Our ability to enter into agreements with additional strategic partners depends in part on convincing them that our products can help achieve and accelerate their goals or efforts. We expend substantial funds and management efforts with no assurance that any additional strategic relationships will result. We cannot guarantee that we will be able to negotiate additional strategic agreements in the future on acceptable terms, if at all, or that current or future strategic partners will not pursue or develop alternative technologies either on their own or in collaboration with others. Some of the companies we are targeting as strategic partners offer products competitive with our xMAP Technology, which may hinder or prevent strategic relationships. Delays in implementation of new products by our strategic partners, changes in their strategy, financial difficulties they experience, or delays in obtaining or their inability to obtain regulatory approval for their products, including as a result of the COVID-19 pandemic, could negatively affect our business. Termination of strategic relationships, the failure to enter into a sufficient number of additional strategic relationships on favorable terms, or disputes with our partners could reduce sales of our products, lower margins on our products and limit the market demand for and acceptance of our products.
As we pursue the development and registration of products, regulation by governmental authorities in the United States and other countries will be a significant factor in the development, testing, production, and marketing of such products. Products that we develop in the molecular diagnostic markets will be regulated as medical devices by the FDA and other global governmental authorities and may require receipt of clearance following a pre-market notification process prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay. Changes to the current regulatory framework, including additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain regulatory approval of our products.
If the quality or delivery of our products does not meet our customers’ expectations, our reputation could suffer and ultimately our sales and operating earnings could be negatively impacted.
In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design, manufacturing and delivery processes, as well as defects in third-party components included in our products. Because our instruments and consumables are highly complex, the occurrence of defects may increase as we continue to introduce new products and services and as we rapidly scale up manufacturing to meet increased demand for our products and services. Although we have established internal procedures to minimize risks that may arise from product quality issues, there can be no assurance that we will be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, identifying the root cause of quality issues, particularly those affecting reagents and third-party components, may be difficult, which increases the time needed to address quality issues as they arise and increases the risk that similar problems could recur. Finding solutions to quality issues can be expensive and we may incur significant costs or lost revenue in connection with, for example, shipment holds, product recalls and warranty or other service obligations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect our brand image, and our reputation as a producer of high quality products could suffer, which could adversely affect our business, financial condition or results of operations.
If our direct selling efforts for our products are less successful than anticipated, our business expansion plans could suffer and our ability to generate revenues could be diminished.
If our direct sales force is not successful, or additions to our sales team fail to gain traction among our customers, we may not be able to increase market awareness and sales of our products, or to maintain historical sales levels. If we fail to establish our systems in the marketplace, it could have a negative effect on our ability to sell subsequent systems and hinder the planned expansion of our business.
The commercial launch of the ARIES System was the first Luminex system launch that was not channeled through a partner. The successful execution of our product launch and adoption by our direct customers has been and will continue to be critical to establishing an installed base of satisfied customers. To the extent that these customers do not continue to adopt the menu of ARIES Assays that have been a significant focus of our research and development efforts over the last five years, there is a significant risk that our investment in these assays may not pay off. Additionally, we have made a significant investment in our customer service, support and direct sales force to support the launches of ARIES Systems. Our ability to service, support and sell the ARIES and VERIGENE Systems directly, and not through a partner, may also fail to meet ongoing market expectations, which could have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to service and support our products directly or in collaboration with our strategic partners.
To the extent that we or our strategic partners fail to maintain a high quality level of service and support for xMAP products, there is a risk that the perceived quality of our xMAP products will be diminished in the marketplace. Likewise, we may fail to provide the level, quantity or quality of service expected by the marketplace. This could result in slower adoption rates and lower than anticipated utilization of xMAP products, which could have a material adverse effect on our business, financial condition and results of operations.
In most of our strategic partnerships, we have granted non-exclusive rights with respect to commercialization of our products and technologies.
We expect that a significant portion of our future revenues will come from sales of our systems and the development and sale of kits utilizing our xMAP consumables by our strategic partners and from use of our xMAP products by our strategic partners in performing services offered to third parties. We believe that our strategic partners will have economic incentives to develop and market these products, but we cannot accurately predict future sales and royalty revenues because some of our existing strategic partner agreements do not include minimum purchase requirements or minimum royalty commitments. Some of our existing strategic partner agreements contain minimum purchase requirements for certain years, but unless renegotiated, these minimum purchase requirements could and will expire. In addition, we have no control with respect to our strategic partners’ sales personnel and how they prioritize products based on xMAP technology, nor can we control the timing of the development or release of products by our strategic partners. The amount of these revenues depends on a variety of factors that are outside our control, including the amount and timing of resources that current and future strategic partners devote to developing and marketing products incorporating our technology. Furthermore, the development and marketing of certain kits will require our strategic partners to obtain governmental approvals, which could delay or prevent their commercialization efforts. If our current or future strategic partners do not successfully develop and market products based on our technology and obtain necessary government approvals, our revenues from product sales and royalties could be significantly reduced.
Our reliance on strategic partnerships makes forecasting difficult.
As a result of our reliance on our strategic relationships, it can be difficult to accurately forecast future operating results. Estimating the timing and amount of sales of our products is particularly difficult for the following reasons (among others):
•we do not control the timing or extent of product development, marketing or sale of our products by our strategic partners;
•we do not control the incentives provided by our strategic partners and distributors to their sales personnel;
•we utilize a limited number of geographically focused distributors for a portion of our sales, including sales of several of our key assays, and the loss of or nonperformance by these distributors could harm our revenues in the territories serviced by these distributors;
•a significant number of our strategic partners intend to produce clinical diagnostic applications that may need to be approved by the FDA or other regulatory bodies in jurisdictions outside of the United States;
•certain strategic partners may have unique requirements for their applications and systems. Assisting the various strategic partners may strain our research and development and manufacturing resources. To the extent that we are unable to timely assist our strategic partners, the commercialization of their products will likely be delayed;
•certain strategic partners may fail to deliver products that satisfy market requirements, or such products may fail to perform properly;
•we have limited access to partner and distributor confidential corporate information. A sudden unexpected change in ownership or strategy or other material event due to information of which we are not currently aware could adversely impact partner purchases of our products; and
•partners tend to order in bulk prior to the production of new lots of their products and prior to major product development initiatives. The frequency of these bulk purchases is difficult to predict and may cause large fluctuations in microsphere sales quarter to quarter.
The capital spending policies of our customers have a significant effect on the demand for our products.
Our customers include clinical diagnostic, pharmaceutical, biotechnological, research institutions, chemical and industrial companies, and the capital spending policies of these companies can have a significant effect on the demand for our products. These policies are based on a wide variety of factors, including general or local economic conditions, governmental regulation or price controls, resources available for purchasing research equipment, government funding, grants, spending priorities among various types of analytical equipment manufacturers and policies regarding capital expenditures during recessionary periods. Any decrease in capital spending by life sciences companies could cause our revenues to decline. As a result, we are subject to significant volatility in revenue. Therefore, our operating results can be materially affected (negatively and positively) by the spending policies and priorities of our customers.
Adjustments of previously recognized royalty revenue from LTG partners could impact our results of operations and result in our restating financial results for certain fiscal periods.
The Company through its LTG enters into contractual arrangements with customers and other third parties, a component of which are royalty arrangements. Such royalty obligations are typically self-reported, paid in the regular course of business and recorded by the Company accordingly. These royalty arrangements may be subject to inspection (either directly by the Company or by a third-party) to seek to assure that the counterparty has made sufficient payment to the Company. Generally, if the Company has inspection rights, the Company may exercise these rights every three years.
With respect to royalty reporting, the Company significantly relies upon the accuracy and completeness of the information it receives from its counterparties to determine the appropriate financial reporting. The Company is regularly involved in negotiations, disputes and other discussions regarding these arrangements and the calculation of any royalties. Should differences between submitted royalties and due royalties be claimed or identified, the Company makes a determination as to the proper way to account for such claim or difference. Any claims or differences with respect to previously recognized royalty revenue could result in the Company recording reserves, making a current period adjustment or correcting or potentially restating the Company’s prior financial statements and its related Exchange Act reports during the relevant historical periods (or in prospective periods during which claims are made). The cost and distraction of any such claim, any necessary adjustments or restatement of amounts previously reported and/or any prospective changes to royalty calculations could harm our operating results and adversely impact our business and stock price.
We rely on the innovation and resources of larger industry participants and public programs in our partnership business to advance genomic research and educate physicians/clinicians on genetic diagnostics.
The linkages between genetic anomalies that our products detect and the underlying disease states are not always fully medically correlated. Additionally, the availability of correlated genetic markers is dependent on significant investment in genomic research, often funded through public programs, for which there are no assurances of ongoing support. Should any government limit patent rights to specific genetic materials, private investment in this area could also be significantly curtailed. In addition, the adoption of genetic diagnostics is dependent to a great extent on the education and training of physicians and clinicians. We do not have the resources to undertake such training, and are relying on larger industry participants and professional medical colleges to establish, communicate and educate physicians and clinicians on best practices related to genetic diagnostics.
Risks Relating to Regulation of Our Products
Our products are subject to extensive regulation by the FDA, the Competent Authorities of EEA Member States and foreign governmental authorities, the Competent Authorities of EEA Member States and foreign governmental authorities, the Competent Authorities of EEA Member States and foreign governmental authorities, including the requirement to obtain premarket approval and the requirement to report adverse events and violations of the FDC Act that could present significant risk of injury to patients. We will continue to be subject to extensive FDA regulatory oversight.
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory clearances to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. In general, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the FDC Act, or is the subject of an approved premarket approval application (PMA), unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. Pursuant to amendments to the statute in 2012, a manufacturer can also submit a petition for a direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk.
High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. Currently, all of our products requiring FDA clearance or approval are Class II and have been cleared through the 510(k) process.
In emergency situations, such as a pandemic, the FDA has the authority to issue an EUA for an unapproved device if the following four statutory criteria have been met: (1) a serious or life-threatening condition exists; (2) evidence of effectiveness of the device exists; (3) a risk-benefit analysis shows that the benefits of the product outweigh the risks; and (4) no other alternatives exist for diagnosing, preventing or treating the disease or condition. Once granted, an EUA will remain in effect and generally terminate on the earlier of (1) the determination by the Secretary of HHS that the public health emergency has ceased or (2) a change in the approval status of the product such that the authorized use(s) of the product are no longer unapproved. After the EUA is no longer valid, the product is no longer considered to be legally marketed and one of the FDA’s non-emergency premarket pathways would be necessary to resume or continue distribution of the subject product. The FDA also may revise or revoke an EUA if the circumstances justifying its issuance no longer exist, the criteria for its issuance are no longer met, or other circumstances make a revision or revocation appropriate to protect the public health or safety.
Our failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of additional warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of our manufacturing facilities are possible.
The recent COVID-19 pandemic has introduced additional strain on the FDA. We are unable to fully understand the impact this may cause on regulations or the related timeframes pertaining to communication with, or clearances by, the FDA.
Our products are also subject to approval, certification and regulation by foreign regulatory and safety agencies. For example, the EU has adopted the In Vitro Diagnostic Regulation (the IVDR), which will impose stricter requirements for the marketing and sale of in vitro diagnostic medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices, as of now, will have until May 26, 2022 to meet the requirements imposed by the IVDR. Complying with the requirements of these regulations may require us to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements.
Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products internationally, we may be subject to rigorous international regulation in the future. In these circumstances, we would rely significantly on our foreign independent distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries.
Marketing of our COVID-19 tests under Emergency Use Authorizations (EUAs) from FDA is subject to certain limitations and we are required to maintain compliance with the terms of the EUA, among other things, and the continuance of our EUAs is subject to government discretion.
On February 4, 2020, then U.S. Secretary of Health and Human Services (HHS) Alex Azar issued a declaration that the threat to public health posed by COVID-19 justified the emergency use of unapproved in vitro diagnostics for the detection or diagnosis of the novel coronavirus (SARS-CoV-2). Under Section 564 of the Food, Drug, and Cosmetic Act (FDCA), because HHS issued this declaration, the FDA Commissioner was authorized to issue EUAs to permit certain developers of SARS-CoV-2 diagnostics to begin offering the tests for detection and diagnosis of COVID-19 without having completed the normally applicable FDA review and clearance or approval process for marketing authorization (with the related standards that would apply to demonstrate safety and effectiveness). The issuance of an EUA at that time reflected an FDA conclusion that, based on the totality of scientific evidence available to the FDA, it was reasonable to believe that the product may be effective in diagnosing COVID-19, and that the known potential benefits of the product outweighed the known and potential risks, and there was no adequate, approved, and available alternative to the emergency use of the product.
On March 27, 2020 we received an EUA for our NxTAG CoV Extended Panel Assay for the qualitative detection of nucleic acid from the SARS-CoV-2 virus in nasopharyngeal swab specimens from individuals suspected of having COVID-19. We received an EUA on April 3, 2020 for our ARIES SARS-CoV-2 Assay for the same indication, but in this case, tests are permitted to be conducted by CLIA laboratories certified to perform moderate complexity tests, as well as those certified for high complexity tests. We also received an EUA on July 16, 2020 for our xMAP SARS-CoV-2 Multi-Antigen IgG Assay, a serology assay to identify the presence of antibodies in people who have been infected with the virus that causes COVID-19. Although there are certain regulatory requirements that the FDA has waived for the duration of the EUA, we remain subject to specific conditions of the authorization, including ensuring appropriate labeling as approved by the FDA specifically for purposes of the EUA, maintaining records of distribution to authorized laboratories, collecting data on occurrences of any false positives or false negatives, and tracking any adverse events.
As with other FDA-regulated products, issues could emerge during the course of the marketing and use of our products under an EUA that could impact our ability to continue the sale and distribution of these products (e.g., compliance and product performance issues).
Our EUAs remain effective only until the HHS declaration is terminated or revoked, and the FDA may also revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect public health or safety. Once our EUA is revoked or terminated, we will be required to stop commercial distribution of our COVID-19 test kit immediately unless we can obtain FDA clearance for our COVID-19 test kit under a traditional regulatory pathway, which is lengthy and expensive, which could harm our future business prospects. We also would be subject to the full and usual regulatory obligations for device manufacturers, including the FDA’s quality system regulations (QSR) under 21 CFR Part 820.
If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance, and the manufacturing processes, reporting requirements, post-market clinical data and promotional activities for such product, are subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies and notified bodies. In particular, we and our strategic partners who manufacture medical devices are required to comply with the QSR in the US. The QSR covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our strategic partners, fail to adhere to QSR requirements in the U.S. or experience delays in obtaining necessary regulatory approvals or clearances, this could delay production of our products and lead to fines, difficulties in obtaining regulatory approvals or clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, such as the Warning Letter, which could, in turn, have a material adverse effect on our financial condition and results of operations. We must comply with equivalent standards in third countries. in obtaining regulatory approvals or clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, such as the Warning Letter, which could, in turn, have a material adverse effect on our financial condition and results of operations.
In addition, the FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. Any failure to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspection observations or product safety issues, could result in any of the following enforcement actions:
•untitled letters, warning letters, such as the Warning Letter, fines, injunctions, consent decrees and civil penalties;
•unanticipated expenditures to address or defend such actions;
•customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
•operating restrictions, partial suspension or total shutdown of production;
•refusing or delaying our requests for regulatory approvals or clearances of new products or modified products;
•refusal to grant export approval for our products; or
•criminal prosecution.
Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in a failure to produce our products on a timely basis and in the required quantities, if at all.
Our products and operations are required to comply with standards set by foreign regulatory bodies, and those standards, types of evaluation and scope of review differ among foreign regulatory bodies. If we fail to comply with any of these standards adequately or if changes to our manufacturing or supply practices require additional regulatory approval, a foreign regulatory body may take adverse actions or cause delays within their jurisdiction similar to those within the power of the FDA. Any such action or circumstance may harm our reputation and business, and could have an adverse effect on our business, results of operations and financial condition.
On June 26, 2020, we received a Warning Letter from the FDA relating to the operations of our Austin, Texas and Northbrook, Illinois facilities and our VERIGENE Processor SP System. The Warning Letter resulted from inspections held at the Facilities from February 10, 2020 to February 14, 2020. The Warning Letter primarily relates to the Company’s VERIGENE SP instrument and its hybridization heater. We timely submitted a response to the FDA regarding the issues raised in the Warning Letter and are working diligently and expeditiously to resolve the issues raised by the FDA. The Warning Letter does not restrict the manufacture, production or shipment of any of the Company’s products, nor require the withdrawal of any product from the marketplace. The Company believes it is taking appropriate measures to address the items identified by the FDA with respect to the VERIGENE SP instrument and its hybridization heater, and the Company included communication of these measures in its response to the Warning Letter.
The Company has responded to the FDA’s concerns raised in the Warning Letter, but cannot give assurances that the FDA will be satisfied with its response to the Warning Letter or that such response will resolve the issues identified in the Warning Letter. Failure to promptly and fully address the issues raised in the Warning Letter to the FDA’s satisfaction or to comply with U.S. medical device regulatory requirements in general could result in further regulatory and enforcement actions being initiated by the FDA. These actions could result in, among other things, product recalls, product seizures, injunctions, civil monetary penalties, delays in obtaining marketing authorization for products, an impact on federal contracts, limitations on our ability to export products, and criminal enforcement action. Any such actions could disrupt our ongoing business and operations and potentially have a material adverse effect on our business, financial condition and results of operations.
In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products in the EEA. We must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory clearances or approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects.
Modifications to our marketed products may require new 510(k) or de novo clearances or PMA approvals or equivalent steps in third countries, including the EEA, or may require us to cease marketing or recall the modified products until clearances or approvals are obtained.
Modifications to our products may require new regulatory approvals or clearances, including 510(k) or de novo clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. For example, a manufacturer may determine that a modification does not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall or to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.
For those products sold in the EEA, we must notify our EU notified body if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Obtaining certification can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
If our products contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device were to recur. As required per the FDA Code of Federal Regulations (21 CFR) Part 803, we have established procedures and processes for documentation and evaluation of all complaints relative to reporting requirements. As with all device manufacturers, we have 30 days from “becoming aware” of an incident to submit to the FDA a medical device report for an event that reasonably suggests that a device has or may have caused or contributed to the incident, or five working days for an event designated by FDA or an event that requires remedial action to prevent an unreasonable risk of substantial harm to the public health. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, would require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
All manufacturers placing medical devices on the market in the EEA are legally bound to report incidents involving devices they produce or sell to the regulatory agency, or Competent Authority, in whose jurisdiction the incident occurred. Under the IVDD an incident is defined as any malfunction, failure or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health; any technical or medical reason in relation to the characteristics or performance of a device for the reasons referred to above, leading to systematic recall of devices of the same type by the manufacturer.
Malfunction of our products could result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such as inspection or enforcement actions. If malfunctions do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.
The FDA, Competent Authorities of EEA Member States and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Competent Authorities of foreign countries impose similar deadlines. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or to the Competent Authorities of foreign countries. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
The misuse or off-label use of our products may harm our reputation or the image of our test kits in the marketplace, or result in injuries that lead to product liability suits, which could be costly to our business. Moreover, we could be subject to FDA sanctions if we are deemed to have engaged in off-label promotion.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition on the promotion of a medical device for an indication that has not been approved or cleared by the FDA, referred to as an off-label use. The FDA does not restrict or regulate a physician’s use of a medical device within the practice of medicine, and we cannot prevent a physician from using our test kits for an off-label use. If the FDA determines that our promotional materials constitute the unlawful promotion of an off-label use, it could subject us to regulatory or enforcement actions, including additional civil money penalties, criminal fines and penalties, and exclusion from participation in federal health programs, among others. Other federal, state or foreign governmental authorities might also take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory authorities. In that event, our reputation could be damaged and the use of our products in the marketplace could be impaired.
Furthermore, the use of our products for indications other than those that have been approved or cleared by the FDA may lead to performance issues or produce erroneous results, which could harm our reputation in the marketplace among physicians and patients and increase the risk of product liability. Product liability claims are expensive to defend and could divert our management’s attention from our primary business and result in substantial damage awards against us. Any of these events could harm our business, results of operations and financial condition.
The advertising and promotion of our products in the EEA is subject to EEA Member States’ national laws implementing the IVDD and, in the future, applying the IVDR Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other national legislation of individual EEA Member States governing the advertising and promotion of medical devices. EEA member state legislation may also restrict or impose limitations on our ability to advertise our products directly to the general public. In addition, voluntary EU and national Codes of Conduct provide guidelines on the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.
Clinical trials necessary to support future product submissions will be expensive and may require the enrollment of large numbers of subjects, and suitable subjects may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new test kits and will adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support a future EUA, 510(k), PMA, or de novo submission, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any test kit we advance into clinical trials may not have favorable results in later clinical trials.
Conducting successful clinical trials will require the enrollment of large numbers of subjects, and suitable subjects may be difficult to identify and recruit. Subject enrollment in clinical trials and completion of subject participation depends on many factors, including the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the indication of the underlying test kit, the availability of appropriate clinical trial investigators, support staff, and proximity of subjects to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and subject compliance. In addition, subjects may not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products.
In addition, our clinical trials may in the future be affected by the COVID-19 pandemic. We are unable to predict with confidence the duration of such potential subject enrollment delays and difficulties, whether related to COVID-19 or otherwise. Delays in subject enrollment or failure of subjects to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our test kits or result in the failure of the clinical trial.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of subjects than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate for approval. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
Even if our products are approved or cleared in the United States and CE marked in the EEA, comparable regulatory authorities of additional foreign countries must also approve the manufacturing and marketing of our products in those countries. Approval and clearance procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States or the EEA, including additional preclinical studies or clinical trials. Any of these occurrences may harm our business, financial condition and prospects significantly.
U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
Moreover, leadership, personnel and structural changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws, regulations or policies that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval, for our new products would have an adverse effect on our ability to expand our business.
In addition, on May 25, 2017, the new MDR entered into force for medical devices marketed in the EU. Implementation of the MDR was delayed by one year due to the COVID-19 pandemic. Following its entry into application in May, 2021, the MDR will introduce substantial changes to the obligations with which medical device manufacturers must comply in the EU. High risk medical devices will be subject to additional scrutiny during the conformity assessment procedure. Specifically, the MDR repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the European Economic Area (EEA) Member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA Member State laws implementing them, in all EEA Member States and are intended to eliminate current differences in regulation of medical devices among EEA Member States. The MDR, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices to ensure a high level of safety and health while supporting innovation. The MDR will enter into application on May 26, 2021. Once applicable, the new regulation will among other things:
•strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
•establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;
•improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
•set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and
•strengthen rules for the assessment of certain high-risk devices which may have to undergo an additional check by experts before they are placed on the market.
The MDR imposes a number of new requirements on manufacturers of medical devices. It will be necessary for notified bodies to be accredited by the EU Member States' accreditation bodies to conduct assessment procedures for medical devices in accordance with the Regulation. There are currently a relatively small number of notified bodies that have been accredited to conduct these assessments. This may delay conformity assessment procedures in the future in the EU. This may impact our activities in the EEA and the UK, the renewal of our existing CE Certificates of Conformity and conformity assessment related to future bodies.
Once applicable, the MDR may impose increased compliance obligations for us to access the EU market.
In April 2017, the EU Regulation on In Vitro Diagnostic Medical Devices (Regulation (EU) 2017/746) (IVDR) was adopted. The IVDR repeals and replaces Directive 98/79/EC, the IVDD. Unlike directives, which must be implemented into the national laws of the individual EU Member States, the IVDR will be directly applicable in the EU Member States and on the basis of the EEA agreement in Iceland, Liechtenstein and Norway. The IVDR is, among other things, intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for in vitro diagnostic medical devices and ensure a high level of safety and health while supporting innovation. The IVDR will apply beginning on May 26, 2022. Once applicable, the IVDR will introduce new classification rules for in vitro diagnostic medical devices and new regulatory requirements. The IVDR will also impose increased compliance obligations for manufacturers of in vitro diagnostic medical devices to access the EEA market. Moreover, the scrutiny imposed by notified bodies for the technical documentation related these devices will increase considerably. Complying with the requirements of this regulation may require us to incur significant expenditures.
In order to continue to sell our products in the EEA, we must maintain our CE marks and continue to comply with certain EU directives and, beginning in May 2021, with the MDR.
Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, suspension, variation or withdrawal of our CE Certificates of Conformity by our EU notified body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the EU, such as the recent departure of the United Kingdom (Brexit), may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market products in such countries.
The UK’s withdrawal from the EU on January 31, 2020, commonly referred to as Brexit, has created significant uncertainty concerning the future relationship between the UK and the EU. On December 24, 2020, the EU and UK reached an agreement in principle on the framework for their future relationship, the EU-UK Trade and Cooperation Agreement. The Agreement primarily focuses on ensuring free trade between the EU and the UK in relation to goods. The Agreement does not however, specifically address medical devices. The Agreement seeks to ensure that the parties ensure “regulatory cooperation.” Among the changes that will now occur are that Great Britain (England, Scotland and Wales) will be treated as a third country. Northern Ireland will, with regard to EU regulations, continue to follow the EU regulatory rules. In light of the fact that the CE marking process is set out in EU law, which no longer applies in the UK, the UK has devised a new route to market culminating in a UK Conformity Assessed (UKCA) mark to replace the CE mark. Northern Ireland will, however, continue to be covered by the regulations governing CE marks. As part of the Agreement, the EU and the UK have agreed to continue to recognize declarations of conformity based on a self-assessment in the other territory.
Given the lack of comparable precedent to Brexit, it is unclear what the financial, regulatory, and legal implications of Brexit will be and how it will affect us. However, potentially changing regulatory schemes and tariffs engendered by Brexit may add additional complexity, cost and delays in marketing or selling our products in the United Kingdom. Our revenue and profit, supply and demand for our products, and customer retention and acquisition in both the long-term and short-term could be adversely affected.
If the governmental laws and regulations change in ways that we do not anticipate or if we fail to comply with existing laws and regulations that affect our business, we could be subject to enforcement actions, injunctions and civil and criminal penalties or otherwise be subject to increased costs that could delay or prevent marketing of our products.
Medical device laws and regulations are in effect within the United States and also in many countries outside the United States. These range from comprehensive device clearance requirements for some or all of our medical device products to requests for product data or certifications regarding the hazardous material content of our products. As a device manufacturer, we are required to report annually to the CMS any payments or transfers of value we have made to physicians and teaching hospitals and any physician ownership or investment interest in the company. This data is published in a publicly searchable database. As part of the European Council Directive 2002/96 of February 13, 2003, we are expected to comply with certain requirements regarding the collection, recycling and labeling of our products containing electronic devices in each of the EU Member States where our regulated products are distributed. While we are taking steps to comply with the requirements of WEEE, we cannot be certain that we will comply with the national stage implementation of WEEE in all Member States. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include, for example, the Registration, Evaluation, Authorization and Restriction of Chemical substances Regulation (REACH), the RoHS Directive and the WEEE Directive enacted in the EU, which regulate the use of certain chemical substance and hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. This and similar legislation that has been or is in the process of being enacted in various countries may require us to redesign our products to ensure compliance with the applicable standards. These redesigns may impact the performance of our products, add greater testing lead times for product introductions or have other similar effects. We believe we comply with all such legislation where our products are sold and we will continue to monitor these laws and the regulations being adopted under them to determine our responsibilities. In addition, the State of California adopted the Electronic Waste Recycling Act, effective January 1, 2007, which requires the California Department of Toxic Substances Control to adopt regulations to prohibit the sale of electronic devices in California if they are also prohibited from sale in the EU under the RoHS Directive because they contain certain heavy metals. The number and scope of these requirements are increasing and we will likely become subject to similar laws in other jurisdictions. Failure to comply with applicable federal, state and foreign medical device laws and regulations may harm our business, financial condition and results of operations. We are also subject to a variety of other laws and regulations relating to, among other things, environmental protection and workplace health and safety.
Our strategic partners and customers expect our organization to operate on an established quality management system compliant with FDA Quality System Regulations and industry standards, the In Vitro Diagnostic Directive 98/79/EC of 27 October 1998 (Directive) as implemented nationally in the EU Member States and industry standards, such as ISO 9000. We became ISO 9001:2000 certified in March 2002 and issued a Declaration of Conformity based on a self-assessment for our Luminex 100/200, FLEXMAP 3D and MAGPIX instruments. Our devices are in conformity with Article 1, Article 9, Annex I (Essential Requirements), Annex III and the additional provisions of the Directive as of December 7, 2003. Subsequent audits are carried out annually to ensure we maintain our system in substantial compliance with ISO and other applicable regulations and industry standards. We became ISO 13485:2003 and Canadian Medical Devices Conformity Assessment System (CMDCAS) certified in July 2005. Failure to maintain compliance with FDA, CMDCAS and EU regulations and other medical device laws, or to obtain applicable registrations, where required, could reduce our competitive position in the markets in which we compete and also decrease satisfaction and confidence levels with our partners.
In addition, our operations in the United States are subject to federal, state, and local laws addressing, among other issues, fraud and abuse, privacy and security, and environmental protection. These laws may impact our operations directly or indirectly through our customers and may affect, for example, our sales and marketing programs. We are also subject to laws in foreign jurisdictions, including those that prohibit commercial bribery and certain activities with customers or potential customers. If we fail to comply with applicable laws and regulations, we may be subject to criminal penalties and civil sanctions, including restrictions on our ability to contract with Medicare and Medicaid providers. Evolving interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes to our operations. For further discussion of these matters, see “Government Regulation - Other Government Regulations” in Part I of this Form 10-K.
Risks Relating to Our Common Stock
There can be no assurance that we will continue to pay dividends.
In February 2017, the Board of Directors initiated a cash dividend program under which the Company will pay a regular quarterly cash dividend. The declaration, amount and timing of such dividends are subject to capital availability and determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable to the declaration and payment of cash dividends. Our continuing ability to pay dividends will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors beyond our control that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments, or our dividend program could have a negative effect on our stock price.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock has been and is likely to continue to be highly volatile and subject to wide fluctuations in price. This volatility is in response to various factors, many of which are beyond our control, including:
•actual or anticipated variations in quarterly operating results from historical results or estimates of results prepared by securities analysts
•announcements related to the COVID-19 pandemic and related updates on the development, commercialization, distribution and use of vaccines worldwide;
•developments in patents or other intellectual property rights and litigation;
•new, or changes in, recommendations, guidelines or studies that could affect the use of our products;
•announcements of technological innovations or new products or services by us or our competitors;
•announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
•developments in relationships with our partners, customers and suppliers;
•additions or departures of key personnel;
•conditions or trends in the life science, biotechnology and pharmaceutical industries, including the regulatory environment;
•published studies and reports relating to the comparative efficacy of products and markets in which we participate;
•changes in financial estimates by securities analysts;
•general worldwide economic conditions and interest rates;
•the success or lack of success of integrating our acquisitions;
•instability in the United States and other financial markets, including, but not limited to, effects resulting from the 2020 elections in the United States, and the ongoing and possible escalation of unrest internationally, other armed hostilities or further acts or threats of terrorism in the United States or elsewhere;
•sales of our common stock; and
◦the potential adverse impact of the secondary trading of our stock on foreign exchanges, without our permission, which exchanges are subject to less regulatory oversight than the Nasdaq Global Select Market, and the activity of the market makers of our stock on such exchanges, including the risk that such market makers may engage in naked short sales and/or other deceptive trading practices which may artificially depress or otherwise affect the price of our common stock on the Nasdaq Global Select Market.
In addition, the stock market in general, and the Nasdaq Global Select Market and the market for technology companies in particular, has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.
Anti-takeover provisions in our certificate of incorporation, bylaws and Delaware law could make a third party acquisition of us difficult.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.
Risk Factors Relating to our Notes
We have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, which may adversely affect our operations and financial results.
On May 13, 2020, we issued $260.0 million aggregate principal amount of 3.00% Notes due 2025. Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a purchase price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest, if any. In addition, the indenture for the Notes provides that we are required to repay amounts due under the indenture in the event that there is an event of default for the Notes that results in the principal, premium, if any, and interest, if any, becoming due prior to maturity date for the Notes. Our indebtedness may:
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;
•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;
•require us to use a substantial portion of our cash flow from operations to make debt service payments;
•limit our flexibility to plan for, or react to, changes in our business and industry;
•place us at a competitive disadvantage compared to our less leveraged competitors; and
•increase our vulnerability to the impact of adverse economic and industry conditions.
Further, the indenture governing the Notes does not restrict our ability to incur additional indebtedness and we and our subsidiaries may incur substantial additional indebtedness in the future, subject to the restrictions contained in any future debt instruments existing at the time, some of which may be secured indebtedness.
We may not have the ability to raise the funds necessary for cash or combination settlement upon conversion of the Notes or to repurchase the Notes for cash upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion of the Notes or to repurchase the Notes.
Holders of the Notes will have the right to require us to repurchase all or a portion of their notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions of the Notes as required by such indenture would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.
The conditional conversion features of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion features of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
Under ASC 470-20, Debt with Conversion and Other Options (ASC 470-20), an entity must separately account for the liability and equity components of the Notes that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date, and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we are required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the respective terms of the Notes. We report lower net income in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest rate, which could adversely affect our future financial results, the trading price of our common stock or the Trading Price of the Notes. In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued.
In August 2020, the FASB issued guidance that changes the accounting for the convertible debt instruments described above. Under the new guidance, an entity will no longer be required to separately account for the liability and equity components of convertible debt instruments. This is expected to reduce non-cash interest expense, thereby increasing net income after adoption of the new guidance. Additionally, the treasury stock method for calculating earnings per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares. Rather, the if-converted method will be required. Application of the “if-converted” method may reduce our reported diluted earnings per share. The guidance is effective for interim and annual periods beginning after December 15, 2021. Early adoption is permitted, but no earlier than January 1, 2021. The Company will early adopt this guidance effective January 1, 2021 under the modified retrospective basis with the cumulative effect recognized through an adjustment to additional paid-in capital. Under this method, earnings per share amounts will not be restated in prior periods presented, but future earnings per share amounts will be impacted by the change to the if-converted method for calculating diluted earnings per share. The Company's adoption is expected to result in a decrease of approximately $42 million in additional paid in capital from the de-recognition of the bifurcated equity component and an increase of approximately $50 million in debt from the de-recognition of the discount associated with the bifurcated equity component. The Company expects to write-off the related deferred tax liabilities to additional paid in capital.
The Convertible Note Hedge and Warrant Transactions may affect the value of the Notes and our common stock.
In connection with the pricing of the Notes, we entered into Convertible Note Hedge Transactions with the option counterparties. We also entered into Warrant Transactions with the option counterparties pursuant to which we will sell Warrants for the purchase of our common stock. The Convertible Note Hedge Transactions are expected generally to reduce the potential equity dilution to our common stock upon any conversion of the Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be. However, the Warrant Transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the Warrants unless, subject to the terms of the Warrant Transactions, we elect to cash settle instead of net share settle the Warrants.
In connection with establishing their initial hedges of the convertible note hedge and Warrant Transactions, the option counterparties or their respective affiliates expect to purchase shares of our common stock and/or enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes. These activities could increase (or reduce the size of any decrease in) the market price of our common stock or the Notes at that time.
In addition, the option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Notes and prior to the maturity of the Notes (and are likely to do so following any conversion of the Notes or during any observation period related to a conversion of notes). These activities could also cause a decrease, or avoid an increase, in the market price of our common stock or the Notes, which could affect the note holder’s ability to convert the Notes and, to the extent the activity occurs following conversion or during any observation period related to a conversion of Notes, it could affect the amount and value of the consideration that a note holder will receive upon conversion of such Notes.
In addition, if any such convertible note hedge and Warrant Transaction fails to become effective, the option counterparty thereto or its respective affiliate may unwind its hedge positions with respect to our common stock, which could adversely affect the value of our common stock and the value of the Notes.
The potential effect, if any, of these transactions and activities on the market price of our common stock or the Notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock or the value of the Notes (and as a result, the value of the consideration, the amount of cash and/or the number of shares of common stock, if any, that a note holder would receive upon the conversion of any Notes) and, under certain circumstances, their ability to convert their Notes.
The Convertible Note Hedge Transactions and the Warrant Transactions are separate transactions (in each case that we entered into with the option counterparties), are not part of the terms of the Notes and will not change the holders’ rights under the Notes. A holder of the Notes will not have any rights with respect to the Convertible Note Hedge Transactions or the Warrant Transactions.
We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the Notes or our common stock. In addition, we do not make any representation that the option counterparties will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
We are subject to counterparty risk with respect to the Convertible Note Hedge Transactions.
The option counterparties are financial institutions, and we will be subject to the risk that any or all of them might default under the Convertible Note Hedge Transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions from time to time have resulted in the actual or perceived failure or financial difficulties of many financial institutions, including the bankruptcy filing by Lehman Brothers Holdings Inc. and its various affiliates. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the Convertible Note Hedge Transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurance as to the financial stability or viability of the option counterparties.
To the extent we choose to deliver shares upon conversion of the Notes, the ownership interests of existing stockholders will be diluted and our stock price may be adversely impacted.
Upon conversion of the Notes, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. To the extent we choose to deliver shares upon conversion of some or all of the Notes, this will result in a dilution to the ownership interests of existing stockholders and may depress our stock price.
Certain provisions in the indentures governing the Notes may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions in the indentures governing the Notes may make it more difficult or expensive for a third party to acquire us. For example, the indentures governing the Notes will require us to repurchase the Notes for cash upon the occurrence of a fundamental change (as defined in the relevant indenture governing the Notes) of us and, in certain circumstances, to increase the conversion rate for a holder that converts the Notes in connection with a make-whole fundamental change. A takeover of us may trigger the requirement that we repurchase the Notes, and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in such takeover. Such additional costs may have the effect of delaying or preventing a takeover of us that would otherwise be beneficial to investors.
General Risk Factors
Our success depends partly on our ability to operate without infringing on or misappropriating the proprietary rights of others.
We have been (and from time to time we may be) notified that third parties consider their patents or other intellectual property relevant to our products. We may be sued for infringing the intellectual property rights of others, including claims with respect to intellectual property of entities we may acquire. In addition, we may find it necessary, if threatened, to initiate a lawsuit seeking a declaration from a court that we do not infringe on the proprietary rights of others or that their rights are invalid or unenforceable. Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation could affect our profitability. Furthermore, litigation is time-consuming and could divert management’s attention and resources away from our business. If we do not prevail in any litigation, we may have to pay damages and could be required to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms, if at all. Moreover, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which could have a material adverse effect on our business, financial condition and results of operations.
We require collaboration with other organizations in obtaining relevant biomarkers, and access to oligonucleotides and enzymes that are patented or controlled by others. If we cannot continue to obtain these items or identify freedom to operate opportunities, our business, financial condition and results of operations could be negatively affected.
Security breaches, including with respect to cybersecurity, and other disruptions could compromise our information, products, and services and expose us to liability and harm our reputation and business.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees in our data centers and on our networks. The secure maintenance and transmission of this information is critical to our operations and business strategy. We rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive data. As a participant in the molecular diagnostic market, we may face cyber-attacks that attempt to penetrate our network security, including our data centers, sabotage or otherwise disable our research, products and services (including instruments at our customers’ sites, which may include personally identifiable information) or cause interruptions of our internal systems.
Furthermore, there are a variety of other state, national, foreign, and international laws and regulations that apply to the collection, use, retention, protection, security, disclosure, transfer, and other processing of personal data. California has passed the California Consumer Privacy Act of 2018 (CCPA), which took effect January 1, 2020. The CCPA applies broadly to information that identifies or is associated with any California household or individual, and compliance with the CCPA requires that we implement several operational changes, including processes to respond to individuals’ data access and deletion requests. In addition, many foreign data privacy regulations (including the General Data Protection Regulation (GDPR), which became effective in the European Union on May 25, 2018), can be more stringent than those in the United States. Each of the GDPR and the CCPA confer a private right of action on certain individuals and associations. These laws and regulations are rapidly evolving and changing, and could have an adverse effect on our operations. The costs of compliance with, and the other burdens imposed by, these and other laws and regulatory actions may increase our operational costs.
If successful, hackers may misappropriate personal or confidential business information. In addition, an associate, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, and may purposefully or inadvertently cause a breach involving such information due to items such as business email compromise. We may be at increased risk if we outsource certain services or functions of our business or otherwise rely on third parties to store and use portions of sensitive data. A break or attack affecting any of these third parties could harm our business.
While we continue to implement additional protective measures to reduce the risk of, and to detect, cyber incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems and maintenance of backup and protective systems) which are continuously reviewed and upgraded, the Company’s information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. Any such compromise of our, or our third-party IT service providers’, data security and any access, unauthorized use, public disclosure or loss of personal or confidential business information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, monetary losses, disruption of our operations, damage to our reputation or customers’ willingness to transact business with us and subject us to additional costs and liabilities, any of which could adversely affect our business.
Our success depends on building and sustaining our technology infrastructure.
We are increasingly dependent on information technology to enable us to improve the effectiveness of our operations and to maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary to build, implement and sustain the proper technology infrastructure, we could be subject to transaction errors, the inability to properly support and service our customers, processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property through security breach or cyber-attack, each of which could materially and adversely affect our business.
Uncertain economic conditions and outlook may adversely impact our business, results of operations, financial condition, and liquidity.
Global economic conditions, including, but not limited to, effects resulting from the 2020 elections in the United States and from the COVID-19 pandemic, could adversely affect our results of operations. The credit markets and the financial services industry continue to experience volatility, both domestically and internationally. These conditions not only limit our access to capital but also make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses and consumers to slow spending on our products and services, which would delay and lengthen sales cycles. Some of our customers rely on government research grants to fund technology purchases. If negative trends in the economy affect the government’s allocation of funds to research, there may be less grant funding available for certain of our customers to purchase technologies like those Luminex sells. Certain of our partners and their and our customers may face challenges gaining timely access to sufficient credit or may otherwise be faced with budget constraints, which could result in decreased purchases of, or development of products based on, our products or in an impairment of their ability to make timely payments to us. If our partners and our customers do not make timely payments to us, we may be required to assume greater credit risk relating to those customers, increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. Although we maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, and such losses have historically been within our expectations and the provisions established, we may not continue to experience the same loss rates that we have in the past given the current condition of the worldwide economy. Additionally, these economic conditions and market turbulence may also impact our suppliers, causing them to be unable to supply sufficient quantities of customized components in a timely manner, thereby impairing our ability to manufacture on schedule and at commercially reasonable costs.
Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, financial condition, and results of operations.
We expect that revenue from U.S. sales will continue to represent the majority of our total revenue, but our future profitability will depend in part on our ability to grow and ultimately maintain our product sales in foreign markets, particularly in Asia and Europe. In 2020, approximately 22% of our revenue was derived from sales to non-U.S. customers, with approximately 12% of revenue from sales to customers in Europe and approximately 7% of revenue from sales to customers in Asia. Continued concerns about the systemic impact of potential long-term and wide-spread recession and geopolitical issues have contributed to increased market volatility and diminished expectations for economic growth around the world. Uncertainty about global economic conditions, particularly in emerging markets and countries with government-sponsored healthcare systems, may cause decreased demand for our products and services and increased competition, which could result in lower sales volume and downward pressure on the prices for our products, longer sales cycles, and slower adoption of new technologies. As such, a significant slowdown in these foreign economies or lower investments in new infrastructure could have a negative impact on our sales. We also purchase a portion of the materials included in our products from overseas sources. A weakening of macroeconomic conditions may also adversely affect our suppliers, which could result in interruptions in supply. As a result of acquisitions and organic growth, we have operations and manufacturing facilities in foreign countries that expose us to certain risks. For example, fluctuations in exchange rates may affect our revenues, expenses and results of operations, as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:
•changes in or interpretations of foreign law that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States;
•tariffs, customs and other barriers to importing/exporting materials and products in a cost-effective and timely manner;
•hyperinflation or economic or political instability in foreign countries;
•imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;
•conducting business in places where business practices and customs are unfamiliar and unknown;
•difficulties in staffing and managing international operations;
•the burden of complying with complex and changing foreign regulatory requirements;
•difficulties in accounts receivable collections;
•the imposition of restrictive trade policies, including export restrictions;
•worldwide political conditions;
•the imposition of inconsistent laws or regulations;
•reduced protection of intellectual property rights and trade secrets in some foreign countries;
•the imposition or increase of investment requirements and other restrictions by foreign governments;
•the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute;
•uncertainties relating to foreign laws, including labor laws, and legal proceedings;
•the burden of complying with foreign and international laws and treaties;
•significant currency fluctuations;
•the burden of complying with and changes in international taxation policies;
•the burden of complying with a variety of U.S. laws, including the Foreign Corrupt Practices Act;
•the burden of complying with U.S. export control regulations and policies that restrict our ability to communicate with non-U.S. employees and to supply foreign affiliates, partners and customers; and
•the burden of complying with applicable international laws governing privacy and data security, such as the European Union General Data Protection Regulation.
Our international sales and purchases are subject to numerous U.S. and foreign laws and regulations, including, without limitation, tariffs, trade barriers, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. If we fail to comply with these laws and regulations, we could be liable for administrative, civil or criminal liabilities, and in the extreme case, we could be suspended or debarred from government contracts or have our export privileges suspended, which could have a material adverse effect on our business.
Changes in policy in the U.S. and other countries regarding international trade, including import and export regulation and international trade agreements, could also negatively impact our business. In 2018, 2019 and 2020 the U.S. imposed tariffs on goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs or further retaliatory trade measures taken by China or other countries in response, could affect the demand for our products and services, impact the competitive position of our products, prevent us from being able to sell products in certain countries or otherwise adversely impact our results of operations. The implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs or new barriers to entry, could negatively impact our business, results of operations and financial condition.
International sales and purchases are also subject to a variety of other risks, including risks arising from currency fluctuations, collection issues and taxes. Our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S. dollar and more competitive in countries with currencies that are increasing in value against the U.S. dollar. In addition, our international purchases can become more expensive if the U.S. dollar weakens against the foreign currencies in which we are billed. We have not entered into any foreign currency derivative financial instruments; however, we may choose to do so in the future in an effort to manage or hedge our foreign exchange rate risk.
Our success depends on our ability to attract and retain our management and staff.
We depend on the principal members of our management and scientific staff, including our chief executive officer, Nachum Shamir, and our operations, marketing, research and development, technical support, technical service and sales staff. The loss of services of key members of management could delay or reduce our product development, marketing and sales and technical support efforts. In addition, recruiting and retaining qualified scientific and other personnel to perform research and development, technical support, technical service and marketing and sales work will be critical to our success. There is a shortage in our industry of qualified management and scientific personnel, and competition for these individuals is intense. There can be no assurance that we will be able to retain existing and attract additional personnel necessary to achieve our business objectives.
Our effective tax rate may fluctuate and we may incur obligations in tax jurisdictions in excess of amounts that have been accrued.
We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate may be lower or higher than experienced in the past due to numerous factors, including a change in the mix of our profitability from country to country, the establishment or release of valuation allowances against our deferred tax assets, and changes in tax laws. In addition, we have recorded gross unrecognized tax benefits in our financial statements that, if recognized, would impact our effective tax rate. We are subject to tax audits in various jurisdictions, including the United States, and tax authorities may disagree with certain positions we have taken and assess additional taxes. There can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes could have a material impact on our net income or financial condition. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business and results of operations. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical income, projected future income, the expected timing of the reversals of existing temporary differences, and the implementation of tax-planning strategies.
If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of biotechnological, human diagnostic and therapeutic products. Although we believe that we are reasonably insured against these risks and we generally have limited indemnity protections in our supplier agreements, there can be no assurance that we will be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. A product liability claim in excess of our insurance coverage or a claim that is outside of or exceeds our indemnity protections in our supplier agreements or a recall of one of our products would have to be paid out of our cash reserves.
If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply.
Our research and development processes involve the controlled storage, use and disposal of hazardous materials, including biological hazardous materials. We are subject to foreign, federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. We may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA), and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act in the United States. OSHA or the EPA may adopt regulations that may affect our research and development programs. We are unable to predict whether any agency will adopt any regulations that would have a material adverse effect on our operations.
The risk of accidental contamination or injury from hazardous materials cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our workers’ compensation insurance. We may not be able to maintain insurance on acceptable terms, if at all.
We may incur impairment charges on our goodwill and intangible assets which would reduce our earnings.
We are subject to Accounting Standards Codification (ASC) 350 “Goodwill and Other” (ASC 350) which requires that goodwill and other intangible assets that have an indefinite life be tested at least annually for impairment. Goodwill and other intangible assets with indefinite lives must also be tested for impairment between the annual tests if a triggering event occurs that would likely reduce the fair value of the asset below its carrying amount. As of December 31, 2020, goodwill and other intangible assets with indefinite lives represented approximately 25% of our total assets. In the future, if we determine that there has been impairment, our financial results for the relevant period would be reduced by the amount of the impairment, net of tax effects, if any.
We hold cash and cash equivalents at various foreign subsidiaries that may not be readily available to meet domestic
cash requirements.
Currently a majority of our cash and cash equivalents is held by our U.S. parent company, however, our various foreign subsidiaries have significant cash holdings, in particular our subsidiary in Canada. These cash balances held outside the United States may not be readily available, or may not be available without an additional tax burden, to meet our domestic cash requirements. We require a substantial amount of cash in the United States for operating requirements, purchases of property and equipment, and for potential future acquisitions. If we are unable to meet our domestic cash requirements using domestic cash flows from operations, domestic cash and cash equivalents, by settling loans receivable with our foreign subsidiaries, or by domestic borrowing, it may be necessary for us to consider repatriation of earnings. U.S. tax laws may allow for reductions to the potential tax burden on repatriation of foreign cash; however, such actions would require us to record additional income tax expense and remit additional taxes, which could have a material adverse effect on our results of operations, cash flows and financial condition.
We expect our operating results to continue to fluctuate from quarter to quarter.
The sale of our instruments and assays typically involves a significant technical evaluation and commitment of capital by us, our partners and end users. Accordingly, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks, much of which is beyond our control, including partners’ budgetary constraints, inventory management practices, regulatory approval and internal acceptance reviews. As a result of this lengthy and unpredictable sales cycle, our operating results have historically fluctuated significantly from quarter to quarter. We expect this trend to continue for the foreseeable future.
The vast majority of our system sales are made to our strategic partners. Our partners typically purchase instruments in three phases during their commercialization cycle: first, instruments necessary to support internal assay development; second, instruments for sales force demonstrations; and finally, instruments for resale to their customers. As a result, most of our system placements are highly dependent on the continued commercial success of our strategic partners and can fluctuate from quarter to quarter as our strategic partners move from phase to phase. We expect this trend to continue for the foreseeable future.
Our assays are sometimes sold to large customers. The ordering and consumption patterns of these customers can fluctuate, affecting the timing of shipments and revenue recognition. In addition, certain products assist in the diagnosis of illnesses that are seasonal, and customer orders can fluctuate for this reason. The loss of any of these customers (including LabCorp’s decision to move to an alternative vendor for women’s health products in 2018) has had and is expected to continue to have a material adverse effect or our business, financial condition and results of operations.
The seasonality of some of our assay offerings results in quarter to quarter fluctuations in the percentage of our quarterly revenues derived from our highest margin items (i.e., consumables, royalties and assays), as some customers make infrequent bulk purchases of $100,000 or more to address this demand. Our gross margin percentage is highly dependent upon the mix of revenue components each quarter. These fluctuations contribute to the variability and lack of predictability of both gross margin percentage and total gross profit from quarter to quarter. We expect this trend to continue for the foreseeable future.
Due to the early stage of the market for molecular tests, projected growth scenarios for our assays are highly volatile and are based on a number of underlying assumptions that may or may not prove to be valid, including our ability to be successful with our direct assay sales strategy.
The “conflict minerals” rule of the SEC has caused us to incur additional expenses, could limit the supply and increase the cost of certain metals used in manufacturing our products, and could make us less competitive in our target markets.
On August 22, 2012, the SEC adopted a rule requiring disclosure of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by public companies. The rule requires companies to obtain sourcing data from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure report. The rule could limit our ability to source at competitive prices. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we have implemented, which may harm our reputation. Furthermore, we may encounter challenges in satisfying those customers who require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s products. We continue to investigate the presence of conflict materials within our supply chain.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our principal research and development, manufacturing and administrative facilities are located in Austin, Texas, and consist of approximately 249,000 square feet of leased space pursuant to lease agreements which expire between June 30, 2022 and August 1, 2030. We have options to renew these lease agreements in Austin, Texas. We maintain 20,000 square feet of leased office space in the Netherlands, approximately 34,700 square feet of leased office and manufacturing space in Toronto, Canada, approximately 35,000 square feet of leased office and manufacturing space in Madison, Wisconsin, approximately 64,000 square feet of leased office and manufacturing space in Northbrook, Illinois, approximately 28,000 square feet of leased office and manufacturing space in Seattle, Washington and approximately 8,000 square feet of leased office and research space in Hayward, California. In addition, we maintain approximately 7,500 square feet and approximately 2,100 square feet of leased office space in Shanghai and Beijing, respectively, People’s Republic of China, approximately 600 square feet of lease office space in Hong Kong and approximately 4,000 square feet of leased office space in Tokyo, Japan.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
When and if it appears probable in management’s judgment, and based upon consultation with outside counsel, that we will incur monetary damages or other costs in connection with any claims or proceedings, and such costs can be reasonably estimated, we record the estimated liability in the financial statements. If only a range of estimated losses can be estimated, we record an amount within the range that, in management’s judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we record the liability at the low end of the range of estimates. Any such accrual would be charged to expense in the appropriate period. We disclose significant contingencies when the loss is not probable and/or the amount of the loss is not estimable, when we believe there is at least a reasonable possibility that a loss has been incurred. We recognize costs associated with legal proceedings in the period in which the services were provided. No material legal proceedings are known to be pending as of December 31, 2020.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol “LMNX.”
Holders
As of February 25, 2021, we had 477 holders of record of our common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.
Dividends
In February 2017, the Board of Directors initiated a cash dividend program under which the Company anticipates paying a regular quarterly cash dividend. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s Board of Directors. Our ability to declare dividends may also from time to time be limited by the terms of any applicable credit facility. Luminex does not currently have a credit facility.
During 2020, the Company paid dividends on common stock as follows:
2020 Dividend per share Payment Date
First Quarter $0.09 April 9, 2020
Second Quarter $0.09 July 9, 2020
Third Quarter $0.09 October 15, 2020
Fourth Quarter $0.10 January 14, 2021
On February 8, 2021, we announced that our Board declared a quarterly cash dividend of $0.10 per share of common stock to be paid to shareholders of record as of the close of business on March 25, 2021 with a payment date of April 15, 2021.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities of Luminex during the twelve months ended December 31, 2020.
Performance Graph
The following graph compares the change in Luminex’s cumulative total stockholder return on its common shares with the Nasdaq Composite Index and the Nasdaq Biotechnology Index.
12/15 12/16 12/17 12/18 12/19 12/20
Luminex Corporation 100.00 94.58 93.23 110.39 112.13 113.51
Nasdaq Composite 100.00 108.87 141.13 137.12 187.44 271.64
Nasdaq Biotechnology 100.00 78.65 95.67 87.19 109.08 137.90
Issuer Purchases of Equity Securities
The stock repurchase activity for the fourth quarter of 2020 was as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Period Total Number of Shares Purchased(1)
Average Price Paid per Share ($) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
10/1/2020 - 10/31/2020 272 $ 22.67 - $ -
11/1/2020 - 11/30/2020 - - - -
12/1/2020 - 12/31/2020 91 23.48 - -
Total Fourth Quarter 363 $ 22.87 - $ -
(1) Total shares purchased includes shares attributable to the withholding of shares by Luminex to satisfy the payment of tax obligations related to the vesting of restricted shares.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this Annual Report on Form 10-K. The consolidated statement of comprehensive income data for the years ended December 31, 2020, 2019 and 2018 and the consolidated balance sheet data at December 31, 2020 and 2019 are derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated results of operations data for the years ended December 31, 2017 and 2016 and the consolidated balance sheet data at December 31, 2018, 2017 and 2016 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K.
Year Ended December 31,
2020 2019 2018 2017 2016
Consolidated Results of Operations Data: (in thousands, except per share data)
Total revenue $ 417,396 $ 334,638 $ 315,818 $ 306,571 $ 270,639
Gross profit 247,852 182,739 195,491 199,046 179,655
Income (loss) from operations 42,443 (12,079) 27,846 37,153 20,986
Net income (loss) $ 15,170 $ (3,838) $ 18,508 $ 29,423 $ 13,814
Net income (loss) per common share, basic $ 0.33 $ (0.09) $ 0.42 $ 0.67 $ 0.32
Shares used in computing net income (loss) per common share (basic) 45,102 44,148 43,727 43,173 42,584
Net income (loss) per common share, diluted $ 0.32 $ (0.09) $ 0.41 $ 0.67 $ 0.32
Shares used in computing net income (loss) per common share (diluted) 45,820 44,148 44,291 43,300 43,013
At December 31,
2020 2019 2018 2017 2016
Consolidated Balance Sheet Data: (in thousands)
Cash and cash equivalents $ 309,407 $ 59,173 $ 76,441 $ 127,112 $ 93,452
Working capital 421,570 144,401 151,369 179,393 133,537
Total assets 825,463 543,729 525,175 490,516 450,716
Total long-term debt 203,136 - - - -
Total stockholders’ equity 517,711 464,860 467,656 437,907 403,679
Dividends declared per share $ 0.37 $ 0.30 $ 0.24 $ 0.24 $ -

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of Form 10-K does not address certain items regarding the year ended December 31, 2018. Discussion and analysis of 2018 and year-to-year comparisons between 2019 and 2018 not included in this Form 10-K can be found in "Item 7. Management's Discussion and Analysis" of our Annual Report on Form 10-K for the year ended December 31, 2019. The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes included below in Item 8 and “Risk Factors” included above in Item 1A of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences industries, including diagnostics, pharmaceuticals and research. These industries depend on a broad range of tests, called assays, to perform diagnostic testing, conduct life science research and perform pharmaceutical testing.
We primarily serve the life sciences industries by marketing products, including our specific testing equipment, called systems, and assays, to various types of testing laboratories. We have a large base of installed systems that has grown primarily from the following:
•placements made by customers within our Licensed Technologies Group, which customers either:
•license our xMAP technology and develop products that incorporate our xMAP technology into products that they then sell to end users, or
•purchase our proprietary xMAP laboratory instruments and our proprietary xMAP microspheres and sell xMAP-based assays and/or xMAP-based testing services, which run on the xMAP instruments, and pay a royalty to us; and
•in addition, we utilize a direct sales force that focuses on the sale of molecular diagnostic assays that run on our systems.
As of December 31, 2020, Luminex had 82 strategic partners, of which 54 have released commercialized reagent-based products utilizing our technology. Our remaining LTG customers are in various stages of development and commercialization of products that incorporate our technology.
Luminex has a number of forms of revenue that result from our business model:
•System revenue is generated from the sale of our xMAP multiplexing analyzers and peripherals, our VERIGENE readers and processors and our flow cytometers and cellular analysis instruments.
•Consumable revenue is generated from the sale of our dyed polystyrene microspheres, along with sheath and drive fluid. Our larger commercial and development partners often purchase these consumables in bulk to minimize the number of incoming qualification events and to allow for longer development and production runs.
•Royalty revenue is generated when a partner sells our proprietary microspheres to an end user, when a partner sells a kit incorporating our proprietary microspheres to an end user or when a partner utilizes a kit to provide a testing result to an end user. End users can be facilities such as testing labs, development facilities and research facilities that buy prepared kits and have specific testing needs or testing service companies that provide assay results to pharmaceutical research companies or physicians.
•Assay revenue is generated primarily from four sources: (i) sale of our branded kits, which are a combination of chemical and biological reagents and our proprietary xMAP bead technology used to perform diagnostic and research assays on samples, (ii) real-time Polymerase Chain Reaction (PCR) and multiplexed PCR assays using our proprietary MultiCode technology, (iii) ARIES cassettes designed to run a fully automated, sample-to-answer molecular assay on the ARIES System, and (iv) VERIGENE test cartridges, a sample-to-answer molecular assay designed to target infections in the bloodstream, respiratory tract, and gastrointestinal tract on the VERIGENE System.
•Service revenue is generated when a partner or other owner of a system purchases a service contract from us after the standard warranty has expired or pays us for our time and materials to service instruments. Service contract revenue is amortized over the life of the contract and the costs associated with those contracts are recognized as incurred.
•Other revenue consists of items such as training, shipping, parts sales, license revenue, grant revenue, contract research and development fees, milestone revenue, amounts paid to global purchasing organizations (which are accounted for as a reduction in revenue) and other items that individually amounted to less than 1.5% of total revenue in 2020.
2020 Highlights
•Consolidated revenue was $417.4 million for 2020, representing a 25% increase over revenue for 2019.
•Assay revenue of $211.9 million for 2020, representing an increase of 60% over 2019.
•Sample-to-answer assay revenue increased for 2020 by $33.2 million, or 49%, from 2019.
•Record placements of sample-to-answer systems, which consisted of 449 ARIES and VERIGENE systems sold or contracted through reagent rental agreements in 2020.
•Profitability increased to $15.2 million for 2020, an increase of more than 490% from 2019.
•Received two BARDA awards related to completing a 510(k) filing for Luminex’s NxTAG CoV Extended Panel and the ARIES SARS-CoV-2 assay for COVID-19 testing in March 2020.
•Received FDA EUA for the NxTAG CoV Extended Panel on March 27, 2020.
•Received FDA EUA for the xMAP SARS-CoV-2 Multi-Antigen IgG Assay on July 16, 2020, which was supported by a BARDA award received in March 2020.
•Received FDA EUA for the ARIES SARS-CoV-2 Assay on April 6, 2020.
•Received two additional BARDA awards related to completing a 510(k) filing for Luminex’s NxTAG RPP and SARS-CoV-2 panel; and support of the enhancement of our xMAP SARS-CoV-2 Multi-Antigen IgG Assay in September 2020.
•Issued $260.0 million principal amount of Notes in the second quarter 2020, due in May 2025.
COVID-19 Considerations
Since December 2019, COVID-19 has spread rapidly, with most countries and territories worldwide having confirmed cases, and a high concentration of cases in the U.S. and many other countries in which we operate. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies.
Our priorities during the COVID-19 pandemic have been, among others, protecting the health and safety of our employees; providing multiple solutions to the marketplace, including our EUA SARS-CoV-2 tests; and ramping up manufacturing to help our customers meet and overcome their current challenges.
Our overall revenues were materially enhanced by COVID-19-related product sales. As of December 31, 2020, the COVID-19 pandemic was the primary driver behind our 25% increase in revenue over 2019. We experienced an overall 60% increase in assay revenue, with our combined respiratory-related products up more than 100% year-over-year as a result of the use of our products related to the pandemic. At the beginning of the pandemic, our customers initially used our products to rule out other respiratory illnesses. However, once we received EUAs for our COVID-19 molecular diagnostic tests, our volume shifted towards our COVID-19-specific products.
The increases in assay, system, and consumable sales revenue were partially offset by a decrease in royalty revenue as a result of pressures faced by some of our partners. System sales increased in 2020, primarily driven by higher placements of sample-to-answer systems, partially offset by lower sales of flow cytometry systems as compared to the prior year. Sample-to-answer sales continued to benefit in part from the COVID-19 pandemic, while flow cytometry instrument sales declined as compared to 2019. We sold 973 multiplexing analyzers in the year ended December 31, 2020, as compared to 990 multiplexing analyzers sold in the comparable period in 2019. In addition, royalty revenue from our partners declined in 2020, primarily driven by a reduction in non-bulk purchases from certain partners and the pressures faced by academic research and diagnostic institutions as a result of the pandemic in the U.S.
Given the increased demand for certain of our assay products in 2020, the pandemic has not negatively impacted the Company’s liquidity position to date. As of December 31, 2020, we believe that we have the cash necessary to meet our short-term liquidity needs. We also have not observed any material impairments of our assets or a significant change in the fair market value of our assets due to the COVID-19 pandemic.
Our additional research and development efforts related to our recent EUA SARS-CoV-2 tests were partially funded by two BARDA contracts awarded to the Company for the development, testing and submission of these tests. In September, 2020, we were awarded two additional BARDA contracts related to completing a 510(k) filing for Luminex’s expanded NxTAG Respiratory Pathogen Panel (RPP), which includes the SARS-CoV-2 virus for COVID-19 testing and to support the enhancement of the company’s xMAP SARS-CoV-2 Multi-Antigen IgG Assay. Please refer to “BARDA Contracts” below for further discussion.
During the year ended December 31, 2020, we focused our energies on increasing our manufacturing capacity (nearly doubling prior capability since the beginning of the year) while portions of our workforce worked remotely as their positions allowed. Our ability to continue to operate without any significant negative operational impact from the COVID-19 pandemic will, in part, depend on our ability to protect our employees and maintain our supply chain. Continued rapid expansion of capacity may be constrained by long lead-time purchased items and capital equipment needs. The Company continues to endeavor to follow the recommended actions of government and health authorities to protect our employees, with particular measures in place for employees who manufacture our products. For the year ended December 31, 2020, we maintained the consistency of our operations with minimal interruptions despite the impact of the COVID-19 pandemic. Although we intend to continue to take appropriate measures to ensure that any disruptions to our operations remain minimal during the pandemic, the complications resulting from the pandemic could result in unforeseen disruptions to our workforce and supply chain, including any potential interruptions in our ability to source, transport and supply materials to the Company that are necessary for continued operations, that could negatively impact our operations.
We believe the extent of the COVID-19 pandemic’s impact on our operating results and financial condition will be driven by many factors, most of which are beyond our control and ability to forecast. Such factors include, but are not limited to, the severity and duration of the pandemic, our ability to timely develop, commercialize and manufacture solutions related to the pandemic, the extent and the effectiveness of responsive actions taken by authorities of impacted countries, the impact of these and other factors on our employees, customers and suppliers, as well as any resulting impact of the economic uncertainty and volatility that could affect demand for our products. Because of these and other uncertainties, we cannot estimate the length or extent of the impact of the pandemic on our business.
BARDA Contracts
In March 2020, BARDA awarded the Company two milestone-based contracts, with a value of $642,450 each, funding approximately 36% of the overall cost of development, testing and submission for two EUAs to provide rapid answers to patients believed to have COVID-19. Luminex funded the remaining 64% of the total program costs, representing $1.1 million each. In March 2020, the Company received FDA EUA for its new NxTAG CoV Extended Panel, a high-throughput test for detecting SARS-CoV-2 that provides results for up to 96 samples in approximately four hours. The NxTAG CoV Extended Panel runs on Luminex’s easy-to-use, compact MAGPIX System. In April 2020, the Company received FDA EUA for its new ARIES SARS-CoV-2 Assay, which is designed to provide rapid answers to patients believed to have COVID-19, generating results in approximately two hours. The test can be run on both 6-unit and 12-unit ARIES Systems.
In September, BARDA awarded the Company two additional milestone-based contracts valued at $5,389,813 and $683,500, respectively, related to completing a 510(k) filing for Luminex’s expanded NxTAG RPP, which includes the SARS-CoV-2 virus for COVID-19 testing, and to support the enhancement of the company’s xMAP SARS-CoV-2 Multi-Antigen IgG Assay. The Company intends to submit this enhanced serology assay for an EUA when this project is completed. No government contract revenue has been recorded to date for either of these two new BARDA contracts.
FDA Matters
On June 26, 2020, the Company received a warning letter (the Warning Letter) from the FDA relating to the operations of the Company’s Austin, Texas and Northbrook, Illinois facilities (the Facilities) and the Company’s VERIGENE Processor SP System. The Warning Letter resulted from inspections held at the Facilities from February 10, 2020 to February 14, 2020. The company submitted a comprehensive response to each of those inspections. The subsequently issued Warning Letter primarily relates to the Company’s VERIGENE SP instrument and its hybridization heater in connection with certain FDA requirements under the Quality System Regulation (21 C.F.R. Part 820) and the regulation of Medical Device Corrections and Removals (21 C.F.R. Part 806).
The Company timely submitted a response and corrective action plan to the FDA regarding the issues raised in the Warning Letter, as requested by the FDA, and continues working diligently and expeditiously to resolve the issues raised by the FDA. The Warning Letter did not restrict the manufacture, production or shipment of any of the Company’s products, nor require the withdrawal of any product from the marketplace. The Company believes it has taken, and is continuing to take, appropriate measures to address the items identified by the FDA with respect to the VERIGENE SP instrument and its hybridization heater, and the Company included communication of these measures in its response to the Warning Letter. Specifically, we recalled affected product from the field and replaced them with new units. Additionally, we are executing a field action to re-calibrate all VERIGENE SP instruments deployed in the field with in-house built and verified temperature verification fixtures by March 18, 2021. In addition, the Company continues to evaluate what further corrective or preventive action may be required.
The Company has responded to the FDA’s concerns raised in the Warning Letter but cannot give assurances that the FDA will be satisfied with its response to the Warning Letter or that such actions will sufficiently resolve the issues identified in the Warning Letter. Failure to promptly and fully address the issues raised in the Warning Letter to the FDA’s satisfaction or to comply with U.S. medical device regulatory requirements in general could result in further regulatory and enforcement actions being initiated by the FDA. These actions could result in, among other things, product recalls, product seizures, injunctions, civil monetary penalties, further delays in obtaining marketing authorization for products, an impact on federal contracts, limitations on our ability to export products, and criminal enforcement action. Any such actions could disrupt our ongoing business and operations and potentially have a material adverse effect on our business, financial condition and results of operations.
Consumable Sales and Royalty Revenue Trends
We have experienced significant fluctuations in consumable revenue in the past. Year-over-year changes in consumable revenue have been an increase of $0.4 million, a decrease of $1.6 million, and an increase of $0.8 million, in 2020, 2019, and 2018, respectively. While the changes over the past three years have not been significant, fluctuations can manifest through periodic changes in volume from our largest purchasing partners. These partners account for 60% of our total consumable sales volume. We expect these fluctuations to continue as the ordering patterns and inventory levels of our largest bulk purchasing partners remain variable. Additionally, even though we experience variability in consumable revenue, the key indicator of the success of our partners’ commercialization efforts is the rising level of royalties and reported royalty-bearing sales. However, during 2020, consumables were flat and royalties were lower than in 2019 as a result of the COVID-19 pandemic. We expect to return to growth in consumables and royalties as the COVID-19 pandemic subsides.
Growth in Inventory
Our inventory has increased from $77.1 million as of December 31, 2019 to $123.1 million as of December 31, 2020, primarily as a result of increases in COVID-19 assay finished goods and instrument inventory to support significant increases in demand. Inventory levels may increase in 2021, primarily as a result of stocking COVID-19-related products to further support current and anticipated demand and new product launches.
Future Operations
We expect our areas of focus over the next twelve months to be:
•delivering on our revenue growth goals;
•development and commercialization of SARS-CoV-2-related diagnostic and serology tests, as well as support of partner activities focused on testing, treatment, and vaccines for SARS-CoV-2;
•maintenance and improvement of our existing products and the timely development, completion and successful commercial launch of our pipeline products;
•completing development and commercialization of the next generation sample-to-answer system, VERIGENE II, our next generation xMAP System and xMAP INTELLIFLEX;
•accelerating development and commercialization of the assays on our sample-to-answer diagnostic systems;
•monitoring and mitigating the effect of the ongoing uncertainty and volatility in global finance markets and changes in government funding on planned purchases by end users;
•improvement of ARIES and VERIGENE gross margins;
•placements of our VERIGENE and ARIES Systems, our sample-to-answer platforms and assays;
•increasing the growth of our LTG revenue through enrichment of our existing partner relationships and the addition of new partners;
•adoption and use of our platforms and consumables by our customers for their testing services; and
•expansion and enhancement of our installed base of systems and our market position within our identified target market segments.
We anticipate continued revenue concentration in our higher margin items (assays, consumables and royalties). Additionally, we believe that a sustained investment in research and development is necessary in order to meet the needs of our marketplace and to provide a sustainable new product pipeline. We may experience volatility in research and development expenses as a percentage of revenue on a quarterly basis as a result of the timing of development expenses, clinical validation and clinical trials in advance of the commercial launch of our new products.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The following is a discussion of our most critical accounting policies used in the preparation of our financial statements, and the judgments and estimates involved under each. We also have other significant accounting policies that do not involve critical accounting estimates because they do not generally require us to make estimates and judgments that are difficult or subjective. These are described in Note 1 of our Consolidated Financial Statements provided herein in Item 8. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition and Performance Obligations: Revenue is generated primarily from the sale of the Company’s products and related services, which are primarily support and maintenance services on the Company’s systems. The Company recognizes product revenue when the customer obtains control of the Company’s product, which typically occurs upon shipment or delivery to the customer depending upon the shipping terms. We treat shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost. Our customers do not typically have any contractual rights of return outside of our warranty provisions. The Company has allowed few returns to date and believes that returns of its products will be minimal.
Royalties: For arrangements that include sales-based royalties, including minimum payments, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation, to which some or all of the royalty has been allocated, has been satisfied. This was a change in 2018 from how the Company has historically treated royalty payments, by recognizing royalty revenue when our strategic partners reported end-user sales to the Company, and is primarily the basis for our cumulative adjustment as of January 1, 2018 to retained earnings of $10.6 million before related tax impacts or $8.1 million net of related tax impacts. Royalty payments are typically received when our strategic partners report end-user sales to the Company.
Reagent Rentals: The Company provides systems and certain other hardware to customers through reagent rental agreements, under which the customers commit to purchasing minimum quantities of disposable products at a stated price over a defined contract term, which is normally two to three years. Instead of rental payments, the Company recovers the cost of providing the system and other hardware in the amount charged for assays. Revenue is recognized over the defined contract term as assays are shipped. The depreciation costs associated with the system and other hardware are charged to cost of sales on a straight-line basis over the estimated life of the system. The costs to maintain these instruments in the field are charged to cost of sales as incurred. The Company began reclassifying the portion of reagent rental revenue associated with the recovery of the cost of providing the system and other hardware in reagent rental agreements from assay revenue to system revenue effective January 1, 2018. This change does not have any impact on top line revenue and the Company does not anticipate any material effects to its revenue categorization.
Warranties: The Company provides a limited, assurance-type warranty, typically for twelve months from installation for the systems sold to end customers and fifteen months for the systems sold to partners. The Company accrues for the estimated cost of initial product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. While management believes that adequate reserve has been made in the consolidated financial statements for product warranties, should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. However, we do not believe this estimate is subject to significant variability.
License Revenues: The Company enters into out-licensing agreements, under which it licenses certain rights to its technology to third parties. These licenses are typically not distinct, as the customer cannot benefit from the license on its own, and do not have significant standalone functionality, but represent single performance obligations together with the sales of our consumables, systems and assays. The terms of these arrangements typically include payment to the Company of non-refundable, up-front license fees. Some of our current agreements range through 2027 and can be extended for up to twenty years. Each of these payments results in license revenues which are recognized ratably over time and are included in other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. Deferred revenues related to these out-licensing agreements are shown in contract liabilities in the table included in Note 18, “Revenue Recognition,” in our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Service Agreements: Revenue from extended service agreements is deferred when payment is received in advance of the performance obligation being satisfied or completed. Luminex provides an integrated service of maintenance and related activities for equipment sold to customers, where the nature of the overall promise is to provide a stand-ready service. As such, the performance obligation is recognized as a series of distinct service periods and the service revenue is recognized ratably over the term of the agreement. The extended service agreements typically range from one to four years and payment is typically received up-front.
Reserves for Variable Consideration: Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts and any other allowances that are offered within contracts between the Company and its customers relating to the Company’s sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of revenue and accounts receivable. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of each contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period when such variances become known.
Inventory. Inventories are valued at the lower of cost and net realizable value. Cost is determined according to the standard cost method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Inventories have been written down through an allowance for excess and obsolete inventories. The two major components of the allowance for excess and obsolete inventory are (i) a specific write-down for inventory items that we no longer use in the manufacture of our products or that no longer meet our specifications and (ii) a write-down against slow moving items for potential obsolescence. Inventory is reviewed on a regular basis and adjusted based on management’s review of inventories on hand compared to estimated future usage and sales. While management believes that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, scientific and technological advances will continue and we could experience additional inventory write-downs in the future. However, we do not believe this estimate is subject to significant variability.
Purchase Price Allocation, Intangibles and Goodwill. The purchase price allocation for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. Intangible assets with definite lives are amortized over the assets’ estimated useful lives using the straight-line method. We periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a diminished fair value or revised useful life.
Goodwill represents the excess of the cost over the fair value of the assets of the acquired business. We evaluate the carrying value of goodwill on a reporting unit level annually, on October 1st of each year, or more frequently if there is evidence that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In 2020 and 2019, the Company estimated the fair value of the reporting unit using a fair-value approach based on the market capitalization. This analysis requires a comparison of the carrying value of the reporting unit to the estimated fair value of the reporting unit. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for the Company’s products, capital needs, economic trends and other factors which are inherently difficult to forecast. Our annual test, performed on the first day of the fourth quarter, did not result in an impairment charge for 2020 or 2019 as the estimated fair value of our reporting unit exceeded the carrying value by a significant enough amount that any reasonably likely change in the assumptions used in the analysis would not cause the carrying value to exceed the estimated fair value for the reporting unit as determined under our analysis.
Accounting for Income Taxes. We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical income, projected future income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. The excess of financial reporting basis over tax basis of our foreign subsidiaries are considered permanently reinvested, with the exception of the Canadian subsidiary. Accordingly, provision for withholding taxes on certain earnings has only been provided for this subsidiary.
The GAAP guidance requires recognition of the impact of a tax position in our financial statements only if that position is more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. Determining the consolidated provision for income taxes involves judgments, estimates and the application of complex tax regulations. We are required to provide for income taxes in each of the jurisdictions where we operate, including estimated liabilities for uncertain tax positions. Although we believe that we have provided adequate liabilities for uncertain tax positions, the actual liability resulting from examinations by taxing authorities could differ from the recorded income tax liabilities and could result in additional income tax expense having a material impact on our consolidated results of operations. Changes of estimates in our income tax liabilities are reflected in our income tax provision in the period in which the factors resulting in the change to our estimate become known to us. We benefit from research tax credit incentives in the U.S. and Canada extended to taxpayers engaged in qualified research and experimental activities while carrying on a trade or business.
Significant reform of the Internal Revenue Code was signed into legislation on December 22, 2017 pursuant to the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act). This legislation includes, among other things, changes to U.S. federal tax rates and the migration from a “worldwide” system of taxation to a territorial system. The U.S. tax reform modifications to the taxation of foreign profits and changes to deductibility of U.S operational expenses will have an ongoing impact to the tax estimates in our financial statements and may not be beneficial.
Stock compensation. All stock-based compensation cost, including grants of stock options, restricted stock units and shares issued under the Company’s employee stock purchase plan, is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The fair value of our stock options is estimated using the Black-Scholes option pricing model. The Black-Scholes valuation calculation requires us to estimate key assumptions such as expected volatility, expected term and risk-free rate of return. Calculation of expected volatility is based on historical volatility. The expected term is calculated using the contractual term of the options as well as an analysis of our historical exercises of stock options. The estimate of the risk-free rate of return is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on our history and expectation of dividend payouts at the time of grant.
The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. As part of the requirements of ASC 718 “Stock Compensation”, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is based on historical forfeiture performance and will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of evaluation and will also impact the amount of stock compensation expense to be recognized in future periods. Ultimately, the actual expense recognized over the vesting period will only be for those awards that vest, except for the limited number of market based awards under long-term incentive plans. If we use different assumptions for estimating stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change in our stock-based compensation expense could materially affect our operating income, net income and net income per share.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue of certain items in the Consolidated Results of Operations. The financial information and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
Year Ended December 31,
2020 2019 2018
Revenue 100 % 100 % 100 %
Cost of revenue 41 % 45 % 38 %
Gross profit 59 % 55 % 62 %
Operating expenses:
Research and development expense 13 % 17 % 15 %
Selling, general and administrative expense 34 % 38 % 35 %
Amortization of acquired intangible assets 3 % 3 % 3 %
Total operating expenses 49 % 58 % 53 %
Income from operations 10 % (4) % 9 %
Interest and other expense, net (3) % 1 % - %
Loss from equity method investment - % - % - %
Income taxes (3) % 2 % (3) %
Net income 4 % (1) % 6 %
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Year Ended December 31,
2020 2019 Variance Variance (%)
(dollars in thousands)
Revenue $ 417,396 $ 334,638 $ 82,758 25 %
Gross profit $ 247,852 $ 182,739 $ 65,113 36 %
Gross margin percentage 59 % 55 % 4 % N/A
Operating expenses $ 205,409 $ 194,818 $ 10,591 5 %
Income from operations $ 42,443 $ (12,079) $ 54,522 451 %
Net income $ 15,170 $ (3,838) $ 19,008 495 %
Total revenue increased by 25% to $417.4 million for 2020 from $334.6 million in 2019. The Company experienced increases primarily in assay sales, partially offset by decreases in royalty revenue compared to the prior year period. Total assay revenue increased 60% as compared to the same period in 2019 and this increase was mainly attributable to increased demand for respiratory and related products stemming from the COVID-19 pandemic, with increases in both our non-automated and automated assay revenue. Non-automated assay revenue grew 77% to $109.1 million for 2020 from $61.7 million in 2019 and comprised 51% of total assay revenue for 2020 compared to 47% of total assay revenue for the comparable period in 2019. Automated assay revenue, which consists of ARIES and VERIGENE assays, grew 49% to $100.9 million for 2020 from $67.7 million in 2019.
The following table presents our revenues disaggregated by revenue source for the years ended December 31, 2020 and 2019:
Year Ended December 31,
2020 2019 Variance Variance (%)
(dollars in thousands)
System sales $ 70,764 $ 70,276 $ 488 1 %
Consumable sales 48,936 48,542 394 1 %
Royalty revenue 48,873 53,562 (4,689) (9) %
Assay revenue 211,902 132,028 79,874 60 %
Service revenue 23,341 22,413 928 4 %
Other revenue 13,580 7,817 5,763 74 %
$ 417,396 $ 334,638 $ 82,758 25 %
We continue to have revenue concentration in a limited number of customers; however, revenue concentration has trended down significantly over the past several years. In 2020, the top five customers, by revenue, accounted for 22% of total revenue, down from 30% of total revenue in 2019 and 42% in 2018. In particular, our two largest customers by revenue accounted for 14% of 2020 total revenue (10% and 4%, respectively), a decrease from 17% of 2019 total revenue (12% and 5%, respectively). No other customer accounted for more than 6% of total revenue in 2020 or 2019. In 2020, approximately 22% of our revenue was derived from sales to non-U.S. customers, with approximately 12% of revenue from sales to customers in Europe and approximately 7% of revenue from sales to customers in Asia. This compares to approximately 25% of our 2019 revenue being derived from sales to non-U.S. customers, with approximately 11% of revenue from sales to customers in Europe and approximately 10% of revenue from sales to customers in Asia. This decline in the percentage of sales to non-U.S. customers has been driven primarily by a decrease in instruments sales as a result of the COVID-19 pandemic.
Revenue from the sale of systems and peripheral components increased 1% to $70.8 million for 2020 from $70.3 million in 2019, and reflected a change in sales mix with higher sales of sample-to-answer systems, partially offset by lower sales of flow cytometry and multiplexing systems. Sample-to-answer sales benefited in part from the increased demand resulting from the COVID-19 pandemic, while both flow cytometry and multiplexing sales experienced pressures of reduced demand from the pandemic. We sold 973 multiplexing analyzers in 2020, as compared to 990 multiplexing analyzers sold in 2019. For 2020, our five highest selling partners accounted for 741 systems, or 76%, of total multiplexing analyzers sold, whereas our five highest selling partners in 2019 accounted for 787, or 79%, of total multiplexing analyzers sold.
Consumable sales, comprised of microspheres and sheath fluid, increased 1% to $48.9 million in 2020 from $48.5 million in 2019, primarily driven by higher aggregate non-bulk purchases from several partners. During 2020, we had 74 bulk purchases of consumables totaling approximately $35.3 million, or 72% of total consumable revenue, ranging from $0.1 million to $3.9 million, as compared with 73 bulk purchases totaling approximately $36.2 million, or 74% of total consumable revenue, in 2019. We expect fluctuations in consumable sales on an ongoing basis. Partners who reported royalty-bearing sales accounted for $27.6 million, or 56%, of total consumable sales in 2020 compared to $34.0 million, or 70%, of the total consumable sales in 2019.
Royalty revenue, which results when our partners sell products or testing services incorporating our technology, decreased 9% to $48.9 million for 2020 from $53.6 million for 2019, primarily attributable to an expectation of lower aggregate royalties to be reported by our partners. Some of our partners’ reports on end user sales indicated declines, which were primarily the result of the COVID-19 pandemic. Additionally, we expect modest fluctuations in the royalties submitted quarter to quarter based upon the varying contractual terms, differing reporting and payment requirements, and the addition of new partners. Our partners’ end user sales may reflect volatility from quarter to quarter and, therefore, that same volatility is reflected in our reported royalty revenues on a quarterly basis.
Assay revenue increased 60% to $211.9 million for 2020 from $132.0 million for 2019, predominantly driven by increased demand for respiratory and related products stemming from the COVID-19 pandemic. Revenue for our non-automated testing assays increased by 77% to $109.1 million for 2020, from $61.7 million for 2019. Our sample-to-answer assay revenue, which consists of ARIES and VERIGENE assay sales, grew 49% to $100.9 million for 2020 from $67.7 million in 2019. No customer accounted for more than 4% of total assay revenue during 2020, down from 10% during the comparable period in 2019.
Service revenue, comprised of extended warranty contracts earned ratably over the term of a contract and time and materials for billable service work not under an extended warranty contract, increased 4% to $23.3 million during 2020 from $22.4 million in 2019. This increase was primarily driven by an increase in the number of systems covered under extended service agreements. At December 31, 2020, we had approximately 3,500 Luminex systems covered under extended service agreements and $10.5 million in deferred revenue related to those contracts. At December 31, 2019, we had approximately 3,000 Luminex systems covered under extended service agreements and $8.7 million in deferred revenue related to those contracts.
Other revenue, which includes training revenue, shipping revenue, miscellaneous part sales, amortized license fees, software revenue, custom service agreements and revenue from agreements with U.S. government agencies, increased to $13.6 million for 2020, compared to $7.8 million for 2019. This increase was primarily the result of two BARDA awards totaling approximately $1.3 million received in March 2020 for the development, testing and submission of our NxTAG and ARIES CoV assays, custom service revenue in the 2020, in addition to increases in shipping revenue in 2020, as compared to 2019.
Gross Profit. Gross profit increased to $247.9 million for 2020, as compared to $182.7 million for 2019. Gross margin (gross profit as a percentage of total revenue) increased to 59% for 2020, from 55% for 2019. This increase in gross margin was primarily attributable to the economies of scale realized in manufacturing, in addition to (i) a favorable sales mix in 2020 and (ii) the absorption of the flow cytometry acquisition-related costs in 2019, primarily expenses of $1.1 million for the step-up in inventory to fair value, which did not repeat in 2020. The concentration of sales in our higher margin items (royalties, consumables, and non-automated assays), represented 50% of revenue for 2020, as compared to 49% in 2019. We anticipate fluctuation in gross margin and related gross profit in future periods primarily as a result of variability in consumable and system purchases and seasonality effects inherent in our assay revenue.
Research and Development Expense. Research and development expense increased to $53.7 million, or 13% of total revenue, for 2020 from $56.2 million, or 17% of total revenue, in 2019. The decrease in research and development expense was primarily attributable to lower direct material expenses, reflecting development activities which were lower in 2020 or completed in 2019 for VERIGENE II assays, the xMAP INTELLIFLEX and Guava Next Gen systems. Research and development expenses in 2020 include expenses related to the development and testing of our NxTAG CoV Extended Panel and the ARIES SARS-CoV-2 Assay which were partially funded under the BARDA contracts awarded in March 2020 and our VERIGENE SP SARS-CoV-2 and VERIGENE II RSP Flex + CoV assays. Research and development headcount as of December 31, 2020 was 218, as compared to 216 as of December 31, 2019. The focus of our research and development activities is expanding the portfolio of COVID-19 solutions, in addition to our ongoing efforts around the development and commercialization of the VERIGENE II System and associated assays, and the development of the xMAP INTELLIFLEX System.
Selling, General and Administrative Expense. Selling, general and administrative expenses, excluding the amortization of acquired intangible assets, increased to $140.2 million for 2020 from $127.2 million for 2019. The increase over the prior year period was primarily attributable to higher sales and marketing expenses, in particular, commission and personnel-related costs in 2020 related to the increase in revenue. Selling, general and administrative headcount at December 31, 2020 was 502, as compared to 495 at December 31, 2019. As a percentage of revenue, selling, general and administrative expense, excluding the amortization of acquired intangible assets, was 34% for 2020 and 38% for 2019.
Interest and Other Expense, Net. Interest and other expense, net, consists primarily of interest expense and income. We earn interest income on our cash, cash equivalents and investments. Interest expense consists primarily of the interest from the amortization of debt discount, issuance costs, and coupon interest attributable to the Notes issued in May 2020, which was approximately $11.5 million in 2020.
Income taxes. Our effective tax rate for 2020 was 47.6%, or a provision of $13.8 million, as compared to a benefit of 60.0%, or $5.7 million, for 2019. The tax expense for 2020 was primarily a result of U.S. federal tax under the global intangible low-tax income (GILTI) provisions of the Tax Act and tax expense of $2.1 million recorded related to valuation allowances which offset deferred tax assets of certain U.S. state net operating loss carryforwards. The tax benefit for 2019 reflects a reduction in unrecognized tax benefits related to the U.S. transition tax of $6.6 million as a result of a ruling for certain aspects of the earnings and profits (E&P) calculation of our Canadian subsidiary. Our rate is also impacted by our research tax credit benefit for our U.S. and Canadian entities.
We expect our worldwide mix of earnings will mainly be taxed in jurisdictions with a top statutory tax rate of 25% in the near-term. The Company also expects to generate annual research tax credit benefits. However, the Tax Act’s modifications to the taxation of foreign profits and changes to deductibility of U.S. operational expenses will have an ongoing impact to the tax estimates in our financial statements and may not be beneficial. As a result, unless the Tax Act is modified or repealed, we expect our consolidated effective tax rate to be in the 25% to 35% range over the next several years, absent any other significant discrete items. We continue to assess our business model and its impact in various tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
December 31, 2020 December 31, 2019
(in thousands)
Cash and cash equivalents $ 309,407 $ 59,173
At December 31, 2020, we held cash and cash equivalents of $309.4 million and had working capital of $421.6 million. At December 31, 2019, we held cash and cash equivalents of $59.2 million and had working capital of $144.4 million. Cash, and cash equivalents increased by $250.2 million during 2020. The increase in cash and cash equivalents from the prior year is primarily attributable to the net proceeds of $217.6 million we received from the issuance of Notes in the second quarter 2020, net cash provided by operating activities of $49.9 million, and proceeds from the issuance of common stock of $20.4 million. These increases were partially offset by the purchases of property, plant and equipment of $17.9 million and dividend payments of $16.5 million.
We have funded our operations to date primarily through cash generated from operations and the issuance of equity securities (in conjunction with an initial public offering in 2000, subsequent option exercises, and our follow-on public offering in 2008) and debt securities (in conjunction with the Notes offering). Our cash reserves are held directly or indirectly in a variety of short-term, interest-bearing instruments, including non-government sponsored debt securities. We do not have any investments in asset-backed commercial paper, auction rate securities, or mortgage backed or sub-prime style investments.
Cash provided by operations was $49.9 million for 2020, as compared with cash provided by operations of $13.5 million for 2019. This increase was primarily attributable to higher net income generated in the year ended December 31, 2020 as compared to the year ended December 31, 2019. Cash used in investing activities was $17.9 million for 2020, a decrease from $20.6 million for 2019. Currently, exclusive of changes in available-for-sale securities, we expect cash used in investing activities to be primarily for purchases of property and equipment, and continued strategic investments or acquisitions.
Cash provided by financing activities increased to $219.2 million for 2020, from cash used in financing activities of $10.5 million for 2019. This change in cash flows from financing activities was primarily attributable to the net proceeds of $217.6 million we received from the issuance of debt securities (in conjunction with the Notes offering).
Our future capital requirements will depend on a number of factors, including our success in developing and expanding markets for our products, payments under possible future strategic arrangements, continued progress of our research and development of potential products, the timing and outcome of regulatory approvals, the need to acquire licenses to new technologies, costs associated with strategic acquisitions including acquisition and integration costs and assumed liabilities, the status of competitive products and potential costs associated with both protecting and defending our intellectual property. Additionally, actions taken as a result of the ongoing internal evaluation of our business could result in expenditures not currently contemplated in our estimates for 2021.
Our short-term projects that are expected to require significant capital to complete include (i) our current in-process research and development of the next generation VERIGENE System, VERIGENE II, on which we began clinical trials in May 2018 and (ii) the next generation xMAP System, xMAP INTELLIFLEX. The Company is currently targeting the commercial launch of the VERIGENE II System in 2021 and believes the xMAP INTELLIFLEX will launch commercially in the first half of 2021. In addition, we closed on the purchase of the building in Northbrook, Illinois in the first quarter of 2021 for approximately $8.0 million. We believe that our existing cash and cash equivalents are sufficient to fund our operating expenses, capital equipment requirements and other expected liquidity requirements for the coming twelve months. Factors that could affect our capital requirements, in addition to those listed above, include, without limitation: (i) continued collections of accounts receivable consistent with our historical experience; (ii) our ability to manage our inventory levels consistent with past practices; (iii) volatility in our key partners’ consumable purchasing patterns; (iv) execution of partnership agreements that include significant up-front license fees; (v) execution of our stock repurchase and dividend programs from time to time and (vi) executing strategic investment or acquisition agreements requiring significant cash consideration. See also the “Safe Harbor Cautionary Statement” and risk factors of this report.
In February 2017, the Board of Directors initiated a cash dividend program to pay a regular quarterly cash dividend. The timing and amount of future dividends and stock repurchases will vary based on a number of factors, including future capital requirements for strategic transactions, the availability of financing on acceptable terms, debt service requirements, changes to applicable tax laws or corporate laws, changes to our business model and periodic determination by our Board of Directors that cash dividends are in the best interests of stockholders and are in compliance with applicable laws and agreements of the Company. On February 8, 2021, we announced that our Board declared a quarterly cash dividend of $0.09 per share of common stock to be paid to shareholders of record as of the close of business on March 25, 2021 with a payment date of April 15, 2021.
We hold cash and cash equivalents at various foreign subsidiaries. As a result of reductions to the U.S. taxation of dividends from foreign subsidiaries under the Tax Act and continued profitability of our Canadian subsidiary, in future years we may continue to repatriate earnings of our Canadian subsidiary. The cash and cash equivalents held by this subsidiary may be more readily available to meet domestic cash requirements in the next year, but will continue to be subject to foreign withholding tax that would be incurred upon repatriation. We anticipate that cash and cash equivalents held by all other foreign subsidiaries will continue to be permanently reinvested and may not be readily available to meet domestic cash requirements.
We believe that our cash provided by operations and our cash and cash equivalents will be sufficient to meet our anticipated capital needs for at least the next twelve months. However, any projections of future cash flows and capital requirements are subject to substantial uncertainty, including as a result of the risks, uncertainties and assumptions described in Item 1A “Risk Factors.” To the extent our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development and deployment of our technologies, or to supplement our position through strategic acquisitions. There can be no assurance that debt or equity funds will be available on favorable terms, if at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of those securities could result in dilution to our stockholders. Moreover, incurring debt financing could result in a substantial portion of our operating cash flow being dedicated to the payment of principal and interest on such indebtedness, could render us more vulnerable to competitive pressures and economic downturns and could impose restrictions on our operations. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds through entering into agreements on unattractive terms.
Contractual Obligations
As of December 31, 2020, we had approximately $65.6 million in non-cancellable purchase obligations for the next 12 months. These obligations are included in our estimated cash usage during 2021. The following table reflects our total current non-cancellable obligations by period as of December 31, 2020 (in thousands):
Payment Due By Period
Contractual Obligations Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
Long-term debt obligation, including interest $ 295,100 $ 7,800 $ 15,600 $ 271,700 $ -
Non-cancellable rental obligations 21,376 7,206 10,047 4,123 -
Non-cancellable purchase obligations (1)
68,103 65,560 2,353 190 -
Minimum royalty commitments (2)
103 25 49 29 -
Insurance premiums 1,561 1,561 - - -
Total (3)
$ 386,243 $ 82,152 $ 28,049 $ 276,042 $ -
(1) Purchase obligations predominantly relate to contractual arrangements in the form of purchase orders primarily as a result of normal inventory purchases or minimum payments due resulting when minimum purchase commitments are not met, as well as other operating commitments.
(2) Amounts represent minimum royalties payable on net sales of products incorporating licensed technology and subject to a minimum annual royalty payment.
(3) Due to the uncertainty with respect to the timing of future cash flows associated with Luminex’s unrecognized tax benefits at December 31, 2020, Luminex is unable to make reasonably reliable estimates of the timing of cash settlement with the respective taxing authority. Therefore,$3.7 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 11 to the Consolidated Financial Statements for a discussion on income taxes.
Inflation
We do not believe that inflation has had a direct adverse effect on our operations to date. However, a substantial increase in product and manufacturing costs and personnel-related expenses could have an adverse impact on our results of operations in the event these expenses increase at a faster pace than we can increase our system, consumable and royalty revenue rates.
Recently Adopted Accounting Pronouncements
See Note 18 to our Consolidated Financial Statements contained in Item 8 of this Annual Report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our interest income is sensitive to changes in the general level of domestic interest rates, particularly since our investments are in long-term instruments available-for-sale. A 50 basis point fluctuation from average investment returns at December 31, 2020 would yield a less than 0.5% variance in overall investment return, which would not have a material adverse effect on our financial condition.
Foreign Currency Risk. Our international business is subject to risks, including, but not limited to: foreign exchange rate volatility, differing tax structures, unique economic conditions, other regulations and restrictions and changes in political climate. Accordingly, our future results could be materially and adversely impacted by changes in these and other factors.
As of December 31, 2020, as a result of our foreign operations, we have costs, assets and liabilities that are denominated in foreign currencies, primarily Canadian dollars and to a lesser extent the Euro, Renminbi and Yen. For example, some fixed asset purchases and certain expenses are denominated in Canadian dollars while sales of products are primarily denominated in U.S. dollars. All transactions in our Netherlands and Japanese subsidiaries are denominated in Euros and Yen, respectively. All transactions, with the exception of our initial capital investment, in our Chinese subsidiary are denominated in Renminbi. As a consequence, movements in exchange rates could cause our foreign currency denominated expenses to fluctuate as a percentage of net revenue, affecting our profitability and cash flows. A significant majority of our revenues are denominated in U.S. dollars. The impact of foreign exchange on foreign denominated balances will vary in relation to changes between the U.S. dollar, Canadian dollar, Euro, Yen and Renminbi exchange rates. A 10% change in all of these exchange rates in relation to the U.S. dollar would result in a statement of comprehensive income impact of approximately $1.6 million on foreign currency denominated asset and liability balances as of December 31, 2020. As a result of our efforts to expand globally, in the future we will be exposed to additional foreign currency risk in multiple currencies. We regularly assess the market to determine if additional strategies are appropriate to mitigate future risks.
In addition, the indirect effect of fluctuations in interest rates and foreign currency exchange rates could have a material adverse effect on our business financial condition and results of operations. For example, currency exchange rate fluctuations could affect international demand for our products. In addition, interest rate fluctuations could affect our customers’ buying patterns. Furthermore, interest rate and currency exchange rate fluctuations may broadly influence the United States and foreign economies resulting in a material adverse effect on our business, financial condition and results of operations. As a result, we cannot give any assurance as to the effect that future changes in foreign currency rates will have on our consolidated financial position, results of operations or cash flows. Our aggregate foreign currency transaction gain of $1,012,000 was included in determining our consolidated results for the year ended December 31, 2020.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
PAGE
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Luminex Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Luminex Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statement of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenues with variable considerations
Description of the matter As described in Note 1 to the consolidated financial statements, revenues from product sales typically include variable consideration based on volume of sales during a designated time period. Revenue from customers is recorded based on a transaction price which includes estimates of variable consideration based on multiple data points including customer contractual tiered pricing, specific known market events and trends as well as historical and forecasted customer buying patterns which must be evaluated and updated as pricing terms and industry conditions change. For the year ended December 31, 2020, the Company recorded $417.4 million of product revenues which included such variable consideration.
Auditing the Company’s recognition of revenue related to variable consideration was complex due to the volume of transactions and incremental procedures performed to test the accuracy of the variable prices charged to customers and recorded as revenue. Each customer contract contains unique terms which must be evaluated to ensure the appropriate price is applied based on actual cumulative volume sales or forecasted sales levels to ensure the amount to be recognized in any given period is accurate.
How we addressed the matter in our audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to approve, review and execute pricing changes within the accounting system. For example, we tested controls over management’s monitoring and evaluation of the accuracy of pricing changes, including the appropriateness of the individuals authorizing and making the changes to pricing. We also tested the operating effectiveness of controls over the Company’s process to approve customer pricing and to ensure that the correct customer pricing based on contractual terms is utilized by the Company in determining variable consideration, including controls over management’s forecasting of sales volumes.
Our audit procedures over the Company’s estimates of variable consideration included, among others, reviewing contracts which included tiered pricing based on volume of sales and comparing such terms to historic sales and forecasted sales volumes to ensure pricing provided to the customer during the year was in line with the terms of the contract. We also analyzed credit memos to evaluate if there were any pricing adjustments and performed a look-back analysis to evaluate the historical accuracy of management’s sales volume forecasts. In addition, we performed correlation analyses between revenue, accounts receivable and cash to identify unusual or unexpected relationships.
Realizability of inventories
Description of the matter The Company’s inventories totaled $123.1 million as of December 31, 2020, representing 15% of total assets. As explained in Note 1 of the consolidated financial statements, inventories are stated at the lower of cost or net realizable value, which includes considerations for inventory becoming obsolete or having quantities in inventory in excess of anticipated usage based upon the Company’s assumptions about future demand for products and other market conditions.
Auditing management’s estimate of inventory reserves involved subjective auditor judgment because management’s assessment of whether a write down is required and the measurement of any excess cost over net realizable value is judgmental and is sensitive to changes in assumptions, including management’s assumptions over future product demand and product expiration dates which may be impacted by, among other things, future market and economic conditions.
How we addressed the matter in our audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s inventory process and the related calculation of inventory reserves, including management’s assessment of the assumptions and data underlying the excess and obsolete inventory valuation such as forecasted usage of inventories.
Our audit procedures included, among others, evaluating the assumptions used by the Company to estimate future product demand, including assumptions surrounding forecasted sales or usage and testing the completeness and accuracy of the underlying data used in its calculations including product expiration or end of life dates, quantities on hand and inventory pricing. For example, we compared the estimated usage rates with the actual usage results of prior periods as well as management’s consideration of expected timing of estimated usage rates as compared to product expiration dates, and we performed a gross margin analysis by product type.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Austin, Texas
February 26, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Luminex Corporation
Opinion on Internal Control over Financial Reporting
We have audited Luminex Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Luminex Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Austin, Texas
February 26, 2021
LUMINEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
As of December 31,
2020 2019
ASSETS
Current assets:
Cash and cash equivalents $ 309,407 $ 59,173
Accounts receivable, net 66,963 55,815
Inventories, net 123,134 77,084
Prepaids and other 9,527 10,398
Total current assets 509,031 202,470
Property and equipment, net 64,146 65,515
Intangible assets, net 78,796 90,336
Deferred income taxes 21,077 27,702
Goodwill 118,145 118,145
Right-of-use assets 17,768 20,439
Other 16,500 19,122
Total assets $ 825,463 $ 543,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 21,049 $ 17,983
Accrued liabilities 56,365 31,872
Deferred revenue - current portion 10,047 8,214
Total current liabilities 87,461 58,069
Deferred revenue 1,658 1,633
Lease liabilities 13,366 17,182
Long-term debt 203,136 -
Other long-term liabilities 2,131 1,985
Total liabilities 307,752 78,869
Stockholders’ equity:
Common stock, $.001 par value, 200,000,000 shares authorized; issued and outstanding: 45,682,687 shares at December 31, 2020; 44,325,369 shares at December 31, 2019 45 44
Preferred stock, $.001 par value, 5,000,000 shares authorized; no shares issued and outstanding - -
Additional paid-in capital 434,021 380,304
Accumulated other comprehensive loss (142) (1,380)
Retained earnings 83,787 85,892
Total stockholders’ equity 517,711 464,860
Total liabilities and stockholders’ equity $ 825,463 $ 543,729
See the accompanying notes which are an integral part of these
Consolidated Financial Statements.
LUMINEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Year Ended December 31,
2020 2019 2018
Revenue $ 417,396 $ 334,638 $ 315,818
Cost of revenue 169,544 151,899 120,327
Gross profit 247,852 182,739 195,491
Operating expenses:
Research and development 53,651 56,228 47,164
Selling, general and administrative 140,216 127,183 111,816
Amortization of acquired intangible assets 11,542 11,407 8,665
Total operating expenses 205,409 194,818 167,645
Income (loss) from operations 42,443 (12,079) 27,846
Interest and other expense, net (11,912) 3,100 465
Loss from equity method investment (1,591) (523) -
Income (loss) before income taxes 28,940 (9,502) 28,311
Income tax (expense) benefit (13,770) 5,664 (9,803)
Net income (loss) $ 15,170 $ (3,838) $ 18,508
Net income (loss) attributable to common stockholders
Basic $ 14,873 $ (3,773) $ 18,196
Diluted 14,872 (3,775) 18,197
Net income (loss) per share attributable to common stockholders
Basic $ 0.33 $ (0.09) $ 0.42
Diluted $ 0.32 $ (0.09) $ 0.41
Weighted-average shares used in computing net income (loss) per share
Basic 45,102 44,148 43,727
Diluted 45,820 44,148 44,291
Dividends declared per share $ 0.37 $ 0.30 $ 0.24
Other comprehensive income (loss):
Foreign currency translation adjustments 1,238 (253) (502)
Other comprehensive income (loss) 1,238 (253) (502)
Comprehensive income (loss) $ 16,408 $ (4,091) $ 18,006
See the accompanying notes which are an integral part of these
Consolidated Financial Statements.
LUMINEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2020 2019 2018
Cash flows from operating activities:
Net income (loss) $ 15,170 $ (3,838) $ 18,508
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 30,483 28,529 23,674
Amortization of debt issuance costs 6,533 - -
Stock-based compensation 14,852 13,198 12,226
Deferred income tax (benefit) expense 6,593 (7,444) 8,159
Loss on sale or disposal of assets 851 641 730
Loss (earnings) on equity method investment (1)
1,592 (2,719) -
Other 2,086 (329) (1,369)
Changes in operating assets and liabilities:
Accounts receivable, net (11,139) (2,440) (1,569)
Inventories, net (45,973) (13,559) (6,827)
Other assets 4,125 4,789 (3,319)
Accounts payable 3,184 3,370 4
Accrued liabilities 19,686 (5,630) 103
Deferred revenue 1,888 (1,031) 579
Net cash provided by operating activities 49,931 13,537 50,899
Cash flows from investing activities:
Purchase of property and equipment (17,910) (16,249) (21,292)
Business acquisition consideration, net of cash acquired - - (65,381)
Proceeds from net working capital adjustments related to business acquisition - 1,916 -
Issuance of note receivable - - (1,000)
Purchase of equity affiliate - (6,980) -
Proceeds from (payments to) cost method investment - 734 (1,782)
Proceeds from sale of assets and investments - - 2
Acquired technology rights 22 (40) (4,000)
Net cash used in investing activities (17,888) (20,619) (93,453)
Cash flows from financing activities:
Proceeds from issuance of convertible note, net of issuance costs 252,247 - -
Purchase of convertible notes bond hedge (54,626) - -
Proceeds from issuance of warrants 19,968 - -
Proceeds from issuance of common stock 20,435 3,750 4,570
Shares surrendered for tax withholding (2,373) (2,095) (2,312)
Dividends paid (16,485) (12,153) (10,654)
Net cash provided by (used in) financing activities 219,166 (10,498) (8,396)
Effect of foreign currency exchange rate on cash (975) 312 279
Change in cash and cash equivalents 250,234 (17,268) (50,671)
Cash and cash equivalents, beginning of period 59,173 76,441 127,112
Cash and cash equivalents, end of period $ 309,407 $ 59,173 $ 76,441
(1) The (earnings) loss on equity method affiliate is shown net of the $3.2 million non-cash gain recognized in the fourth quarter 2019, resulting from the remeasurement of our equity method investment. See Note 2 - Investments and Other Assets for further details.
See the accompanying notes which are an integral part of these
Consolidated Financial Statements.
LUMINEX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
Number of Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive (Loss) Retained Earnings Total Stockholders’ Equity
Balance at December 31, 2017 43,404,493 $ 43 $ 350,834 $ (625) $ 87,655 $ 437,907
Exercise of stock options 157,754 - 2,814 - - 2,814
Issuances of restricted stock, net of shares withheld for taxes 253,152 1 (2,312) - - (2,311)
Stock compensation - - 12,187 - - 12,187
Issuance of common shares under ESPP 83,811 - 1,740 - - 1,740
Net income - - - - 18,508 18,508
Foreign currency translation adjustments - - - (502) - (502)
Dividends - - 86 - (10,796) (10,710)
Other - - - - 8,023 8,023
Balance at December 31, 2018 43,899,210 $ 44 $ 365,349 $ (1,127) $ 103,390 $ 467,656
Exercise of stock options 95,097 - 1,698 - - 1,698
Issuances of restricted stock, net of shares withheld for taxes 217,620 - (2,095) - - (2,095)
Stock compensation - - 13,198 - - 13,198
Issuance of common shares under ESPP 113,442 - 2,030 - - 2,030
Net income - - - - (3,838) (3,838)
Foreign currency translation adjustments - - - (253) - (253)
Dividends - - 124 - (13,660) (13,536)
Balance at December 31, 2019 44,325,369 $ 44 $ 380,304 $ (1,380) $ 85,892 $ 464,860
Exercise of stock options 990,071 1 17,988 - - 17,989
Issuances of restricted stock, net of shares withheld for taxes 240,100 - (2,373) - - (2,373)
Stock compensation - - 14,852 - - 14,852
Issuance of common shares under ESPP 127,147 - 2,391 - - 2,391
Net income - - - - 15,170 15,170
Foreign currency translation adjustments - - - 1,238 - 1,238
Dividends - - 184 - (17,275) (17,091)
Equity component of convertible notes, net of issuance costs - - 41,950 - - 41,950
Purchases of convertible note hedge - - (41,243) - - (41,243)
Issuance of warrants - - 19,968 - - 19,968
Balance at December 31, 2020 45,682,687 $ 45 $ 434,021 $ (142) $ 83,787 $ 517,711
See the accompanying notes which are an integral part of these
Consolidated Financial Statements.
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Luminex Corporation, the “Company” or “Luminex,” develops, manufactures and sells proprietary biological testing technologies and products with applications throughout the life sciences industries, including diagnostics, pharmaceutical and research. These industries depend on a broad range of tests, called assays, to perform diagnostic testing and conduct life science research. The Company established a position in several segments of the life sciences industries by developing and delivering products that satisfy a variety of customer needs in specific market segments, including multiplexing, accuracy, precision, sensitivity, specificity, reduction of labor and ability to test for proteins and nucleic acids. These needs are addressed by the Company’s proprietary technologies.
Multiplexing, the foundation of the Company, allows the end user in a laboratory to generate multiple laboratory results from a single sample with a single assay. This is important because the Company’s end user customers, which include laboratory professionals performing discovery and research and clinical laboratories performing tests on patients as ordered by physicians and other laboratories, have a fundamental need to perform high quality testing as efficiently as possible. Until the availability of multiplexing technology, the laboratory professional had to perform one assay at a time in a sequential manner, and if additional testing was required on a sample, a second assay would be performed to generate the second result, and so on until all the necessary tests were performed.
The Company primarily serves the life sciences industries by marketing products, including our specific testing equipment and assays, to various types of testing laboratories. As of December 31, 2020, the Company had 82 strategic partners, 54 of which have released commercialized reagent-based products utilizing the Company’s technology. Luminex and these partners have sold approximately 17,900 xMAP-based instruments in laboratories worldwide as of December 31, 2020, some of which may be retired or otherwise not in use. The Company’s remaining partners are in various stages of development and commercialization of products incorporating the Company’s technology.
A primary focus for the Company’s growth is the development and sale of molecular diagnostic assays utilizing the Company’s proprietary MultiCode and VERIGENE technologies for use on the Company’s installed base of systems. The Company utilizes a direct sales model for sales of these products, which is intended to take advantage of the Company’s increasing installed base of instruments. Luminex’s assays are primarily focused on multiplexed applications for the human molecular clinical diagnostics market. Luminex’s assays are currently focused on three segments of the molecular diagnostic testing market: infectious disease, personalized medicine and human genetics.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts and results could differ from those estimates, and such differences could be material to the financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits and highly liquid investments with original maturities of three months or less when purchased.
Investments
The Company determines the appropriate classification of its investments in equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.
Fair Value of Financial Instruments
The fair values of financial instruments are determined by obtaining non-binding market prices from the Company’s third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets or inputs other than quoted prices that are observable either directly or indirectly in determining fair value. The Company’s financial instruments include cash and cash equivalents, short-term investments, accounts receivable, equity-method investments, long-term investments, accounts payable and accrued liabilities. The fair values of these financial instruments were not materially different from their carrying or contract values at December 31, 2020 and 2019. See Note 6 for further details concerning fair value measurements.
Supplemental Cash Flow Statement Information (in thousands)
Year Ended December 31,
2020 2019 2018
Cash paid during the period for taxes $ 2,141 $ 1,206 $ 2,214
Cash paid during the period for interest and penalties 3,969 29 17
Effect of acquisitions:
Fair value of tangible assets acquired - 2,657 13,262
Liabilities assumed - (1,915) (5,082)
Cost in excess of fair value of assets acquired - 18 32,647
Acquired identifiable intangible assets - 609 26,797
Deferred tax liabilities, net - 731 (4,433)
In-process research and development - (4,016) 6,703
Total purchase price - (1,916) 69,894
Less cash and cash equivalents acquired - - 4,513
Net cash paid for business acquisition $ - $ (1,916) $ 65,381
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of short-term and long-term investments and trade receivables. The Company provides credit, in the normal course of business, to a number of its customers geographically dispersed primarily throughout the U.S. The Company attempts to limit its credit risk by performing ongoing credit evaluations of its customers and maintaining adequate allowances for potential credit losses, but the Company does not require collateral.
One customer accounted for 10%, 12% and 14% of our total revenues in 2020, 2019 and 2018, respectively. Another customer accounted for 4%, 5% and 15% of our total revenues in 2020, 2019 and 2018, respectively. No other customer accounted for more than 10% of our total revenues in 2020, 2019 or 2018.
Inventories
Inventories, consisting primarily of raw materials and purchased components, are stated at the lower of cost or net realizable value, with cost determined according to the standard cost method, which approximates the first-in, first-out method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. As a developer and manufacturer of high technology medical equipment, the Company may be exposed to a number of economic and industry factors that could result in portions of inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in the Company’s markets, ability to meet changing customer requirements, competitive pressures on products and prices, and reliability and replacement of and the availability of key components from suppliers. The Company’s policy is to establish inventory reserves when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon the Company’s assumptions about future demand for products and market conditions. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product expiration or end of life dates, estimated current and future market values and new product introductions. Assumptions used in determining the Company’s estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted. If inventory is determined to be above the lower of cost or net realizable value, excess or obsolete, the Company would be required to record impairment charges within cost of goods sold at the time of such determination. Although considerable effort is made to ensure the accuracy of forecasts of future product demand, any significant unanticipated changes in demand or expected usage could have a significant negative impact on the value of inventory and the Company’s operating results. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value.
Property and Equipment
Property and equipment are carried at cost less accumulated amounts for amortization and depreciation. Property and equipment are typically amortized or depreciated on a straight-line basis over the useful lives of the assets, which typically range from two to seven years. Leasehold improvements and equipment under capital leases are amortized on a straight-line basis over the shorter of the remaining term of the lease or the estimated useful life of the improvements and equipment. The Company classifies the carrying value of Luminex’s xMAP, ARIES and VERIGENE Systems placed within the reagent rental program and the instruments on loan to customers in property and equipment as “Assets on loan/rental.”
Leases
With the adoption of the new lease guidance effective January 1, 2019, the Company determines whether an agreement represents a lease and at commencement we evaluate each lease agreement to determine whether the lease is an operating or financing lease. The Company recorded an operating lease right-of-use asset and an operating lease liability on its balance sheet. Right-of-use lease assets represent the Company’s right to use the underlying asset for the lease term and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. The right-of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. For all lease agreements we combine lease and non-lease components. Leases with an initial term of twelve months or less are not recorded on the balance sheet.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the fair value of the assets of the acquired business. In accordance with Accounting Standards Codification (ASC) 350 “Goodwill and Other” (ASC 350), goodwill is reviewed for impairment at least annually at the beginning of the fourth quarter, or more frequently if impairment indicators arise, tested at our sole reporting unit level. Events or circumstances that could trigger an impairment test include, but are not limited to, a significant adverse change in the business climate, significant changes in our use of the acquired assets, significant negative industry or economic trends, significant under-performance relative to operating performance indicators and significant changes in competition. The Company determined that no triggering events occurred during the year ended December 31, 2020. In 2020 and 2019, the Company estimated the fair value of the reporting unit using a fair-value-based approach based on the market capitalization. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for the Company’s products, capital needs, economic trends and other factors which are inherently difficult to forecast. The Company’s annual test did not result in an impairment charge in 2020, as the estimated fair value of the reporting unit continued to exceed the carrying value by a significant enough amount such that any reasonably likely change in the assumptions used in the analysis would not cause the carrying value to exceed the estimated fair value for the reporting unit. No goodwill impairments were recorded in 2020, 2019 or 2018.
Intangible assets are amortized on a straight-line basis over their respective estimated useful lives ranging from 9 to 15 years. Any in-process research and development will be an indefinite-lived intangible asset until completion or abandonment, at which point it will be accounted for as a finite-lived intangible asset or written off if abandoned.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made.
Revenue Recognition, Receivables and Allowance for Doubtful Accounts
Performance Obligations: Revenue is generated primarily from the sale of the Company’s products and related services, which are primarily support and maintenance services on the Company’s systems. The Company recognizes revenue when the customer obtains control of promised products or services, in an amount that reflects the consideration which the Company expects to receive in exchange for these products or services. To determine revenue recognition for arrangements, the Company performs 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 the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract, identifies the performance obligations and assesses whether each promised good or service is distinct. The Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation and recognizes as revenue when such performance obligation is satisfied. Revenue recognition typically occurs upon shipment or delivery to the customer depending upon the shipping terms. We treat shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost. Our customers do not typically have any contractual rights of return outside of our warranty provisions. The Company has allowed few returns to date and believes that returns of its products will be minimal in the future.
Royalties: For arrangements that include sales-based royalties, including minimum payments, the Company recognizes revenue at the later of: (i) when the related sales occur, or (ii) when the performance obligation, to which some or all of the royalty has been allocated, has been satisfied. Royalty payments are typically received when our strategic partners report the end-user sales to the Company.
Reagent Rentals: The Company provides systems and certain other hardware to customers through reagent rental agreements, under which the customers commit to purchasing minimum quantities of assays at a stated price over a defined contract term, which is normally two to three years. Instead of rental payments, the Company recovers the cost of providing the system and other hardware in the amount charged for assays. Revenue is recognized over the defined contract term as assays are shipped. The depreciation costs associated with the system and other hardware are charged to cost of sales on a straight-line basis over the estimated life of the system. The costs to maintain these instruments in the field are charged to cost of sales as incurred. Under the guidance, the Company reclassified the portion of reagent rental revenue associated with the recovery of the cost of providing the system and other hardware in reagent rental agreements from assay revenue to system revenue.
Warranties: The Company provides a limited, assurance-type warranty, typically for twelve months from installation for the systems sold to end customers and fifteen months for the systems sold to partners. The Company accrues for the estimated cost of initial product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. While the Company believes that adequate reserve has been made in the consolidated financial statements for product warranties, should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required. Warranty expenses are evaluated and adjusted periodically.
License Revenues: The Company enters into out-licensing agreements, under which it licenses certain rights to its technology to third parties. These licenses are typically not distinct, as the customer cannot benefit from the license on its own, and do not have significant standalone functionality, but represent single performance obligations together with the sales of our consumables, systems and assays. The terms of these arrangements typically include payment to the Company of non-refundable, up-front license fees and can extend up to twenty years. Each of these payments results in license revenues which are recognized ratably over time and are included in other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. Deferred revenues related to these out-licensing agreements are shown in contract liabilities in Note 18, “Revenue Recognition”.
Service Agreements: Revenue from extended service agreements is deferred when payment is received in advance of the performance obligation being satisfied or completed. Luminex provides an integrated service of maintenance and related activities for equipment sold to customers, where the nature of the overall promise is to provide a stand-ready service. As such, the performance obligation is recognized as a series of distinct service periods and the service revenue is recognized ratably over the term of each agreement. The extended service agreements typically range from one to four years and payment is typically received up-front.
Reserves for Variable Consideration: Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts and any other allowances that are offered within contracts between the Company and its customers relating to the Company’s sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of each contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period when such variances become known.
Receivables and Allowance for Doubtful Accounts: We recognize receivables when we have an unconditional right to payment, which represents the amount we expect to collect in a transaction and is most often equal to the transaction price in the contract. The Company adopted the new credit loss standard effective January 1, 2020. The primary impact for the Company was the timing of recording expected credit losses on its trade receivables. The Company’s allowance for doubtful accounts is based upon its expected credit losses, which is based upon its historical loss experience. Management prepared an analysis of partner versus non-partner credit loss experience and noted that its loss experience between partners and non-partners was very comparable. These receivables have been pooled together, as similar risk characteristics exist between them. On the rare occasion that interest is charged on trade receivables, it is recognized when received and there are no related fees and costs. Receivable balances are written off to the allowance for doubtful accounts when, in the judgment of management, they are considered uncollectible. The Company's credit losses have historically been within the Company’s expectations, but there can be no assurance that the Company will continue to experience the same level of credit losses that it has in the past. A significant change in the liquidity or financial position of any one of the Company’s significant customers, or a deterioration in the economic environment in general, could have a material adverse impact on the collectability of the Company’s accounts receivable and its future operating results, including a reduction in future revenues and additional allowances for doubtful accounts.
Product-Related Expenses
The Company provides for the estimated cost of initial product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required. Shipping and handling costs associated with product sales are included in cost of sales. Advertising costs are charged to operations as incurred. The Company does not have any direct-response advertising. Advertising expenses, which include trade shows and conventions, were approximately $1.4 million, $3.5 million and $2.8 million for 2020, 2019 and 2018, respectively, and were included in selling, general and administrative expense in the Consolidated Statements of Comprehensive Income.
Research and Development Costs
Research and development costs are expensed in the period incurred. Nonrefundable advance payments for research and development activities for materials, equipment, facilities and purchased intangible assets that have an alternative future use are deferred and capitalized. In addition, the Company capitalizes certain internally developed products used for evaluation during development projects that also have alternative future uses. These internally developed assets are generally depreciated on a straight-line basis over the useful life of the assets, which range from one to five years.
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830, “Foreign Currency Matters.” The reporting currency for the Company is the U.S. dollar. With the exception of its Canadian subsidiary, whose functional currency is the U.S. dollar, the functional currency of the Company’s foreign subsidiaries is their local currency. Accordingly, assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each balance sheet date. Before translation, the Company re-measures foreign currency denominated assets and liabilities, including inter-company accounts receivable and payable, into the functional currency of the respective entity, resulting in unrealized gains or losses recorded in selling, general and administrative expenses in the Consolidated Statement of Comprehensive Income. Revenues and expenses are translated using average exchange rates during the respective period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are included in selling, general and administrative expenses in the Consolidated Statement of Comprehensive Income and to date have not been material.
Incentive Compensation
Management incentive plans are tied to various financial and non-financial performance metrics. Bonus accruals made throughout the year related to the various incentive plans are based on management’s best estimate of the achievement of the specific metrics. Adjustments to the accruals are made on a quarterly basis as forecasts of performance are updated. At year-end, the accruals are adjusted to reflect the actual results achieved.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that those assets will be realized.
The Company accounts for uncertain tax positions in accordance with ASC 740, “Income Taxes”, which clarifies the accounting for uncertainty in tax positions. These provisions require recognition of the impact of a tax position in the Company’s financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected as a component of income tax expense.
Earnings Per Share
Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common shares and potential common shares from outstanding stock options, restricted stock units (RSUs) and contingently issuable shares resulting from an award subject to performance or market conditions determined by applying the treasury stock method. In periods with a net loss, potentially dilutive securities composed of incremental common shares issuable upon the exercise of stock options and warrants, and common shares issuable on conversion of preferred stock, would be excluded from historical diluted loss per share because of their anti-dilutive effect.
Stock-Based Compensation
The Company accounts for stock-based employee compensation plans under the fair value recognition and measurement provisions of ASC 718 “Stock Compensation” (ASC 718). ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options, restricted stock units and shares issued under the Company’s employee stock purchase plan. Pursuant to ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.
NOTE 2 - INVESTMENTS AND OTHER ASSETS
Marketable Securities
The Company determines the appropriate classification of any investments in debt and equity securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Available-for-sale securities consisted of the following as of December 31, 2020 (in thousands):
Amortized Cost Gains in Accumulated Other Comprehensive Income Losses in Accumulated Other Comprehensive Income Estimated Fair Value
Current:
Money Market funds $ 707 $ - $ - $ 707
Total current securities 707 - - 707
Noncurrent:
Total noncurrent securities - - - -
Total available-for-sale securities $ 707 $ - $ - $ 707
Available-for-sale securities consisted of the following as of December 31, 2019 (in thousands):
Amortized Cost Gains in Accumulated Other Comprehensive Income Losses in Accumulated Other Comprehensive Income Estimated Fair Value
Current:
Money Market funds $ 707 $ - $ - $ 707
Total current securities 707 - - 707
Noncurrent:
Total noncurrent securities - - - -
Total available-for-sale securities $ 707 $ - $ - $ 707
There were no proceeds from the sales of available-for-sale securities for the years ended December 31, 2020 and December 31, 2019. Realized gains and losses on sales of investments are determined using the specific identification method and are included in other income (expense) in the Consolidated Statement of Comprehensive Income. There were no available-for-sale debt securities as of December 31, 2020 or December 31, 2019.
Non-Marketable Securities and Other-Than-Temporary Impairment
During the year ended December 31, 2018, the Company made a $1.8 million investment in Combinati, a private company. Subsequently, on October 1, 2019, the Company made an additional $7.0 million investment in Combinati, bringing the Company's ownership to approximately 28.4% of the voting interest of Combinati. The Company does not have majority control of the entity in which the investment was made, but has the ability to exercise significant influence over operating and financial policies due to its larger ownership percentage and its seat on the Board of Directors. The Company does not have unilateral decision making power, and therefore will not consolidate the investee; therefore, the Company accounts for this investment using the equity method. In the fourth quarter of 2019, we remeasured the existing, minority interest investment based on the fair value prior to the additional investment and recorded a gain of approximately $3.2 million in Other income, net in the Consolidated Statements of Comprehensive Income. The minority interest investment in Combinati is classified in equity method investments to distinguish it from other minority interest investments that take the fair value alternative. The Company's proportionate share of income or loss of approximately 28.4% is recorded in other income (expense), net in the Consolidated Statement of Comprehensive Income. This non-marketable equity investment is recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. The Company periodically reviews this equity investment for other-than-temporary declines in fair value based on the specific identification method and writes down the investment to its fair value when it determines that an other-than-temporary decline has occurred.
As of December 31, 2020, the carrying value of the Company’s total investment in Combinati was $9.9 million, which exceeded the Company’s share of Combinati’s net assets by $8.1 million and is not amortized. For the year ended December 31, 2020, the Company recorded the allocable share of Combinati’s net income in its Consolidated Statement of Comprehensive Income and as an adjustment to the invested balance.
In August 2018, the Company exercised its purchase option on a second private company and acquired 100% of its capital stock in a non-cash transaction involving (i) a prior investment of $2.0 million being applied to the purchase option, (ii) the forgiveness and application of a $2.4 million note and related interest receivable to the purchase option and (iii) a tax impact of $0.1 million. This acquisition was accounted for as an asset acquisition rather than a business combination, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, a next generation technology. The Company recorded the $4.3 million asset acquisition as a defensive, in-process research and development (IP R&D) intangible asset. There were no gains or losses recognized as part of this transaction.
The Company owned a minority interest in another private company based in the U.S. through its initial investment of $1.0 million in the third quarter of 2012. We were informed that this private company will be dissolving and ceasing operations in the first quarter of 2020. We received cash representing the majority of our investment in the fourth quarter of 2019 and recorded an impairment of $205,000 in Other income, net in the Consolidated Statements of Comprehensive Income during 2019 based upon these circumstances. We received the final cash payment for the remainder of this minority interest in the first quarter of 2020, recorded in cash flows from investing activities in the Consolidated Statements of Cash Flows.
These minority interest investments do not have readily determinable fair values. Therefore, the Company has elected the measurement alternative for its minority interests and the investments are recorded at cost, less any impairment, including changes resulting from observable price changes. The Company regularly evaluates the carrying value of its investment for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is less than the investment’s carrying value, the Company will record an impairment charge in Other income, net in the Consolidated Statements of Comprehensive Income. Other than the $205,000 impairment in 2019 discussed above, the Company has not recorded any impairment charges related to these non-marketable investments.
As the inputs utilized for the Company’s periodic impairment assessment are not based on observable market data, the determination of fair value of its investments is classified within Level 3 of the fair value hierarchy. See Note 6 - Fair Value Measurement to our Condensed Consolidated Financial Statements for further information on the fair value hierarchy and the three classification levels. To determine the fair value of these investments, the Company uses all available financial information related to the entities, including information based on recent or pending third-party equity investments in these entities. In certain instances, an investment’s fair value is not estimated as there are no identified events or changes in the circumstances. There have been no unrealized gains or losses related to these Level 3 minority interest investments.
Other long-term assets consisted of the following at December 31 (in thousands):
2020 2019
Purchased technology rights (net of accumulated amortization of $8,872 and $8,300 in 2020 and 2019, respectively) $ 5,454 $ 6,027
Minority interest and equity method investments 9,909 11,501
Other 1,137 1,594
$ 16,500 $ 19,122
For the years ended December 31, 2020 and 2019, the Company recognized amortization expense related to the amortization of purchased technology rights of approximately $572,000 and $667,000, respectively. Future amortization expense is estimated to be $542,000 in 2021, $543,000 in 2022, $537,000 in 2023, $532,000 in 2024, $532,000 in 2025 and $2,768,000 thereafter.
NOTE 3 - ACCOUNTS RECEIVABLE AND RESERVES
Accounts receivable consisted of the following (in thousands):
2020 2019
Accounts receivable $ 68,629 $ 56,956
Less: Allowance for doubtful accounts (1,666) (1,141)
$ 66,963 $ 55,815
The following table summarizes the changes in the allowance for doubtful accounts (in thousands):
Balance at December 31, 2017 $ 1,345
Net increases charged to costs and expenses (437)
Write-offs of uncollectible accounts (65)
Balance at December 31, 2018 $ 843
Net recoveries charged to costs and expenses 400
Write-offs of uncollectible accounts (102)
Balance at December 31, 2019 1,141
Net recoveries charged to costs and expenses 546
Write-offs of uncollectible accounts (21)
Balance at December 31, 2020 1,666
NOTE 4 - INVENTORIES, NET
Inventories consisted of the following at December 31 (in thousands):
2020 2019
Parts and supplies $ 86,380 $ 45,459
Work-in-progress 18,858 15,532
Finished goods 17,896 16,093
$ 123,134 $ 77,084
The Company has non-cancellable purchase commitments with certain of its component suppliers in the amount of approximately $68.1 million at December 31, 2020. Should production requirements fall below the level of the Company’s commitments, the Company could be required to take delivery of inventory for which it has no immediate need or incur an increased cost per unit going forward.
NOTE 5 - FAIR VALUE MEASUREMENT
ASC 820 “Fair Value Measurement” (ASC 820) defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. There were no transfers between Level 1, Level 2 or Level 3 measurements for the year ended December 31, 2020.
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands):
Fair Value Measurements as of December 31, 2020 Using
Level 1 Level 2 Level 3 Total
Assets:
Money Market funds $ 707 $ - $ - $ 707
Equity investment $ - $ - $ 9,909 $ 9,909
Fair Value Measurements as of December 31, 2019 Using
Level 1 Level 2 Level 3 Total
Assets:
Money Market funds $ 707 $ - $ - $ 707
Minority interest investments - long-term $ - $ - $ 22 $ 22
Equity investment $ - $ - $ 11,501 $ 11,501
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in thousands):
2020 2019
Laboratory equipment $ 70,189 $ 60,486
Leasehold improvements 45,784 43,471
Computer equipment 4,034 3,916
Purchased software 22,981 22,621
Furniture and fixtures 6,081 5,924
Assets on loan/rental 32,544 28,946
181,613 165,364
Less: Accumulated depreciation (117,467) (99,849)
$ 64,146 $ 65,515
Depreciation expense was $18.4 million and $16.5 million for the years ended December 31, 2020 and 2019, respectively.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill during the period are as follows (in thousands):
December 31, 2020 December 31, 2019
Balance at beginning of period $ 118,145 $ 118,127
Flow cytometry acquisition $ - $ 18
Balance at end of period $ 118,145 $ 118,145
A portion of the Company’s goodwill is not expected to be deductible for tax purposes. The Company’s intangible assets are reflected in the table below (in thousands, except weighted average lives):
Finite-lived Indefinite-lived
Technology, trade secrets and know-how Customer lists and contracts Other identifiable intangible assets IP R&D Total
Balance as of December 31, 2018 $ 98,469 $ 23,819 $ 10,655 $ 24,013 $ 156,956
Flow cytometry acquisition purchase price allocation adjustments (116) (428) 1,154 (4,016) (3,406)
Balance as of December 31, 2019 98,353 23,391 11,809 19,997 153,550
Less: accumulated amortization:
Accumulated amortization balance as of December 31, 2018 (40,501) (9,036) (2,271) - (51,808)
Amortization expense (7,784) (2,428) (1,194) - (11,406)
Accumulated amortization balance as of December 31, 2019 (48,285) (11,464) (3,465) - (63,214)
Net balance as of December 31, 2019 $ 50,068 $ 11,927 $ 8,344 $ 19,997 $ 90,336
Weighted average life (in years) 11 10 10
Balance as of December 31, 2019 $ 98,353 $ 23,391 $ 11,809 $ 19,997 $ 153,550
Completion of IPR&D projects 2,687 (2,687) -
Balance as of December 31, 2020 101,040 23,391 11,809 17,310 153,550
Less: accumulated amortization:
Accumulated amortization balance as of December 31, 2019 (48,285) (11,464) (3,465) - (63,214)
Amortization expense (7,919) (2,427) (1,194) - (11,540)
Accumulated amortization balance as of December 31, 2020 (56,204) (13,891) (4,659) - (74,754)
Net balance as of December 31, 2020 $ 44,836 $ 9,500 $ 7,150 $ 17,310 $ 78,796
Weighted average life (in years) 11 10 10
The Company currently has two IP R&D projects. The first relates to the development of the next generation VERIGENE System, VERIGENE II. The Company is targeting the commercial launch of the VERIGENE II System in 2021. The second is a defensive IP R&D project related to the Company’s next generation xMAP System, xMAP INTELLIFLEX, which the Company currently believes will launch commercially in the first half of 2021. The next generation Guava System (Guava Next Gen System), acquired as part of the Company’s acquisition of EMD Millipore Corporation’s flow cytometry portfolio, was launched commercially in the second quarter of 2020 and transferred from IP R&D to finite-lived technology, trade secrets and know-how and is being amortized.
The estimated aggregate amortization expense for the next five fiscal years and thereafter is as follows (in thousands):
2020 $ 11,316
2021 10,070
2022 9,721
2023 9,721
2024 8,188
Thereafter 12,470
$ 61,486
NOTE 8 - OTHER COMPREHENSIVE (LOSS) INCOME
Comprehensive loss represents a measure of all changes in equity that result from recognized transactions and other economic events other than those resulting from investments by and distributions to shareholders. Other comprehensive loss for the Company includes foreign currency translation adjustments and net unrealized holding gains and losses on available-for-sale investments.
The following table presents the changes in each component of accumulated other comprehensive loss, net of tax (in thousands):
Accumulated Other Comprehensive Loss Items - Foreign Currency
Balance as of December 31, 2019 $ (1,380)
Other comprehensive loss
1,238
Net current-period other comprehensive loss 1,238
Balance as of December 31, 2020 $ (142)
There are no tax benefits or expenses related to the other comprehensive loss for the twelve months ended December 31, 2020.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31 (in thousands):
2020 2019
Compensation and employee benefits $ 33,992 $ 17,011
Dividends payable 4,711 4,104
Income and other taxes 7,058 1,538
Warranty costs 1,849 1,641
Royalties payable 782 1,335
Current operating lease liabilities 5,942 5,053
Convertible notes interest payable 996 -
Other 1,035 1,190
$ 56,365 $ 31,872
Sales of certain of the Company’s systems are subject to a warranty. System warranties typically extend for a period of twelve months from the date of installation or no more than 15 months from the date of shipment. The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. Warranty expenses are evaluated and adjusted periodically.
The following table summarizes the changes in the warranty accrual (in thousands):
Accrued warranty costs at December 31, 2017 $ 1,308
Warranty services provided (2,159)
Accrual for warranty costs 2,752
Accrued warranty costs at December 31, 2018 1,901
Warranty services provided (2,868)
Accrual for warranty costs 2,608
Accrued warranty costs at December 31, 2019 1,641
Warranty services provided (2,362)
Accrual for warranty costs 2,570
Accrued warranty costs at December 31, 2020 $ 1,849
NOTE 10 - CONVERTIBLE SENIOR NOTES
In May 2020, the Company issued $260.0 million principal amount of Convertible Senior Notes due in May 2025 (Notes). The interest rates for the Notes is fixed at 3.00% per annum with interest payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2020. The Notes mature on May 15, 2025, unless earlier converted or repurchased in accordance with their terms prior to such date. Each $1,000 of principal amount of the Notes will initially be convertible into 22.8918 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $43.68 per share. The initial conversion price for each of the Notes is subject to adjustment upon the occurrence of certain specified events. On December 3, 2020, we announced that our Board declared an increased quarterly cash dividend of $0.10 per share of common stock to be paid to shareholders of record as of the close of business on December 23, 2020 with a payment date of January 14, 2021. This increase in the dividend adjusted the conversion price to $43.67 per share, or 22.9009 shares of the Company's common stock for each $1,000 of principal amount of the Notes.
Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2024 only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (Measurement Period) in which the trading price (as defined in the relevant indenture governing the Notes) per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
•upon the occurrence of specified corporate events as set forth in the indenture governing the Notes.
On or after November 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The Company currently intends to settle the principal amount of the Notes in cash, and settle any excess amount with shares of the Company’s common stock, upon conversion. As of December 31, 2020, the Notes were not yet convertible.
If a fundamental change (as defined in the relevant indenture governing the Notes) occurs prior to the maturity date, holders of each of the Notes may require the Company to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Notes, the Company separated each of the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value, as of the date of issuance, of a similar debt without the conversion feature. The effective interest rate used for the liability component was 8.50%. The liability component of the Notes is recorded in long-term debt, and the interest payable within the next twelve months is recorded in accrued liabilities on the Condensed Consolidated Balance Sheets as of December 31, 2020. The carrying amount of the equity component representing the conversion feature was determined by deducting the fair value of the liability components from the total initial proceeds. The difference between the par amount of the Notes and the carrying amount of the liability component represents debt discounts that are amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification.
In accounting for the $7.7 million of issuance costs related to the Notes, the Company allocated the total amount of issuance costs incurred to the liability and equity components in proportion to the allocation of the proceeds from issuance to the liability and equity components. Issuance costs attributable to the liability components are amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The issuance costs attributable to the equity components were netted against the respective equity components in additional paid-in capital.
Issuance costs attributable to the liability component, totaling $6.0 million, are being amortized to expense over the expected life of the Notes using the effective interest method. Issuance costs attributable to the equity component related to the conversion feature, totaling $1.7 million, were netted with the equity component.
The Notes consist of the following:
As of December 31, 2020
Liability component:
Principal $ 260,000
Unamortized debt discount (51,352)
Unamortized debt issuance costs (5,512)
Net carrying amount $ 203,136
Equity component:
Net carrying amount $ 41,950
The following table sets forth total interest expense recognized related to the Notes for the years ended December 31 (in thousands):
2020 2019
Contractual interest expense $ 4,940 $ -
Amortization of debt issuance costs 531 -
Amortization of debt discount 6,002 -
Total $ 11,473 $ -
As of December 31, 2020, the remaining period over which the debt discount and debt issuance costs will be amortized was 4.4 years.
Convertible Note Hedge and Warrant Transactions
Concurrent with the offering of the Notes, the Company entered into privately negotiated convertible note hedge transactions (Convertible Note Hedge Transactions) with certain financial institutions (Option Counterparties) related to the issuance of the Notes. The Convertible Note Hedge Transactions are generally expected to reduce the potential dilution to the Company’s common stock upon any conversion of Notes or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes.
The Company also entered into separate privately negotiated warrant transactions (Warrant Transactions) with each of the Option Counterparties pursuant to which the Company issued Warrants that will be exercisable into a number of shares of the Company’s common stock at a price per share equal to $69.89, subject to certain adjustments under the terms of the Warrant Transactions. The Warrant Transactions could separately have a dilutive effect on the Company’s common stock if the market value per share of the Company’s common stock exceeds the applicable strike price of the Warrants. However, subject to certain conditions, the Company may elect to settle the Warrants in cash.
The Convertible Note Hedge Transactions and the Warrant Transactions are separate transactions, in each case, entered into by the Company with the same Option Counterparties and are not part of the terms of the Notes and will not affect any holder’s rights under the Notes. The holders of the Notes will not have any rights with respect to the Convertible Note Hedge Transactions or Warrant Transactions. The Company used approximately $34.7 million of the net proceeds of the issuance of the Notes to pay the costs of the Convertible Note Hedge Transactions, after such cost was partially offset by the proceeds to the Company from the sale of the Warrants in the Warrant Transactions. The Convertible Note Hedge Transactions and Warrant Transactions do not meet the criteria for derivative accounting as they are indexed to the Company's stock. The amounts paid for the Convertible Note Hedge Transactions and the proceeds received from the Warrant Transactions have been included as a net reduction to additional paid-in capital.
NOTE 11 - INCOME TAXES
The components of income before income taxes for the years ended December 31 are as follows (in thousands):
2020 2019 2018
Domestic $ (33,631) $ (31,314) $ 7,242
Foreign 62,571 21,812 21,069
Total $ 28,940 $ (9,502) $ 28,311
The components of the provision (benefit) for income taxes attributable to continuing operations for the years ended December 31 are as follows (in thousands):
2020 2019 2018
Current:
Federal $ (7) $ 821 $ (3,318)
Foreign 6,689 951 515
State 179 (163) 600
Total current expense (benefit) $ 6,861 $ 1,609 $ (2,203)
Deferred:
Federal (2,913) (10,179) 6,351
Foreign 8,886 4,597 5,271
State 936 (1,691) 384
Total deferred expense (benefit) 6,909 (7,273) 12,006
Total provision (benefit) for income taxes $ 13,770 $ (5,664) $ 9,803
The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal rate to pretax income as follows (in percentages):
Year Ended December 31,
2020 2019 2018
Statutory tax rate 21.0 % 21.0 % 21.0 %
State taxes, net of federal benefit (3.5) % 9.6 % 3.0 %
Permanent items (2.4) % (1.6) % 2.6 %
Effect of foreign operations 10.2 % (11.7) % 3.4 %
Research and incentive tax credit generated (7.7) % 18.9 % (8.7) %
Valuation allowance 9.1 % 0.8 % 0.4 %
Income tax reserves 1.0 % 67.3 % 24.7 %
Remeasurement U.S. deferreds 0.0 % 0.0 % (0.3) %
Transition tax 0.0 % (5.3) % (16.6) %
Foreign earnings withholding tax 0.1 % 6.6 % (7.9) %
Global intangible low-taxed income 18.6 % (44.4) % 5.7 %
Other measurement period Tax Act adjustments 0.0 % 0.0 % 2.6 %
Canadian income tax audit 0.0 % 0.0 % 4.8 %
Other 1.2 % (1.0) % (0.1) %
47.6 % 60.2 % 34.6 %
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740 “Income Taxes” (ASC 740). Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at the end of each reporting period. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows (in thousands):
2020 2019
Deferred tax assets:
Accrued liabilities and other $ 7,479 $ 4,577
Net operating loss and credit carryforwards 40,966 52,141
Deferred revenue 2,119 1,023
Operating lease liability 4,060 5,023
Stock compensation and other 7,542 7,791
Bond hedge 12,103 -
Gross deferred tax assets 74,269 70,555
Valuation allowance (16,882) (17,906)
Total deferred tax assets $ 57,387 $ 52,649
Deferred tax liabilities:
Accrued liabilities and other $ (4,230) $ (1,287)
Depreciation and amortization (15,710) (18,443)
Operating lease right-of-use assets (3,649) (4,550)
Equity method investment (279) (667)
Convertible debt (12,442)
Total deferred tax liabilities (36,310) (24,947)
Net deferred tax assets $ 21,077 $ 27,702
The Company has established a valuation allowance against a portion of its remaining deferred tax assets because it is more likely than not that certain deferred tax assets will not be realized. In determining whether deferred tax assets are realizable, the Company considered numerous factors including historical profitability, the amount of future taxable income and the existence of taxable temporary differences that can be used to realize deferred tax assets. The valuation allowance decreased approximately $1.0 million in 2020 from 2019 primarily due to releasing valuation allowance of $3.6 million against deferred tax assets of certain state net operating loss carryforwards, state research credit carryforwards, and deferred tax assets for stock compensation, and recording additional valuation allowance on the deferred tax assets of certain state net operating loss carryforwards of $2.6 million. The Company’s valuation allowance is primarily offsetting certain state net operating loss and state tax credit carryforwards, and certain stock based compensation. We anticipate portions of our deferred tax assets will not be realized under the provisions of Section 162(m) of the Tax Act which limits the deductibility of executive compensation.
At December 31, 2020, the Company had gross federal, state and foreign net operating loss carryforwards of approximately $41.9 million, $283.8 million, and $6.1 million, respectively. These losses expire beginning in 2021. Federal and state net operating losses of approximately $41.9 million and $268.9 million, respectively, were acquired as part of the acquisitions of U.S. companies. These acquired net operating losses are subject to annual limitations due to the “change of ownership” provisions of Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has federal, state and foreign credit carryforwards of approximately $8.6 million, $3.4 million, and $2.6 million, respectively. These credits begin to expire in 2023, except for approximately $1.1 million of state research credits which have an indefinite carryforward period. Certain of these credits are subject to annual limitations under the change in ownership provisions.
The excess of financial reporting basis over tax basis of the Company’s foreign subsidiaries is considered permanently reinvested with the exception of certain earnings of the Canadian subsidiary. The cumulative amount of excess financial reporting basis of the Company’s non-U.S. subsidiaries was approximately $14.3 million at December 31, 2020, $22.5 million at December 31, 2019 and $3.8 million at December 31, 2018. Since the Company does not intend to permanently reinvest portions of its previously taxed Canadian earnings, it has recorded a deferred tax liability of approximately $30 thousand related to state income taxes associated with the ultimate repatriation from Canada to the U.S. of these previously taxed earnings. Beginning January 1, 2018, the Tax Act implemented a territorial tax system in the U.S. such that the income earned by the Company’s non-U.S. subsidiaries will be subject to a 100% dividend received deduction, with certain exceptions. We have not recognized a deferred tax liability related to withholding taxes or state income taxes on the excess financial reporting basis of our other foreign subsidiaries because the Company currently intends to reinvest earnings of these subsidiaries in operations outside the U.S. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable.
As of December 31, 2020 and December 31, 2019, the Company had recorded gross unrecognized tax benefits of approximately $3.7 million and $3.4 million, respectively. All of the unrecognized tax benefits as of December 31, 2020, if recognized, would impact the effective tax rate. The Company recognizes interest expense and penalties associated with uncertain tax positions as a component of income tax expense. During the years ended December 31, 2020 and 2019, the Company recognized approximately $26 thousand and $1 thousand in tax related interest and penalties, respectively. Reserves for interest and penalties as of December 31, 2020 and 2019 are not significant as the Company has net operating loss carryovers and tax credit carryforwards.
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
2020 2019
Balance at beginning of year $ 3,423 $ 9,721
Additions based on tax positions related to the current year 311 342
Additions for tax positions of prior years - 398
Reductions for tax positions of prior years (30) (7,038)
Balance at end of year $ 3,704 $ 3,423
As of December 31, 2020, there were no unrecognized tax benefits that we expect would change significantly over the next 12 months.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. In the United States and Canada, the statute of limitations with respect to the federal income tax returns for tax years after 2015 are open to audit; however, since the Company has net operating losses, the taxing authority has the ability to review tax returns prior to the 2015 tax year and make adjustments to these net operating loss carryforwards. In the fourth quarter of 2020, the IRS completed its audit of the Company's 2016 tax return with no material adjustments. In addition, during 2020 the IRS began auditing the Company's 2017 tax return with respect to certain limited issues. The IRS completed its audit of the Company's 2017 tax return in the fourth quarter of 2020 with no tax adjustments. We are not under audit in any major taxing jurisdictions at this time.
NOTE 12 - EARNINGS PER SHARE
A reconciliation of the denominators used in computing per share net income (EPS) is as follows (in thousands, except per share amounts):
Year Ended December 31,
2020 2019 2018
Basic:
Net income (loss) $ 15,170 $ (3,838) $ 18,508
Less: allocation to participating securities (297) 65 (312)
Net income (loss) attributable to common stockholders $ 14,873 $ (3,773) $ 18,196
Weighted average common stock outstanding 45,102 44,148 43,727
Net income (loss) per share attributable to common stockholders $ 0.33 $ (0.09) $ 0.42
Diluted:
Net income (loss) $ 15,170 $ (3,838) $ 18,508
Less: allocation to participating securities (298) 63 (311)
Net income (loss) attributable to common stockholders $ 14,872 $ (3,775) $ 18,197
Weighted average common stock outstanding 45,102 44,148 43,727
Effect of dilutive securities: stock options and awards 718 - 564
Weighted-average shares used in computing net income (loss) per share 45,820 44,148 44,291
Net income (loss) per share attributable to common stockholders $ 0.32 $ (0.09) $ 0.41
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Restricted stock awards (RSAs) and stock options to acquire 1,620,252 shares, 1,271,248 shares, and 619,113 shares for the years ended December 31, 2020, 2019 and 2018, respectively, were excluded from the computations of diluted earnings per share because the effect of including the RSAs and stock options would have been anti-dilutive.
We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested, time-based restricted stock awards with non-forfeitable dividends and for our common stock. Our non-vested, time-based restricted stock awards with non-forfeitable dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested, time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.
NOTE 13 - STOCKHOLDERS’ EQUITY, EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION
Preferred Stock
The Company’s Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company’s stockholders. At December 31, 2020 and 2019, there was no preferred stock issued and outstanding.
Dividends
In February 2017, the Board of Directors initiated a cash dividend program under which the Company began paying a regular quarterly cash dividend. The following table shows cash dividends declared, recorded, and paid (or to be paid) in the periods shown:
Date Paid or
To Be Paid Dividends Declared per Share
Twelve Months Ending Date Declared Date Payable
December 31, 2018
January 24, 2018 March 23, 2018 April 13, 2018 $ 0.06
May 18, 2018 June 22, 2018 July 13, 2018 $ 0.06
September 11, 2018 September 21, 2018 October 12, 2018 $ 0.06
December 11, 2018 December 22, 2018 January 10, 2019 $ 0.06
December 31, 2019
February 8, 2019 March 21, 2019 April 11, 2019 $ 0.06
May 21, 2019 June 20, 2019 July 11, 2019 $ 0.06
July 31, 2019 September 26, 2019 October 17, 2019 $ 0.09
December 6, 2019 December 19, 2019 January 15, 2020 $ 0.09
December 31, 2020
February 18, 2020 March 19, 2020 April 9, 2020 $ 0.09
May 22, 2020 June 18, 2020 July 9, 2020 $ 0.09
September 10, 2020 September 24, 2020 October 15, 2020 $ 0.09
December 3, 2020 December 23, 2020 January 14, 2021 $ 0.10
The Company’s current intent is to pay a continuing dividend on a quarterly basis. However, future declaration of dividends is subject to the final determination of the Company’s Board of Directors.
Stock-Based Compensation
At December 31, 2020, the Company has one stock-based employee compensation plan pursuant to which grants may be made: the Luminex Corporation 2018 Equity Incentive Plan (Equity Incentive Plan) which was approved at the Company’s Annual Meeting on May 17, 2018. No further grants shall be made pursuant to the 2000 Long-Term Incentive Plan (2000 Plan), the 2001 Broad-Based Stock Option Plan (2001 Plan) or the 2006 Equity Incentive Plan (2006 Plan). In addition, at December 31, 2020, the Company has one plan pursuant to which discount purchases may be made by the participants in such plan: the Luminex Corporation Employee Stock Purchase Plan (ESPP), which was approved at the Company’s Annual Meeting on May 17, 2012 and amended at the Company’s Annual Meeting on May 18, 2017.
Equity Incentive Plans
Under the Company’s Equity Incentive Plan and, the 2006 Plan, certain employees, consultants and non-employee directors have been granted RSAs, restricted stock units (RSUs) and options to purchase shares of common stock. The options, RSAs, and RSUs generally vest in installments over a three to five year period, and the options expire either seven or ten years after the date of grant.
The ESPP provides for the granting of rights to certain employees of the Company to defer an elected percentage, up to 15%, of their base salary through the purchase of the Company’s common stock, discounted by 15%. As of December 31, 2020, there were approximately 2,400,000 shares authorized for future issuance under the Company’s Equity Incentive Plan and 83,044 shares eligible for purchase pursuant to the terms and conditions of the ESPP as more fully described below.
The Equity Incentive Plan, the 2006 Plan and the ESPP are administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the authority to determine the terms and conditions under which awards will be granted from the Equity Incentive Plan, including the number of shares, vesting schedule and term, as applicable. Any option exercise prices, as set forth in the Equity Incentive Plan, will be equal to the fair market value on the date of grant. Under certain circumstances, the Company may repurchase previously granted RSAs and RSUs.
On February 27, 2020 and February 21, 2019, the Compensation Committee approved awards of stock options (the Performance Options) to the Company’s named executive officers and certain other executives that vest over four years based on achievement of certain operating profit and revenue targets for each of 2020 and 2019, respectively. The Performance Options have an exercise price equal to the closing market price for the Company’s common stock on the Nasdaq Global Select Market on the date of grant (March 12, 2020 and 2019, respectively) and expire seven years from the date of grant. The Performance Options were measured over a one-year performance period ending on December 31, 2020 and 2019, respectively. Following the end of the applicable fiscal year, the Committee determined the number of Performance Options which were eligible to vest based upon the level of achievement of an established Company performance goal (the Company Financial Goal). If the Company failed to meet the threshold performance for the performance period, no Performance Options would be eligible to vest. Minimum vesting for minimum threshold performance started at 30% of the target value for the Company Financial Goal. If the Company’s performance exceeded the target performance, the recipient may receive additional Performance Options above the target number, subject to a maximum of 200% of the target award. The Company’s financial performance resulted in delivery of 200% and 83% of the number of target Performance Options granted for 2020 and 2019, respectively. The Performance Options that are eligible to vest after the determination date will vest 25% on each of the first four anniversaries of the grant date. In the event of a change of control of the Company before the end of the performance period, the Performance Options will automatically vest based on the greater of actual achievement of the pro-rated Company Financial Goal as of the date of the change of control or 100% of target performance, as determined by the Committee in its sole discretion. The Performance Options are exercisable into shares of the Company’s common stock.
Accounting for Stock Compensation
Stock-based compensation costs are generally based on the fair value calculated from the Black-Scholes option-pricing model on the date of grant for stock options, performance options and market value on the date of grant for RSAs. The fair values of stock and stock options are amortized as compensation expense on a straight-line basis over the vesting period of the grants.
In accordance with ASC 718, the Company evaluates the assumptions used in the Black-Scholes model at each grant date using a consistent methodology for computing expected volatility, expected term and risk-free rate of return. Calculation of expected volatility is based on historical volatility. The expected life is calculated using the contractual term of the options as well as an analysis of the Company’s historical exercises of stock options and performance options. The estimate of the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on our history and expectation of dividend payouts at the time of grant. The assumptions used are summarized in the following table:
2020 2019 2018
Dividend yield 1.5 % 0.9 % 1.2 %
Expected volatility 0.3 0.4 0.4
Risk-free rate of return 0.9 % 2.6 % 2.7 %
Expected life of a 10 year contractual term option 7 years 7 years 7 years
Expected life of a 7 year contractual term option 4.75 years 4.88 years 4.88 years
Weighted average fair value at grant date $ 6.17 $ 7.69 $ 8.23
As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is based on historical forfeiture performance and will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of evaluation and will also impact the amount of stock compensation expense to be recognized in future periods.
The Company’s stock option activity for the year ended December 31, 2020 is as follows:
Stock Options Shares
(in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2019 3,793 $ 20.17
Granted 1,508 23.09
Exercised (998) 18.18
Canceled or expired (550) 24.43
Outstanding at December 31, 2020 3,753 $ 21.25 4.48 $ 7,633
Vested at December 31, 2020 and expected to vest 3,687 $ 21.22 4.45 $ 7,623
Exercisable at December 31, 2020 1,519 $ 19.12 3.00 $ 6,248
During the years ended December 31, 2020, 2019 and 2018, the total exercise intrinsic value of stock options exercised was $16.2 million, $0.4 million and $1.3 million, respectively, and the total fair value of stock options that vested was $10.6 million, $11.9 million and $12.7 million, respectively. Exercise intrinsic value represents the difference between the market value of the Company’s common stock at the time of exercise and the price paid by the employee to exercise the options. The Company had $10.5 million of total unrecognized compensation costs related to stock options at December 31, 2020 that are expected to be recognized over a weighted-average period of 2.57 years.
The Company’s restricted share activity for the year ended December 31, 2020 is as follows:
Restricted Stock Awards Shares
(in thousands) Weighted Average Grant Price
Non-vested at December 31, 2019 810 $ 22.28
Granted 416 23.26
Vested (295) 21.49
Cancelled or expired (38) 22.65
Non-vested at December 31, 2020 893 $ 22.98
Restricted Stock Units Shares
(in thousands) Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands)
Non-vested at December 31, 2019 522
Granted 100
Vested (45)
Cancelled or expired (7)
Non-vested at December 31, 2020 570 1.09 $ 13
Vested at December 31, 2020 and expected to vest 563 1.05 $ 13
Exercisable at December 31, 2020 403 0.00 $ 9
As of December 31, 2020, there was $18.7 million of unrecognized compensation cost related to RSAs and RSUs. That cost is expected to be recognized over a weighted average-period of 2.17 years. The total fair value of restricted shares vested during the year ended December 31, 2020, 2019 and 2018 was $7.3 million, $6.0 million and $6.7 million, respectively.
RSAs and RSUs may be granted at the discretion of the Compensation Committee of the Board of Directors under the Equity Incentive Plan in connection with the hiring or retention of key employees and are subject to certain conditions. Restrictions expire at certain dates after the grant date in accordance with specific provisions in the applicable agreement. During the year ended December 31, 2020, the Company awarded 416,142 shares of RSAs, which had a fair value at the date of grant ranging from $23.05-$31.65. During the year ended December 31, 2019, the Company awarded 413,967 shares of RSAs, which had a fair value at the date of grant ranging from $20.04-$24.43. During the year ended December 31, 2018, the Company awarded 387,436 shares of RSAs, which had a fair value at the date of grant ranging from $20.33-$29.33. During the year ended December 31, 2020, the Company awarded 99,584 shares of RSUs and dividend equivalents, which had a fair value at the date of grant ranging from $23.09-$31.65. During the year ended December 31, 2019, the Company awarded 120,498 shares of RSUs and dividend equivalents, which had a fair value at the date of grant ranging from $21.01-$24.43. During the year ended December 31, 2018, the Company awarded 95,127 shares of RSUs, which had a fair value at the date of grant ranging from $21.98-$26.39. Compensation under these RSAs and RSUs was charged to expense over the restriction period and amounted to $9.2 million, $8.2 million, and $6.2 million in 2020, 2019 and 2018, respectively. There were no significant stock compensation costs capitalized into assets as of December 31, 2020, 2019 or 2018.
The Company received $18.0 million, $1.7 million and $2.8 million for the exercise of stock options during the years ended December 31, 2020, 2019 and 2018, respectively. Cash was not used to settle any equity instruments previously granted. The Company issued shares pursuant to grants relating to each of the Equity Incentive Plan, the 2006 Plan and 2000 Plan from reserves upon the exercise of stock options and vesting of RSAs.
The following are the stock-based compensation costs recognized in the Company’s consolidated statements of comprehensive income (in thousands):
Year Ended December 31,
2020 2019 2018
Cost of revenue $ 2,332 $ 2,028 $ 1,715
Research and development 2,027 1,635 1,409
Selling, general and administrative 10,493 9,535 9,102
Stock-based compensation costs reflected in net income (loss) $ 14,852 $ 13,198 $ 12,226
Employee Stock Purchase Plan
In May 2012, the Company’s stockholders approved the ESPP, which provides for the purchase of up to 500,000 shares of the Company’s common stock by eligible employees. In May 2017, the Company’s stockholders approved an amendment to the ESPP Plan, which increased the shares available under the ESPP by 341,744 shares. The ESPP period is semi-annual and allows participants to purchase the Company’s common stock at 85% of the lesser of (i) the closing market value per share of the common stock on the first trading date of the option period or (ii) the closing market value per share of the common stock on the last trading date of the option period. As of December 31, 2020, 2019 and 2018, 758,700 shares, 631,553 shares and 518,111 shares, respectively had been issued out of the ESPP. The related stock-based compensation expense was $0.7 million, $0.6 million and $0.5 million for 2020, 2019 and 2018, respectively.
The Company uses the Black-Scholes model to estimate the fair value of shares to be issued under the ESPP as of the grant date using the following weighted average assumptions:
2020 2019 2018
Assumptions:
Risk-free interest rates 0.18 % 2.55 % 2.1 %
Expected life 0.5 years 0.5 years 0.5 years
Expected volatility 0.3471 0.35 0.44
Dividend yield 1.454 % 0.942 % 1.2 %
Reserved Shares of Common Stock
At December 31, 2020 and 2019, the Company had reserved 6,808,668 and 8,349,808 shares of common stock, respectively, for the issuance of common stock upon the exercise of options, issuance of RSAs, RSUs, purchase of common stock pursuant to the ESPP or other awards issued pursuant to the Company’s equity plans and arrangements. The following table summarizes the reserved shares by plan as of December 31, 2020:
Options and RSUs Outstanding Shares Available for Future Issuance Total Shares Reserved
Equity Incentive Plan 4,339,804 2,385,820 6,725,624
ESPP - 83,044 83,044
4,339,804 2,468,864 6,808,668
Employee Savings Plans and Other Benefit Plans
Effective January 1, 2001, the Company began sponsoring a retirement plan authorized by section 401(k) of the Internal Revenue Code for the Company’s employees in the United States. In accordance with the 401(k) plan, all employees are eligible to participate in the plan on the first day of the month following the commencement of full time employment. For 2020, 2019 and 2018, each employee could contribute a percentage of compensation up to a maximum of $19,500, $19,000, and $18,500 per year, respectively, with the Company matching 50% of each employee’s contributions. Effective January 1, 2010, the Company began contributing to a deferred profit sharing plan for its Canadian employees. All Canadian employees are eligible to participate in the plan. The Company’s contributions to these plans for 2020, 2019 and 2018 were $5.4 million, $5.1 million and $4.0 million, respectively.
Several of the Company’s Netherlands employees are covered by a defined benefit plan. The cost and total liability to the Company is not material. Effective January 1, 2011, all of the Company’s new hires in the Netherlands are eligible to participate in a defined contribution plan.
NOTE 14 - REVENUE RECOGNITION
Contract assets are included within Accounts receivables, net and contract liabilities are included in Deferred revenue on the Company’s Balance Sheet. The following table presents the opening and closing balances of the Company’s contract assets and liabilities for the twelve months ended December 31, 2020 (in thousands):
Balance at
December 31, 2020 Balance at December 31, 2019
Contract assets:
Unbilled receivables - Royalties $ 12,054 $ 12,257
Contract liabilities - short-term:
Deferred revenue - Service $ 9,346 $ 7,771
Deferred revenue - Licenses 197 207
Deferred revenue - Instruments 78 2
Deferred revenue - Other 426 234
Total Contract liabilities - short-term $ 10,047 $ 8,214
Contract liabilities - long-term:
Deferred revenue - Service $ 1,190 $ 968
Deferred revenue - Licenses 468 665
Total Contract liabilities - long-term $ 1,658 $ 1,633
During the twelve months ended December 31, 2020, the Company recognized the following revenues as a result of changes in the contract asset and contract liability balances in the period (in thousands):
Year Ended December 31, 2020
Revenue recognized in the period:
Amounts included as contract liabilities at the beginning of the period $ 9,387
Performance obligations satisfied in previous periods -
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Leases
We have leased all of our research, manufacturing and office space and have entered into various other leases in conducting our business. Our leases have remaining lease terms of one year to six years, and some of our leases include options to extend the leases for up to ten years, tenant improvement allowances, rent holidays and rent escalation clauses. As the Company’s leases do not provide an implicit rate, we have used an estimated incremental borrowing rate of 5.75%, based on the information available at the commencement date in determining the present value of lease payments.
The components of the lease expense were as follows (in thousands):
Twelve Months Ended December 31,
2020 2019 2018
Operating lease cost(a)
$ 9,792 $ 9,434 $ 7,032
(a) Includes short-term lease expense costs, which were immaterial in the years ended December 31, 2020, 2019 and 2018
Supplemental cash flow information related to leases was as follows (in thousands):
Twelve Months Ended Twelve Months Ended
December 31, 2020 December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities $ 7,072 $ 6,553
Supplemental balance sheet information related to leases was as follows (in thousands):
December 31, 2020 December 31, 2019
Operating leases:
Operating lease right-of-use assets $ 17,768 $ 20,439
Operating lease liabilities $ 19,308 $ 22,235
Weighted average remaining lease term 3.52 years 4.36 years
Weighted average discount rate 5.75 % 5.75 %
Minimum annual lease commitments as of December 31, 2020 under non-cancellable leases for each of the next five years and in the aggregate were as follows (in thousands):
Operating Leases
2021 $ 7,206
2022 5,540
2023 4,507
2024 3,177
2025 945
Thereafter -
Total lease payments 21,375
Less: imputed interest (2,067)
Lease liabilities at December 31, 2020 $ 19,308
These non-cancellable lease commitments related to facilities include certain rent escalation provisions which have been included in the minimum annual rental commitments shown above. These amounts are recorded to expense on a straight-line basis over the life of the lease. In addition, some of the Company’s leases contain options to renew the lease for five to ten years at the then prevailing market rental rate, right of first refusal to lease additional space that becomes available, or leasehold improvement incentives.
Non-Cancellable Purchase Commitments
As of December 31, 2020 the Company had approximately $68.1 million in purchase commitments primarily with several of its inventory suppliers as well as other operating commitments. Certain of our supply agreements require purchase and delivery of minimum amounts of components through 2020, and purchases under these arrangements were $0.5 million, $0.8 million and $2.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Employment Contracts
The Company has entered into employment contracts with certain of its key executives. Generally, certain amounts may become payable in the event the Company terminates the executives’ employment without cause or the executive resigns for good reason.
Legal Proceedings
In the normal course of business, the Company is subject to claims, lawsuits and legal proceedings. When and if it appears probable in management’s judgment, and based upon consultation with outside counsel, that we will incur monetary damages or other costs in connection with any claims or proceedings, and such costs can be reasonably estimated, we record the estimated liability in the financial statements. If only a range of estimated losses can be estimated, we record an amount within the range that, in management’s judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we record the liability at the low end of the range of estimates. Any such accrual would be charged to expense in the appropriate period. We disclose significant contingencies when the loss is not probable and/or the amount of the loss is not estimable, when we believe there is at least a reasonable possibility that a loss has been incurred. We recognize costs associated with legal proceedings in the period in which the services were provided.
NOTE 16 - GUARANTEES
The terms and conditions of the Company’s development and supply and license agreements with its strategic partners generally provide for a limited indemnification of such partners, arising from the sale of Luminex systems and consumables, against losses, expenses and liabilities resulting from third-party claims based on an alleged infringement on an intellectual property right of such third party. The terms of such indemnification provisions generally limit the scope of and remedies for such indemnification obligations to a multiple of amounts paid by such strategic partner to Luminex during the previous annual period(s). To date, the Company has not had to reimburse any of its strategic partners for any losses arising from such indemnification obligations.
NOTE 17 - GEOGRAPHIC INFORMATION
The table below provides information regarding product revenues and property and equipment, net from the Company’s sales to customers within the United States and in foreign countries for the years ended December 31 (in thousands):
Sales to Customers Property and Equipment, net
2020 2019 2018 2020 2019 2018
Domestic $ 325,781 $ 252,381 $ 261,726 $ 61,755 $ 63,180 $ 63,382
Foreign:
Europe 48,635 36,625 21,672 89 178 394
Asia 30,018 32,220 21,603 577 442 519
Canada 5,293 4,775 1,725 1,715 1,993
Other 12,962 8,119 6,042 - - -
$ 417,396 $ 334,638 $ 315,818 $ 64,146 $ 65,515 $ 66,288
The Company’s aggregate foreign currency transaction gain of $1,012,000, and losses of $432,000 and $487,000 were included in determining the consolidated results for the years ended December 31, 2020, 2019 and 2018, respectively.
NOTE 18 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting guidance
In June 2016, the FASB issued guidance on financial instruments and related credit losses. The guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The statement of comprehensive income reflects the measurement of credit losses for newly recognized financial assets, as well as the expected credit losses during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The updated guidance is effective for annual periods beginning after December 15, 2019, and is applicable to the Company in fiscal 2020. The Company adopted the new standard effective January 1, 2020. The primary impact for the Company was the timing of recording expected credit losses on its trade receivables. The Company does not have a history of significant credit losses and this guidance did not have a material impact on its consolidated financial statements.
Recent accounting guidance not yet adopted
In December 2019, the FASB issued final guidance that simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes. The guidance amended certain disclosure requirements that had become redundant, outdated or superseded. Additionally, this guidance includes provisions for investment company reporting modernization, amends accounting for the interim period effects of changes in tax laws or rates, and simplifies aspects of the accounting for franchise taxes. The guidance is effective for annual periods beginning after December 15, 2020, and is applicable for the Company in fiscal 2021. Early adoption is permitted. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under U.S. GAAP. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments and how the instruments have been reported in the entity’s financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2021. Early adoption is permitted, but no earlier than January 1, 2021. The Company will early adopt this guidance effective January 1, 2021 under the modified retrospective basis with the cumulative effect recognized through an adjustment to additional paid-in capital. Under this method, earnings per share amounts will not be restated in prior periods presented, but future earnings per share amounts will be impacted by the change to the if-converted method for calculating diluted earnings per share. The Company's adoption is expected to result in a decrease of approximately $42 million in additional paid in capital from the de-recognition of the bifurcated equity component and an increase of approximately $50 million in debt from the de-recognition of the discount associated with the bifurcated equity component. The Company expects to write-off the related deferred tax liabilities to additional paid in capital.
NOTE 19 - SELECTED QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share data):
Quarter Ended
March 31,
2020 June 30,
2020 September 30,
2020 December 31,
Revenue $ 90,424 $ 109,519 $ 106,060 $ 111,393
Gross profit 50,346 69,681 63,381 64,444
Income (loss) from operations 1,641 18,776 11,526 10,500
Net income (loss) 654 12,510 1,767 239
Basic income (loss) per common share 0.01 0.27 0.04 0.01
Diluted income (loss) per common share 0.01 0.27 0.04 0.01
Cash dividends per common share 0.09 0.09 0.09 0.10
Quarter Ended
March 31,
2019 June 30,
2019 September 30,
2019 December 31,
Revenue $ 82,408 $ 83,056 $ 78,673 $ 90,501
Gross profit 45,807 45,227 41,840 49,865
Income from operations (3,584) (5,756) (5,722) 2,983
Net income (loss) 2,960 (4,931) (5,250) 3,383
Basic income (loss) per common share 0.07 (0.11) (0.12) 0.08
Diluted income (loss) per common share 0.07 (0.11) (0.12) 0.07
Cash dividends per common share 0.06 0.06 0.09 0.09
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (Exchange Act), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation and criteria of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level and designed to ensure that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15 d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the 2013 framework in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of change in conditions, or that the degree of the compliance with the policies or procedures may deteriorate.
Our independent registered public accounting firm, Ernst & Young LLP, has issued a report on their assessment of the effectiveness of our internal control over financial reporting, which is provided in Item 8 “Financial Statements and Supplementary Data,” page 75.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) during the fourth quarter of 2020 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item, including information concerning our directors and executive officers, audit committee, and audit committee financial experts, code of ethics and compliance with Section 16(a) of the Exchange Act is incorporated by reference to information under the captions “Proposal 1 - Election of Class I Directors”, “Corporate Governance” and “Delinquent Section 16(a) Reports” in our definitive proxy statement for our 2021 Annual Meeting of Stockholders to be held on or about May 20, 2021 (Proxy Statement). It is anticipated that our Proxy Statement will be filed with the Securities and Exchange Commission on or about April 1, 2021.
Pursuant to General Instruction G(3), certain information with respect to our executive officers is set forth under the caption “Information about our Executive Officers” in Item 1 of this Annual Report on Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Corporate Governance” and “Executive and Director Compensation.”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth, as of December 31, 2020, certain information with respect to shares of our common stock authorized for issuance under our equity compensation plans.
Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options and Restricted Stock Units Weighted-Average Exercise Price of Outstanding Options Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A))
(A) (B)(2)
(C)
Equity compensation plans approved by security holders(1)
4,339,804 $ 21.25 2,468,864
Equity compensation plans not approved by security holders - $ - -
Total 4,339,804 2,468,864
(1) Includes approximately 570,000 shares that are issuable upon vesting of outstanding restricted stock units. The remaining balance consists of outstanding stock option grants.
(2) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding restricted stock units, which have no exercise price.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated by reference to the sections of the Proxy Statement entitled “Certain Relationships and Related Party Transactions” and “Corporate Governance.”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as a part of this Annual Report on Form 10-K:
(1)Financial Statements:
The Financial Statements required by this item are submitted in Part II, Item 8 of this report.
(2)Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or in the notes thereto.
(3)Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
2.1
First Amendment to the Agreement and Plan of Merger, dated as of May 22, 2016, between Luminex Corporation, Commodore Acquisition, Inc., and Nanosphere, Inc. (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109), filed on May 23, 2016).
3.1
Restated Certificate of Incorporation of the Company (Previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-96317), filed February 7, 2000, as amended).
3.2
Amended and Restated Bylaws of the Company (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed March 11, 2015).
4.1
Description of the Registrant’s Securities (Previously filed as an Exhibit to the Company's Current Report on Form 10-K (File No. 000-30109), for the fiscal year ended December 31, 2019).
4.2
Indenture dated as of May 13, 2020 between Luminex Corporation and the Trustee (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109), filed on May 13, 2020).
4.3
Form of 3.00% Convertible Senior Note due 2025 (included in Exhibit 4.1) (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109), filed on May 13, 2020).
10.1#
Form of Indemnification Agreement between the Company and each of the directors and executive officers of the Company (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed September 16, 2008).
10.2
Lease Agreement between Aetna Life Insurance Company, as Landlord, and Luminex Corporation, as Tenant, dated October 19, 2001 (Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended September 30, 2001).
10.3
First Amendment to Lease Agreement between Aetna Life Insurance Company, as Landlord, and Luminex Corporation, as Tenant, dated July 25, 2002 (Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2002).
10.4
Lease Amendment between McNeil 4 & 5 Investors, LP, as Landlord, and Luminex Corporation, as Tenant, dated January 27, 2003 (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2002).
10.5
Lease Agreement between PS Business Parks, L.P., as Landlord, and Luminex Corporation, as Tenant, dated September 30, 2014 (Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2014).
10.6#
Employment Agreement, effective as of October 1, 2003, by and between Luminex Corporation and Harriss T. Currie (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2003).
10.7#
Luminex Corporation Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 21, 2009).
10.8#
Form of Non-Qualified Stock Option Agreement for the Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 21, 2009).
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.9#
Form of Restricted Share Award Agreement for Officers & Employees for the Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 21, 2009).
10.10#
Form of Restricted Share Award Agreement for Directors for the Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 21, 2009).
10.11#
Form of Restricted Share Unit Agreement for Officers & Employees for the Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 21, 2009).
10.12#
Form of Restricted Share Unit Agreement for Directors for the Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 21, 2009).
10.13#
Luminex Corporation 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Proxy Statement (File No. 000-30109) for its Annual Meeting of Shareholders held on May 25, 2006).
10.14#
Form of Non-Qualified Stock Option Agreement for the 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 25, 2006).
10.15#
Form of Restricted Share Award Agreement for Officers & Employees for the 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 25, 2006).
10.16#
Form of Restricted Share Award Agreement for Directors for the 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed May 25, 2006).
10.17#
Form of Restricted Share Unit Agreement for the 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2006).
10.18#
Form of Amendments to Equity Award Agreements (Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2007).
10.19#
Luminex Corporation Second Amended and Restated 2006 Equity Incentive Plan (Previously filed as Annex A to the Company's Proxy Statement (filed with the Securities and Exchange Commission on April 3, 2012; (File No. 000-30109) for its Annual Meeting of Stockholders held on May 17, 2012).
10.20#
Form of Amendment to Employment Agreement, effective as of December 31, 2012, by and between Luminex Corporation and its Executives (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2012).
10.21#
Employment Agreement, dated October 14, 2014, between Luminex Corporation and Nachum Shamir (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed October 20, 2014).
10.22#
Employment Agreement, dated August 14, 2012, by and between Luminex Corporation and Nancy M. Fairchild (Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2014).
10.23#
Second Amendment to Employment Agreement, effective as of February 6, 2014, by and between Luminex Corporation and Nancy M. Fairchild (Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2014).
10.24#
Third Amendment to Employment Agreement, effective as of January 1, 2015, by and between Luminex Corporation and Nancy M. Fairchild (Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2014).
10.25#
First Amendment to the Luminex Corporation Second Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109), filed on March 11, 2015).
10.26#
Form of Non-Qualified Stock Option Agreement for the Luminex Corporation Second Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended March 31, 2015).
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.27#
Form of Stock Appreciation Rights Agreement for the Luminex Corporation Second Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended March 31, 2015).
10.28#
Luminex Corporation Third Amended and Restated 2006 Equity Incentive Plan (Previously filed as Annex A to the Company’s Proxy Statement (filed with the Securities and Exchange Commission on March 30, 2015; (File No. 000-30109) for its Annual Meeting of Stockholders held on May 14, 2015).
10.29#
Form of Restricted Share Award Agreement for Directors for the Luminex Corporation Third Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2015).
10.30#
Form of Restricted Share Unit Agreement for Directors for the Luminex Corporation Third Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2015).
10.31#
Employment Agreement, dated March 4, 2015, by and between Luminex Corporation and Richard Rew (Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2015).
10.32#
Employment Agreement, dated March 16, 2015, by and between Luminex Corporation and Randall Myers (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2016).
10.33#
Employment Agreement, dated November 1, 2016, by and between Luminex Corporation and Todd Bennett (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2016).
10.34#
Amended and Restated 2016 Management Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed March 28, 2016).
10.35#
Form of Performance-Based Non-Qualified Stock Option Agreement for the Luminex Corporation Third Amended and Restated 2006 Equity Incentive Plan (Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended March 31, 2016).
10.36#
First Amendment to Employment Agreement, effective March 27, 2017, by and between Luminex Corporation and Nachum Shamir (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed March 31, 2017).
10.37#
Amended and Restated 2017 Management Incentive Plan (Previously filed as an Exhibit to the Company's Current Report on Form 8-K (File No. 000-30109), filed March 31, 2017).
10.38#
Amended and Restated Luminex Corporation Employee Stock Purchase Plan (Previously filed as Annex A to the Company's Proxy Statement (filed with the Securities and Exchange Commission on April 3, 2017; (File No. 000-30109) for its Annual Meeting of Stockholders held on May 18, 2017).
10.39#
Employment Agreement, dated January 1, 2018, by and between Luminex Corporation and Chuck Collins (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2017).
10.40#
Form of Amendment to Employment Agreement by and between Luminex Corporation and its Executives.(Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended March 31, 2018).
10.41#
Luminex Corporation 2018 Equity Incentive Plan (Previously filed as Annex A to the Company’s Proxy Statement (filed with the Securities and Exchange Commission (File No. 000-30109) on April 2, 2018) for its Annual Meeting of Stockholders held on May 17, 2018).
10.42#
Luminex Corporation 2018 Management Incentive Plan (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109) filed April 20, 2018).
10.43#
Form of Restricted Share Award Agreement for Directors for the Luminex Corporation 2018 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2018).
10.44#
Form of Restricted Share Unit Agreement for Directors for the Luminex Corporation 2018 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2018).
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.45#
Form of Non-Qualified Stock Option Agreement for the Luminex Corporation 2018 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2018).
10.46#
Form of Restricted Share Award Agreement for Officers and Employees for the Luminex Corporation 2018 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2018).
10.47#
Form of Restricted Share Unit Agreement for Officers and Employees for the Luminex Corporation 2018 Equity Incentive Plan (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended June 30, 2018).
10.48
First Amendment to Lease Agreement between PS Business Parks, L.P., as Landlord, and Luminex Corporation, as Tenant, dated March, 2017 (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended September 30, 2018).
10.49
Second Amendment to Lease Agreement between PS Business Parks, L.P., as Landlord, and Luminex Corporation, as Tenant, dated July, 2018 (Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-30109) for the quarterly period ended September 30, 2018).
10.50#
Employment Agreement, dated March 1, 2018, by and between Luminex Corporation and Eric Shapiro (Previously filed as an Exhibit to the Company's Annual Report on Form 10-K (File No. 000-30109) for the fiscal year ended December 31, 2018).
10.51
Form of Confirmation of Convertible Note Hedge Transaction dated as of May 7, 2020 between the Option Counterparties and the Registrant (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109) filed May 13, 2020.
10.52
Form of Confirmation of Warrant Transaction dated as of May 7, 2020, between the Option Counterparties and the Registrant (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109) filed May 13, 2020.
10.53
Purchase and Sale Agreement between Northbrook Commercial Properties, LLC, as Seller, and Luminex Corporation, as Purchaser, dated December 4, 2020.
10.54
Lease Agreement between Sundance Consolidated, L.L.C., as Landlord, and Luminex Corporation, as Tenant, dated December 16, 2020.
21.1
Subsidiaries of the Company.
23.1
Consent of Independent Registered Public Accounting Firm.
24.1
Power of Attorney (incorporated in the signature page of this report).
31.1
Certification by CEO pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by CFO pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials from Luminex Corporation's Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity and (iv) Notes to Condensed Consolidated Financial Statements.
104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included in Exhibit 101).
# Management contract or compensatory plan or arrangement.
* Schedules, annexes and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. Luminex agrees to furnish a supplemental copy of omitted schedules to the Securities and Exchange Commission upon request.