Luminex Corporation
Annual Report 2019

Plain-text annual report

LETTER TO SHAREHOLDERS NACHUM “HOMI” SHAMIR PRESIDENT AND CHIEF EXECUTIVE OFFICER My Fellow Shareholders, 2019 was definitely a challenging year for Luminex, but one that we emerged from on solid footing—fully prepared for accelerated growth. More importantly, we begin 2020 as a transformed company on the path to double-digit growth, profitability and cash flow generation. During 2019, in the face of the final headwinds brought on by the departure of one of our largest customers, our diversified business performed very well and showcased both our flexibility and creativity. We fully integrated the flow-cytometry acquisition from Merck/ Millipore, expanded our automated molecular diagnostics franchise by 20%, completed development of our VERIGENE® II System and submitted the first VERIGENE® II assay to the FDA, launched our newly FDA-cleared MRSA assay on the ARIES® System, and prepared for the launch of our new products in 2020—all while remaining in firm control of our operating expenses. And then, we were confronted with a global pandemic unlike anything we’ve ever experienced. The COVID-19 outbreak has truly shown the capabilities and responsiveness of our organization. When presented with opportunities to help detect the SARS-CoV-2 virus and save lives, Luminex rapidly responded across multiple channels. We developed an assay that received Emergency Use Authorization (EUA) from the FDA on our NxTAG® platform and validated the use of our ARIES® technology to enable the development of Laboratory Developed Tests (LDT) for detection of this novel coronavirus. As a result of concerted efforts across our entire organization, we have been able to supply a significant volume of test kits and instruments to our customers. We also anticipate receiving an EUA for our ARIES® SARS-COV-2 Assay in the near future. Longer-term, we are working on adding SARS-CoV-2 detection to our new VERIGENE II Respiratory Flex® Assay. Our broad portfolio lets us quickly tailor Luminex’s products to address unmet needs in the market and provide a comprehensive array of cost-effective solutions for our customers. During the first half of 2019, we were laser-focused on the integration of the flow cytometry business acquired from Merck/Millipore, including transferring manufacturing and distribution from offshore locations, incorporating additional operations into our systems, onboarding employees, and leveraging synergies as we merged the flow business into our existing operations. Our efforts reduced manufacturing cycle time, resulting in better than anticipated revenue in the first half of the year, and we finished the year on-target with $45 million in revenue. Additionally, because the customer base of the flow business and our Partners’ research businesses have some degree of overlap, we have been able to deepen relationships with many long-standing customers of Luminex. Overall, we look forward to continuing to expand the flow- cytometry business, with a significant focus on the proprietary, image- based platforms. Over the course of 2019, we also expanded our automated molecular franchise by more than 20%. We placed more than 200 new sample-to- answer systems under contract, including both ARIES® and VERIGENE units, increasing the active customer utilization rates by 7% and 12%, respectively. We continue to hold our prices in line with what our customers can afford. Given current reimbursement rates, this gives us a significant competitive advantage, with an average price per assay that is often well below our competitors’ prices—with comparable performance. In an environment with ever-increasing pressure to minimize healthcare costs, we remain well-positioned for success, and our customers continue to let us know that they appreciate that we view them as collaborative partners in a joint relationship. In October of 2019, we completed the development of our next- generation VERIGENE II System, submitted the first associated assay to the FDA on October 31, and submitted a second assay in early 2020. The VERIGENE II System offers a number of significant improvements over the current system including Flex® Testing, which provides more cost-effective results. We believe the Flex capability of our assays offers another significant competitive advantage—by allowing physicians to customize the test report to view the specific targets that make sense based on an individual’s symptoms and history, they pay only for what is necessary. This customization helps healthcare providers align with dynamic reimbursement guidelines and supports a more cost-effective evaluation of each patient. The new VERIGENE II System will provide the company with expanded margin opportunities, and, as the menu develops, should contribute to increased profitability with volume. Throughout 2019, we maintained tight control over our operating expenses in a year where revenue growth was challenged. Although we added expenses as a product of the flow-cytometry acquisition, our pre- existing core expenses remained essentially flat, despite the fact that we conducted three clinical trials—two for VERIGENE II and one for ARIES®. While this outbreak has certainly placed a heavy burden on healthcare providers across the globe, and has significantly impacted our daily lives, I am proud to say that Luminex remains well-positioned to accelerate our growth towards our target of $500 million in revenue, improved gross margins and increased profitability. We also will continue to have a solid, ongoing commitment to R&D. With our new product launches in 2020, we are working to establish an even stronger foundation for double- digit growth and margin expansion as the volume in all of our factories increases. VERIGENE II will provide a significant improvement over the existing VERIGENE platform. xMAP® INTELLIFLEX, our next-generation xMAP instrument, will provide improvements and modernization to a platform that is the gold standard for multiplexing. xMAP Technology has been well-respected for more than two decades in both the research and clinical diagnostic space. Overall, we expect our LTG business to grow at a consistent, mid-to-high single-digit rate over the coming years, the flow business at or in excess of 10%, and our sample-to-answer franchise in excess of 20%. Once again, I would like to thank our shareholders for your continued support and confidence. Additionally, I would like to acknowledge our more than 1,300 employees worldwide for their outstanding efforts and continued dedication to making a positive difference in the lives of the healthcare providers and patients we serve on a daily basis. Yours sincerely, Homi Shamir UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2019 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __ to __. or LUMINEX CORPORATION (Exact name of registrant as specified in its charter) Delaware 000-30109 74-2747608 (State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer Identification No.) 12212 Technology Blvd., Austin, Texas (Address of principal executive offices) 78727 (Zip Code) (512) 219-8020 Registrant’s Telephone Number, Including Area Code None Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of exchange on which registered Common Stock, $0.001 par value LMNX The Nasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Yes No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer Accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Based on the closing sale price of common stock on The Nasdaq Global Select Market on June 28, 2019, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $848,754,179 as of such date, which assumes, for purposes of this calculation only, that all shares of common stock beneficially held by officers and directors are shares owned by “affiliates.” There were 45,168,166 shares of the Company’s Common Stock, par value $0.001 per share, outstanding on February 26, 2020. Portions of the Registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. DOCUMENTS INCORPORATED BY REFERENCE LUMINEX CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019 TABLE OF CONTENTS Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits, Financial Statement Schedules Form 10-K Summary Signatures and Certifications PAGE 1 24 45 45 45 45 46 48 48 62 64 97 97 98 99 99 99 99 99 100 103 103 PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. Table of Contents SAFE HARBOR CAUTIONARY STATEMENT This annual report on Form 10-K contains statements that are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide our current expectations of forecasts of future events. All statements other than statements of current or historical fact contained in this annual report, including statements regarding our future financial position, business strategy, impact of the reimbursement landscape, products including ARIES®, VERIGENE® NxTAG®, Muse®, Guava®, easyCyte™, InCyte™, Amnis®, ImageStream®, FlowSight® and CellStream®, assay sales, consumables sales patterns and bulk purchases, budgets, system sales, anticipated gross margins, liquidity, cash flows, projected costs and expenses, taxes, deferred tax assets, regulatory approvals or the impact of laws or regulations applicable to us, plans and objectives of management for future operations, and impact of prior acquisitions or future acquisitions, integration and the expected benefit of our acquisitions are all forward-looking statements. The words “anticipate,” “believe,” “continue,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “projects,” “will” and similar expressions as they relate to us, are intended to identify forward- looking statements. These statements are based on our current plans and actual future activities, and our financial condition and results of operations may be materially different from those set forth in the forward-looking statements as a result of known or unknown risks and uncertainties, including, among other things: • concentration of our revenue in a limited number of direct customers and strategic partners, some of which may experience decreased demand for their products utilizing or incorporating our technology, periodic variability in their purchasing patterns or practices as a result of internal resource planning challenges, or budget or finance constraints in the current economic environment; • risks and uncertainties relating to market demand and acceptance of our products and technologies, including ARIES®, MultiCode®, NxTAG®, xMAP®, VERIGENE®, Muse®, Guava®, and Amnis® products; • our ability to scale manufacturing operations and manage operating expenses, gross margins and inventory levels; • our ability to obtain and enforce intellectual property protections on our products and technologies; • the impact on our growth and future results of operations with respect to the loss of the LabCorp women’s health business; • our ability to successfully launch new products in a timely manner; • dependence on strategic partners for development, commercialization and distribution of products; • risks and uncertainties associated with implementing our acquisition strategy; • our challenge to identify acquisition targets including our ability to obtain financing on acceptable terms; • our ability to integrate acquired companies or selected assets, including the flow cytometry assets recently acquired from EMD Millipore, into our consolidated business operations, and the ability to fully realize the benefits of our acquisitions; • timing of and process for regulatory approvals; • competition and competitive technologies utilized by our competitors; • fluctuations in quarterly results due to a lengthy and unpredictable sales cycle, fluctuations in bulk purchases of consumables, fluctuations in product mix and the seasonal nature of some of our assays; • our ability to comply with applicable laws, regulations, policies and procedures; • the impact of the ongoing uncertainty in global finance markets and changes in government and government agency funding, including its effects on the capital spending policies of our partners and end users and their ability to finance purchases of our products; • changes in principal members of our management staff; • potential shortages, or increases in costs, of components or other disruptions to our manufacturing operations; Table of Contents • our increasing dependency on information technology to enable us to improve the effectiveness of our operations and to monitor financial accuracy and efficiency; • implementation, including any modification, of our strategic operating plans; • uncertainty regarding the outcome or expense of any litigation brought against or initiated by us; • risks relating to our foreign operations, including fluctuations in exchange rates, tariffs, customs and other barriers to importing/exporting materials and products in a cost-effective and timely manner; difficulties in accounts receivable collections; our ability to monitor and comply with foreign and international laws and treaties; and our ability to comply with changes in international taxation policies; • budget or finance constraints in the current economic environment, or periodic variability in customer purchasing patterns or practices as a result of material resource planning challenges; and • reliance on third party distributors for distribution of specific Luminex-developed and manufactured assay products. Many of these risks, uncertainties and other factors are beyond our control and are difficult to predict. Any or all of our forward-looking statements in this annual report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. New factors could also emerge from time to time that could adversely affect our business. The forward-looking statements herein can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions outlined above and described in Item 1A “Risk Factors” below. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this annual report including in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Item 1A “Risk Factors.” Our forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or revise forward- looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward- looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report. Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Luminex,” the “Company,” “we,” “us” and “our” refer to Luminex Corporation and its subsidiaries. ___________________ Luminex®, xMAP®, xTAG®, NxTAG®, Luminex® 100/200™, Luminex® SD™, FLEXMAP 3D®, MicroPlex®, MAGPIX®, MagPlex®, SeroMAP™, xPONENT®, LumAvidin®, MultiCode®, SYNCT™, ARIES®, VERIGENE®, xMAP® INTELLIFLEX, agPlex-TAG™, and Flex®, Muse®, Guava®, easyCyte™, InCyte™, Amnis®, ImageStream®, FlowSight®, CellStream®, INSPIRE™, IDEAS®, SpeedBead®, easyCheck™, FlowCellect®, ViaCount™, and Guava Nexin® are trademarks of Luminex Corporation or one of its subsidiaries. This report also refers to trademarks, service marks and trade names of other organizations. Table of Contents ITEM 1. BUSINESS Overview PART I 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 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, 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. Our xMAP Technology Our xMAP technology is an open architecture, multiplexing technology that combines existing biological testing techniques with illumination, advanced digital signal processing, detection and proprietary software. With our technology, discrete assays are performed on the surface of color-coded microspheres. These microspheres are read in a compact analyzer that utilizes lasers or light emitting diodes (LEDs), detectors, charge-coupled device imaging and high-speed digital signal processing to simultaneously identify the assay and measure the individual assay results. The key features of xMAP technology include the following: • Multi-analyte/multi-format xMAP technology has been designed to simultaneously perform up to 500 distinct assays in a single tube or well of a microtiter plate using only a small amount of sample. Moreover, unlike most existing technologies that are dedicated to only one type of assay, xMAP can perform multiple types of assays including enzymatic, genetic and immunologic tests on the same instrument platform. • Flexibility/scalability xMAP technology allows flexibility in customizing test panels. Panels can be modified to include new assays in the same tube by adding additional microsphere sets. It is also scalable, meaning that there is no change in the manufacturing process and only minimal changes to the labor required to produce a small or large number of microsphere-based tests. • Both protein and nucleic acid applications on a single platform xMAP technology has an advantage due to its ability to analyze both proteins and nucleic acids. This allows customers to utilize a single platform to evaluate samples across more biological parameters, which generates a more complete assessment of these samples. Alternative technologies are typically restricted to either proteins or nucleic acid, requiring customers to use two or more technologies from other vendors to get the same information. • High throughput Our technology can 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. Rapid sample analysis permits efficient use for high-throughput applications. • Ease of use Most xMAP-based assays are simple to perform. A test sample is added to a solution containing microspheres that have been coated with reagents. The solution is then processed through one of our xMAP systems, which incorporate proprietary software to automate data acquisition and analysis in real-time. 1 Table of Contents • Cost-effective By performing multiple assays at one time, xMAP technology is designed to be cost-effective for customers compared to competitive techniques such as enzyme-linked immuno-sorbent assay (ELISA) or real-time polymerase chain reaction (PCR). By analyzing only those assays in which a customer is interested, xMAP is also more cost-effective than most competing microarray technologies. In addition, microsphere-based assays are inexpensive compared to other technologies, such as chip-based microarrays. Two types of microspheres—polystyrene microspheres and polystyrene magnetic microspheres—are both fundamental components of the xMAP technology. We purchase and manufacture microspheres and, in a proprietary process, dye them with varying intensities of proprietary dyes to achieve up to 500 distinct colors. The specific dye proportions permit each color-coded microsphere to be readily identified based on its distinctive fluorescent signature. Our customers create assays by attaching different biochemical reactants to each distinctly colored microsphere set. These unique reactants bind, or capture, specific substances present in the test sample. The microsphere sets can then be combined in test panels as required by the user, with a maximum of 500 tests per panel. Customers can order either standard microspheres or magnetic microspheres. To perform an assay using xMAP technology on our systems, a researcher attaches biomarker detectors such as antibodies or nucleic acid oligos to one or more sets of color-coded microspheres, which are then mixed with a test sample. This mixture is injected into an xMAP analyzer, such as the Luminex 200 instrument, where the microspheres pass single-file in a fluid stream through two laser beams. The first laser excites the internal dyes that are used to identify the color of the microsphere and the test being performed on the surface of the microsphere. The second laser excites a fluorescent dye captured on the surface of the microspheres that is used to detect the result of the assay taking place. Our proprietary optics, digital signal processors and software record the fluorescent signature of each microsphere and compare the results to the known identity of that color-coded microsphere set. The results are analyzed and displayed in real-time with data stored on the computer database for reference, evaluation and analysis. Our xMAP technology is currently being used within various segments of the life sciences industries, including the fields of drug discovery and development, and for clinical diagnostics, bio-defense, food safety and biomedical research. We have a full range of instruments using our xMAP Technology: our LUMINEX® 100/200™ Systems offer 100-plex testing; our FLEXMAP 3D® System is our high-throughput, 500-plex testing system; and our MAGPIX® System provides 50- plex testing at a lower cost using imaging rather than flow cytometry. By using our xMAP technology, the end users are able to be more efficient by generating multiple simultaneous results per sample. We believe that this technology may also offer advantages in other industries, such as in food safety, animal health and bio-defense/bio-threat markets. Using the xMAP products Luminex has available today, up to 500 simultaneous analyte results can be determined from a single sample. Our Amnis/Guava® Technologies Due to our acquisition of EMD Millipore Corporation’s flow cytometry portfolio, which closed on December 31, 2018, we now have both Amnis® and Guava® technologies. Amnis systems are a family of imaging flow cytometry products for cell- based analysis. With the proprietary Amnis charge-coupled device detection and time-delayed integration (CCD-TDI) technology, CellStream® provides fluorescence and small particle sensitivity in a highly customizable flow cytometer. 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. This acquisition expanded Luminex’s existing offering of flow-based detection systems, which is centered around our innovative xMAP® multiplexing technology, with approximately 17,000 xMAP systems sold worldwide, some of which may be retired or otherwise not in use. The results of operations for this acquisition have been included in Luminex’s consolidated financial statements beginning January 1, 2019. 2 Table of Contents Our Non-Automated Technologies Our xTAG® technology consists of several components, including multiplexed PCR or target identification primers, DNA Tags, xMAP microspheres and data analysis software. xTAG technology permits the development of molecular diagnostic assays for clinical use by hospital and reference laboratories. xTAG technology has also been applied to human genetic assays, pharmacogenetic assays and infectious disease assays. Our MultiCode technology is based upon a unique assay chemistry that is a flexible platform for both real-time PCR and multiplex PCR-based applications. MultiCode-based PCR assays are primarily used for the detection of infectious diseases and genetic-based conditions. We have multiple molecular diagnostic (MDx) assays based on the MultiCode chemistry. MultiCode products are based upon the unique MultiCode bases, isoC and isoG. The synthetic isoC:isoG DNA base pair differs from the naturally occurring base pairs in its hydrogen bonding pattern. As a result, the MultiCode bases, isoC and isoG, can only pair with each other, but can co-exist with naturally occurring nucleotide pairs. This property enables site-specific incorporation of the isobases during amplification. The MultiCode base pair is recognized by naturally occurring enzymes and can be used for the specific placement of reporter molecules and to increase the molecular recognition capabilities of hybridization-based assays. The MultiCode base pair enables solutions to complex molecular challenges that were previously not possible with natural nucleic acid alone. We have multiple assay development activities ongoing and these activities are focused in the areas of infectious disease, human genetics, and pharmacogenomics. Our ARIES® Technology The ARIES® System is our sample to answer platform for our MultiCode®-RTx technology, including In Vitro Diagnostic (IVD) assays. The ARIES® System is a clinical test system which automates and integrates extraction of nucleic acid from a clinical sample, performs real-time PCR, and detects multiple signals generated by target-specific probes. 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 both IVD and MultiCode® Analyte Specific Reagents (ASRs) simultaneously with a common Universal Assay Protocol. Our VERIGENE Technology Our offering in the molecular diagnostic market segment includes proprietary diagnostic tools that enable rapid and accurate detection of respiratory, gastrointestinal and bloodstream infections. Our U.S. Food and Drug Administration (FDA) cleared VERIGENE® Gram-Positive Blood Culture (BC-GP) and Gram-Negative Blood Culture (BC-GN) test panels for the early detection of pathogens associated with bloodstream infections are leading products in the high-growth bloodstream infection testing segment. In addition to detecting bacteria, these panels also detect yeast and identify antibiotic resistance markers. In contrast to traditional methodologies, which can take several days, these assays enable physicians to identify pathogens, including any associated resistance markers, and prescribe the most appropriate antibiotic regimen, all within 2.5 hours after identification of a positive blood culture. The ability for clinicians to make earlier, better informed therapeutic decisions results in improved patient outcomes and lower healthcare costs. Our VERIGENE product offering also includes FDA-cleared products for the detection of gastrointestinal and respiratory infections. These consist of a targeted product for the detection of C. difficile, as well as highly multiplexed molecular enteric, blood and respiratory pathogen panels, which test for a wide spectrum of microorganisms often associated with these types of infections. With the combination of the ARIES® and VERIGENE platforms, Luminex offers customers automated molecular platforms for both syndromic and targeted molecular diagnostic testing. The VERIGENE System is an automated multiplex-capable system 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. The VERIGENE System utilizes advanced automation and proprietary chemistry to enable rapid sample to answer detection of nucleic acid and protein targets. NanoGrid Technology, a unique gold nanoparticle probe chemistry, is the driving force behind all VERIGENE tests, providing a foundation for the VERIGENE System’s menu of clinically meaningful diagnostics. 3 Table of Contents In addition to our menu of infectious disease tests, we are currently developing a next generation VERIGENE System, VERIGENE II, that we expect will deliver an improved user experience. This next generation system is designed to provide a reduced time to result, an improved user interface and a room temperature cartridge, all in a fully automated sample to answer system with an optimized footprint. In addition, 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. 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, is 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 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 partners needs in their respective fields of use. Our LTG sales and marketing strategy is focused on generating recurring revenues from the sale of Luminex developed assays, microspheres and other consumables, as well as from royalties on kits and testing services developed or performed by partners. Our strategic partners include 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. We continue to work with 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. As of December 31, 2019, we had 82 strategic partners, compared to 74 strategic partners as of December 31, 2018. During 2019, we had 55 strategic partners with commercialized products utilizing xMAP Technology submitting royalties. Of these 55 strategic partners, 30 principally serve the clinical diagnostics market and 25 principally serve the life science research market. Revenues from these 55 commercialized, royalty-submitting, strategic partners constituted 43% of total revenue for 2019. 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 that 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 approximately 17,000 xMAP-based instruments in laboratories worldwide as of December 31, 2019, some of which may be retired or otherwise not in use. 4 Table of Contents 3. Flow Cytometry: the continued innovation of our proprietary image based flow cytometry technology. 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 expect that the growth of our flow cytometry business will be driven by our pipeline of new product launches and expanding our positions in the pharma, academic, diagnostics and industrial markets, which should grow our recurring revenue in service, research and clinical reagents, and clinical trial solutions. In turn, we expect these accomplishments will 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. The near-term goals of this business line are to strengthen the flow cytometry direct sales channel through integration into the Luminex sales function and expand our distribution networks in emerging markets. 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. 5 Table of Contents The following systems and assays are available on the market as of December 31, 2019: FDA CE-IVD MARK Clearance Commercial Launch Declaration Commercial Launch ARIES® HSV 1&2 Assay ARIES® Flu A/B & RSV Assay ARIES® Group B Streptococcus (GBS) Assay ARIES® Bordetella Assay ARIES® Norovirus Assay ARIES® C. Difficile Assay ARIES® Group A Strep Assay ARIES® MRSA Assay NxTAG® Respiratory Pathogen Panel (RPP) VERIGENE® Clostridium Difficile Test (CDF) VERIGENE® Enteric Pathogens Test (EP) VERIGENE® Respiratory Pathogens Flex Test (RP Flex) VERIGENE® Gram-Negative Blood Culture Test (BC-GN) VERIGENE® Gram-Positive Blood Culture Test (BC-GP) 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) xTAG® Respiratory Viral Panel (RVP) FAST v2 2015 - Q4 2016 - Q2 2017 - Q1 2017 - Q2 2017 - Q3 2017 - Q4 2019 - Q3 2016 - Q1 2012 - Q4 2014 - Q4 2015 - Q4 2014 - Q2 2012 - Q4 2013 - Q4 2011 - Q2 2009 - Q4 2010 - Q1 2013 - Q1 2008 - Q1 2016 - Q1 2016 - Q2 2016 - Q4 2017 - Q3 2017 - Q2 2017 - Q3 2017 - Q4 2015 - Q4 2013 - Q2 2015 - Q4 2015 - Q2 2013 - Q1 2012 - Q1 2013 - Q4 2013 - Q2 2012 - Q1 2009 - Q3 2011 - Q2 2007 - Q4 2011 - Q4 We have plans to submit additional assays to regulatory authorities in 2020, including the FDA and foreign equivalents, for market authorization in order to comply with established guidelines across the jurisdictions in which we participate. Industry Background The life sciences industries use assays to detect the presence and characteristics of certain biochemicals, proteins or nucleic acids in a sample. Drug discovery, genetic analysis, pharmacogenomics, clinical diagnostics and general biomedical research all use assays. For example, assays can be used to: • measure the presence and quantity of substances such as infectious agents, antigens for histocompatibility, hormones, cancer markers and other proteins in a patient’s blood, other body fluid or tissue to assist physicians in diagnosing, treating or monitoring disease conditions; • detect genetic variations, such as single nucleotide polymorphisms or genetic mutations present in inherited diseases; • measure the response to a compound or dosage by measuring cellular activity to assist in drug discovery and development; and 6 Table of Contents • assist physicians in prescribing or dosing the appropriate drug therapy based on the patient’s genetic makeup, a field known as pharmacogenetics. The life sciences customer can purchase assays in the form of complete off-the-shelf kits, develop them from scratch or utilize a customized service to meet the customer’s specific needs. The table below briefly describes the key assay technologies in the life sciences industries: KEY TECHNOLOGIES DESCRIPTION Sequencing BioChips/Microarrays Automated Immunoassays Gels and blots Instruments which “read” the nucleotide sequence of DNA or ribonucleic acid (RNA) by a variety of methods including Next Generation Sequencing methods High-density arrays of DNA fragments or proteins attached to a flat glass or silicon surface Automated test tube-based instruments used for detecting antibodies, proteins and other analytes Physical separation of molecules or analytes for visualization PCR methods Tests which use PCR technology to test DNA and RNA Microfluidics chips Miniaturized liquid handling system on chips Microtiter-plate based assays Plastic trays with discrete wells in which different types of assays are performed, usually ELISA tests Genotyping technologies DNA primers or probes designed to identify small differences between DNA targets Gene expression technologies Mass Spectrometry DNA primers or probes designed to measure the degree of transcriptional activity of a specific gene, indicating how active the cells are in making the protein encoded by that gene Analytical technique and type of instrument used to identify the mass of ionized molecules or molecular fragments The table below briefly describes our key systems and technologies: MARKETS SERVED Biomedical research and clinical diagnostics Biomedical research and clinical diagnostics Clinical diagnostics Biomedical research and clinical diagnostics Nucleic acid testing in clinical diagnostics and biomedical research Biomedical research and clinical diagnostics Drug discovery, clinical diagnostics and biomedical research Drug discovery, clinical diagnostics and biomedical research Drug discovery, clinical diagnostics and biomedical research Blood culture identification, pathogen fingerprinting SYSTEMS Luminex® 100/200™ FLEXMAP® 3D MAGPIX® ARIES® and ARIES® M1 VERIGENE® Amnis® FlowSight® Amnis® ImageStream® Amnis® CellStream® Guava easyCyte™ Muse® Cell Analyzer TECHNOLOGIES xMAP Technology xMAP Technology xMAP Technology xTAG® and MultiCode Technologies NanoGrid Technology Amnis CCD-TDI Technology Amnis CCD-TDI Technology Amnis CCD-TDI Technology Guava Microcapillary Technology Guava Microcapillary Technology 7 Table of Contents 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, (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 partnership-driven business model and a product-driven sales model focused on selected market segments and assay applications 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 technology and solutions we offer our customers to meet their needs. We acquired the MultiCode RTx real-time PCR technology for both quantitative and qualitative low-plex real-time PCR assays and the GenturaDx IDbox sample to answer platform, which is compatible with our MultiCode RTx technology, to provide our customers with a complete system for their real-time PCR assays. The GenturaDx IDbox was further developed and launched as the ARIES® System. A key focus currently is the development of additional assays for our ARIES® System. The ARIES® System, when combined with our proprietary real-time PCR chemistry and a new menu of highly automated assays that we have developed, offers a differentiated, easy to use diagnostic solution. The ARIES® System is designed to help clinical diagnostic laboratories overcome their daily challenges: minimizing healthcare cost increases while maintaining the overall quality of healthcare, the scarcity of highly trained laboratory personnel and limited lab bench space. The ARIES® System offers barcode-based data entry, an efficient workflow, a slim design that occupies minimal bench space, and universal assay protocols that enable true walkaway automation and the ability to simplify laboratory developed tests (LDTs). The VERIGENE System offers automated, cost-effective multiplex capabilities that rapidly and accurately detect infectious pathogens and drug resistance markers, without relying on time-consuming culture methods. We currently offer assays on the VERIGENE platform in the categories of Bloodstream Infection Tests, Gastrointestinal Infection Tests and a Respiratory Infection Test. The VERIGENE Bloodstream Infection Tests provide cost-effective bacterial identifications and antibiotic resistance determinations directly from positive blood culture bottles up to 48 hours faster than conventional methods. The BC-GP test provides 15 different targets, and the BC-GN test provides 14 different targets. VERIGENE enables an earlier shift from empiric to targeted antibiotic treatment and differentiates potential blood culture contaminants. As a result, the VERIGENE System delivers better outcomes, improved patient care, and true antibiotic stewardship, all at a lower cost. Testing for gastrointestinal pathogens has traditionally been labor-intensive, unpleasant for technologists to perform, has low sensitivity, and can take as long as five to seven days to produce definitive results. The VERIGENE C. difficile Test for healthcare-acquired diarrhea with 027 hypervirulent strain differentiation and VERIGENE Enteric Pathogens Test for community-acquired diarrhea with nine bacterial and viral targets require less than five minutes of user hands-on time and deliver comprehensive results directly from a stool sample in less than two hours. As a result, the VERIGENE System provides earlier optimization for patient treatment and improved laboratory and hospital efficiency. Influenza is highly contagious and affects up to 20% of the U.S. population each year. It is responsible for more than 200,000 hospitalizations, and as many as 49,000 deaths, each year depending on the severity of the season. Influenza can lead to serious complications such as pneumonia, bronchitis, sinus infections, and a general worsening of chronic conditions. Respiratory pathogens are responsible for more than one billion annual cases of the common cold and other related illnesses. They are recognized as a serious contributor to respiratory ailments in children, the elderly, and the immunocompromised and are commonly mistreated with unnecessary antibiotics due to delays in diagnosis. The VERIGENE Respiratory Pathogens Flex (RP Flex) provides viral identification information clinicians need to select appropriate treatment for their patients. VERIGENE RP Flex can limit misuse and overuse of antibiotics, which are ineffective and not indicated for viral infections, and it can provide results within two hours. 8 Table of Contents • Develop next generation products 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 continued the development of the VERIGENE II System. We initiated clinical studies on the system and its first assay in 2018 and currently expect to commercially launch the VERIGENE II System by the middle of 2020. We are also developing the next generation Guava System (Guava Next Gen System). We currently believe the Guava Next Gen System will commercially launch in 2020. In the fourth quarter of 2015, we launched our sample to answer platform, ARIES® System. We have also received FDA clearance for seven assays that run on the ARIES® System. In addition, we are collaborating with industry participants, biomedical research institutions and government entities to develop additional products on our platforms. We continuously consider other adjacent markets where our platform and assay offerings would be beneficial. We have improved the simplicity and ease of use of our multiplex products through the development of a version of our multiplex PCR technology. This NxTAG chemistry enables customers to experience streamlined workflow without sacrificing throughput. We recognize that the crucial aspect of our current technology that we want to preserve for our larger customers is the ability to process samples from 1 to 96 patients in a single batch. This throughput flexibility and capacity is a crucial aspect for tests like our xTAG Respiratory Pathogen Panel (RPP), in which seasonality and local outbreaks can cause testing volumes to surge unpredictably. We offer the convenience of a one-step workflow with the throughput of a batch-based system. In addition, products using this chemistry are expected to have the convenience of room temperature shipping and storage. Additionally, we continue pursuing projects such as the development of consumables, automation, software and the expansion and enhancement of our multiplexing capabilities to advance our technologies and market acceptance. We are working on the development of a next generation bead-based multiplexing instrument, xMAP INTELLIFLEX. This new system will provide the opportunity to address both expanding and evolving market needs, plus an opportunity for existing users to upgrade to a refreshed version of bead-based multiplexing. We currently expect to have a commercial launch mid-2020. • Actively pursue acquisitions that could accelerate our business strategies We utilize analytical tools and an evaluation template to 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 in select key markets As of December 31, 2019, 55 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 2019, the 55 strategic partners who have commercialized xMAP based assays accounted for approximately 42% of our total revenue and all of our strategic partners represented approximately 43% of our total revenue. 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 Luminex xMAP customers with more assay options than any one company or Luminex could develop and commercialize individually. 9 Table of Contents 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 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. Products 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. 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. 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. ARIES®. The ARIES® System is a sample to answer real-time PCR platform. The ARIES® System uses internal barcode scanning and other advanced features to minimize operator errors. Two independent modules each support from one to six cassettes, allowing for both STAT and batch testing. The ARIES® System can run both IVD assays and MultiCode® ASRs simultaneously with a common Universal Assay Protocol. In addition, it can run traditional hydrolysis probe technology for LDTs using the ARIES® Exo+ Ready Mix. An integrated touchscreen computer eliminates the need for a separate computer, stand-alone keyboard and mouse, thus maximizing valuable bench space. ARIES® M1. The ARIES® M1 System is a single-module version of the ARIES® System. It shares the same cassette- based sample to answer molecular diagnostic workflow as the ARIES® System, reducing hands-on time and simplifying operations. The ARIES® System is also able to run up to 6 different assays in different sample types in a random batch via Universal Assay Protocol, including LDTs. VERIGENE® Reader and Processor SP. The VERIGENE System is a semi-automated, multiplex, molecular analysis system for the clinical diagnostics market. The VERIGENE System consists of a microfluidics processor, touchscreen reader and disposable test cartridges. The microfluidics processor interacts with and manipulates various functional components of the test cartridge, accomplishing a number of necessary steps, including target binding to the nucleic acid, gold nanoparticle probe hybridization, intermediate washes, and signal amplification (if required for the assay). The reader houses the optical detection module that illuminates the test slide and automated spot recognition software analyzes the resulting signal intensities and provides the test results. The reader also serves as the control station for the VERIGENE System and features a simple and intuitive touchscreen interface that allows users to track samples and test cartridges, initiate and monitor test processing, analyze results and generate reports. The novel Flex® Software capability associated with the Respiratory Flex assay allows the user to select and pay for only the targets of interest, reducing overall cost. The reader is also web-enabled to allow remote access to results and reports. 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. 10 Table of Contents 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 new 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. A sample of fluorescently labeled cells is aspirated into a uniquely proportioned microcapillary flow cell providing direct absolute counting of cells without reference beads. Forward and side scatter characteristics are detected by photodiode, and fluorophores excited by the violet, blue or red laser emit signals that are spectrally filtered to resolve up to 10 fluorophores simultaneously. 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 ?m in diameter and includes a user-friendly touchscreen interface, intuitive software and optimized “Mix-and-Read” assays. 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. These 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. These dyed microspheres 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. These 100 distinct sets of microspheres 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. 11 Table of Contents Software xPONENT®. Our xPONENT Software is included in all of our xMAP instruments and enhances 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. SYNCTTM. 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, SYNCTTM Standard Curve Analysis Software enables labs to create quantitative LDTs. 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. Clinical Diagnostic Assay Product Families A product family consists of two or more assays that are focused on similar or related markets. Each assay consists of a combination of chemical and biological reagents and our proprietary technologies used to perform diagnostic and research assays on samples. As of February 26, 2020, the following product families are commercially available: xTAG Assays and Product Family This 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. MultiCode Assays and Product Family This product family includes our FDA-cleared HSV 1&2 Assay as well as a number of ASRs and other products. These products are generally designed to detect infectious agents in clinical samples using our proprietary MultiCode-RTx real-time PCR chemistry. We carry a diverse portfolio of bacterial, viral, fungal and protozoan pathogen primers for global laboratory professionals and are an OEM of instrumentation for certain of our customers. 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. This product family includes our FDA-cleared and CE-marked ARIES® HSV 1&2 Assay, ARIES® Flu A/B & RSV Assay, ARIES® GBS Assay, ARIES® Group A Strep Assay, ARIES® Bordetella Assay, and ARIES® C. difficile Assay. In addition, we launched an FDA-cleared ARIES® MRSA Assay in 2019. 12 Table of Contents 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. This 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. Customers In 2019, only one partner accounted for more than 10% of our total revenues. Thermo Fisher Scientific Inc. accounted for 12%, 14% and 15% of our total revenues in 2019, 2018 and 2017, respectively. LabCorp accounted for 5%, 15% and 20% of our total revenues in 2019, 2018 and 2017, respectively. No other customer or partner accounted for more than 10% of our total revenues in 2019, 2018 or 2017; however, Bio-Rad Laboratories, Inc., a partner, accounted for 5%, 6% and 6% of our total revenues in 2019, 2018 and 2017, respectively. The loss of any of these customers or partners could have a material adverse effect on our business, financial condition and results of operations. 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, 2019, 2018 and 2017, foreign shipments to customers totaled $82.3 million, $54.1 million and $49.7 million, respectively, representing 25%, 17% and 16%, 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. 13 Table of Contents 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, 2019, 2018 and 2017, was $56.2 million, $47.2 million and $45.7 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 2020. • 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 by the middle of 2020. 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. • Guava Next Gen Our flow cytometry research and development group has been working on a next generation Guava instrument that will provide researchers with simplified benchtop flow cytometry combined with an easy to use software interface. This new instrument will allow researchers to perform basic to advanced analysis with a consistent and reliable platform on the benchtop. These researchers will be in academia, pharma, government and biotechnology segments, and will be conducting research in areas such as immunology, cancer, bacteria, and others. This product will be a research use only product but is expected to launch worldwide by the middle of 2020. Manufacturing We have approximately 134,000 square feet of leased manufacturing space, including space located at our principal executive offices in Austin, Texas (74,000 square feet), in Madison, Wisconsin (12,000 square feet), in Toronto, Canada (11,700 square feet), in Northbrook, Illinois (26,300 square feet) and in Seattle, Washington (10,000 square feet). 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). 14 Table of Contents 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, 2019, approximately 17,000 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. 15 Table of Contents 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 and 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 770 issued patents worldwide directed to various aspects and applications of our products and technology, including 238 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 160 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.” 16 Table of Contents 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 require 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. De Novo Classification Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down- classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. 17 Table of Contents Premarket Approval Pathway A PMA must be submitted if a new device cannot be cleared through the 510(k) process or downclassified by the de novo pathway described above. The PMA process is generally more complex, costly and time consuming than the 510(k) process or de novo processes. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application for filing and begin an in depth review of the submitted information. By statute, the FDA has 180 days to review the accepted application, although review of the application generally can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with its quality system regulations (QSRs). New premarket approval applications or premarket approval application supplements are also required for product modifications that affect the safety and efficacy of the device. 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 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. 18 Table of Contents 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 not sought to require these laboratories to comply with FDA regulations regarding medical devices. During 2010, the FDA publicly announced that it has decided to exercise regulatory authority over these LDTs, and that it plans 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 will 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 this 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 LTDs, 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. 19 Table of Contents 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 approval and regulation by foreign regulatory and safety agencies. For example, the European Union (EU) has adopted the EU Medical Device Regulation (the 2017/745 MDR) and the In Vitro Diagnostic Regulation (the EU IVDR), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2020 to meet the requirements of the EU MDR and until May 2022 to meet the EU 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. Medical device laws and regulations are also in effect in many countries outside of the United States ranging from comprehensive pre-approval 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. 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 Devices Directive (98/79/EC) (IVDD). CE marking of our products is currently by self-declaration, not issued by a third party, based on the intended uses of our products. A product that is not CE marked is automatically considered to be non-compliant. The law is enforced through market surveillance by appointed national enforcement agencies. Imported products are checked for compliance at customs offices. No in vitro device or accessory may be placed on the market or put into service unless it satisfies the essential requirements set forth in the IVDD. Devices considered to meet the essential requirements must bear the CE marking of conformity, placed by the manufacturer, when introduced on the market. A manufacturer placing devices on the market in its name must notify its national competent authorities. There can be no assurance that the EU 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. 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 change could have a material impact. 20 Table of Contents WEEE The European Community Council Directive 2002/96/EC on Waste Electrical and Electronic Equipment (WEEE) outlines the responsibility for the disposal of waste electrical and electronic equipment. Compliance with WEEE 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 EU member states where our regulated products are distributed. RoHS RoHS stands for “The Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment” and implements EU Directive 2002/95, which bans the placing on the EU market of new electrical and electronic equipment containing more than agreed upon levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether flame retardants. The Directive directly affects producers who manufacture or assemble electrical or electronic equipment in the EU, importers of electrical or electronic equipment from outside the EU and companies that re-brand electric producers as their own. The Directive applies to electrical and electronic equipment falling under the categories 1, 2, 3, 4, 5, 6, 7 and 10 set out in Annex IA of the WEEE Directive (2002/96/EC). Equipment categories 8 and 9 defined in the WEEE Directive are currently outside the scope of the RoHS Directive. Luminex IVD equipment is classified as category 8 (Medical Devices) in Annex IA of the WEEE Directive, which is not covered within the scope of the RoHS Directive. Luminex research equipment is classified as category 9 (Monitoring and Control Instruments) in Annex IA of the WEEE Directive, which is not covered within the scope of the RoHS Directive. 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. 21 Table of Contents 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. 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 the presidential administration 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. Employees As of February 26, 2020 and December 31, 2019, respectively, we had a total of 1,247 and 1,257 employees and contract employees, as compared with 988 as of December 31, 2018. The year over year increase is primarily the result of the flow cytometry acquisition, which was completed on December 31, 2018. None of our employees are represented by a collective bargaining agreement, and we have not experienced any work stoppage. We believe that relations with our employees are good. 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. 22 Table of Contents Financial information relating to our business for the years ended December 31, 2019, 2018 and 2017 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 Nachum Shamir Harriss T. Currie Todd C. Bennett Chuck Collins Nancy M. Fairchild Randall J. Myers Richard W. Rew II Eric S. Shapiro Age 66 58 50 43 66 58 52 56 Position President and Chief Executive Officer Chief Financial Officer, Senior Vice President, Finance and Treasurer Senior Vice President, Global Sales and Customer Operations Senior Vice President, Research and Development Senior Vice President, Human Resources Senior Vice President, Global Manufacturing and Quality Senior Vice President, General Counsel and Corporate Secretary 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. 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. 23 Table of Contents 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. 24 Table of Contents ITEM 1A. RISK FACTORS 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. 25 Table of Contents 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 the 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; 26 Table of Contents • we may be unable to realize the anticipated benefits and synergies from acquisitions, such as our flow cytometry acquisition, 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 the 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. 27 Table of Contents 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. 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. 28 Table of Contents 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 770 issued patents worldwide, including 238 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 160 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. 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. 29 Table of Contents 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. 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; 30 Table of Contents • 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. Currently, a limited number of direct customers and strategic partners 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 direct customers and strategic partners. Thermo Fisher Scientific Inc. (a partner), LabCorp (a customer), and Bio-Rad Laboratories, Inc. (a partner), accounted for 22% of total revenue (12%, 5% and 5%, respectively) in the twelve months ended December 31, 2019. For comparative purposes, these same three companies accounted for 35% of total revenue (14%, 15% and 6%, respectively) in the twelve months ended December 31, 2018 and 41% of total revenue (15%, 20% and 6%, respectively) in the twelve months ended December 31, 2017. No other customer accounted for more than 5% of total revenue during the twelve months ended December 31, 2019. In total, for the years ended December 31, 2019 and 2018, our top five customers accounted for 30% and 42%, 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. 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. Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-19) first identified in Wuhan, China. We have operations in China related to the sale and servicing of our products. In an effort to halt the outbreak of COVID-19, the Chinese government has placed significant restrictions on travel within China, leading to extended business closures. These travel restrictions and business closures could adversely impact our operations in China, including our ability to sell or distribute our products, as well as cause temporary closures of our offices, or the facilities of our suppliers or customers. Any disruption of our suppliers or customers could impact our global sales and operating results. We cannot at this time accurately predict what effects these conditions will have on our operations, including due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length of the travel restrictions and business closures imposed by the Chinese government and governments of other impacted countries. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and likely impact our operating results. 31 Table of Contents 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 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. 32 Table of Contents 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. 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, 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. 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. 33 Table of Contents 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. 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. 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. 34 Table of Contents 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 products are subject to extensive regulation by the FDA, 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. Even though we have received FDA 510(k) clearances to commercially market our products, 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 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. Our failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of 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. Our products are also subject to approval and regulation by foreign regulatory and safety agencies. For example, the EU has adopted the EU Medical Device Regulation 2017/745 (the MDR) and the In Vitro Diagnostic Regulation (the EU IVDR), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2020 to meet the requirements of the EU MDR and until May 2022 to meet the EU 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. 35 Table of Contents 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. Modifications to our marketed products may require new 510(k) or de novo clearances or PMA approvals, 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 European Union, 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 clearances and approvals 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 work 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. 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, is subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our strategic partners who manufacture medical devices are required to comply with the QSR. 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 United States 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, which could, in turn, have a material adverse effect on our financial condition and results of operations. 36 Table of Contents 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, 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. Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. The FDA 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 FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. 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. 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. 37 Table of Contents 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 or regulations 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. Following its entry into application on May 26, 2020, 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 become applicable in May 2020. Once applicable, the new regulations 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. Once applicable, the MDR may impose increased compliance obligations for us to access the EU market. In addition the EU has adopted the EU IVDR and currently approved medical devices will have until May 2022 to meet the EU IVDR. Complying with the requirements of these regulations may require us to incur significant expenditures. In order to continue to sell our products in Europe, we must maintain our CE marks and continue to comply with certain EU directives and, beginning in May 2020, 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 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 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. 38 Table of Contents 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 2019, approximately 25% of our revenue was 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. 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; 39 Table of Contents • 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 and 2019, 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. 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, the RoHS Directive and the WEEE Directive enacted in the EU, which regulate the use of certain 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. 40 Table of Contents 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 self-declared our Luminex 100/200, FLEXMAP 3D and MAGPIX instruments to the Directive. 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. 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. 41 Table of Contents 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. 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, 2019, goodwill and other intangible assets with indefinite lives represented approximately 38% 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. 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. 42 Table of Contents 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. 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. 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. We are subject to evolving legislative, regulatory, judicial and ethical standards on use of technology and biotechnology. The adoption of genetic testing is occurring within the broader context of a myriad of decisions related to genetic patenting and genotyping. Issues associated with health insurance, data access, intellectual property protection, national and international legislative and regulatory initiatives and other variables may have a significant impact on the widespread adoption of genetic testing or on specific segments or tests within the genetic testing market, which could in turn impact our business. 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. 43 Table of Contents 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 various foreign subsidiaries, in particular our subsidiary in Canada; however, any 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. Recent changes to 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. 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. 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. 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; • 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; 44 Table of Contents • 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. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our principal research and development, manufacturing and administrative facilities are located in Austin, Texas, and consist of approximately 198,600 square feet of leased space pursuant to lease agreements which expire between June 30, 2022 and April 30, 2025. 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 5,500 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. 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, 2019. ITEM 4. MINE SAFETY DISCLOSURES None. 45 Table of Contents PART II 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 26, 2020, we had 411 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 2019, the Company paid dividends on common stock as follows: 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Dividend per share $0.06 $0.06 $0.09 $0.09 Payment Date April 11, 2019 July 11, 2019 October 17, 2019 January 15, 2020 On February 18, 2020, we announced that our Board declared a quarterly cash dividend of $0.09 per share of common stock to be paid to shareholders of record as of the close of business on March 19, 2020 with a payment date of April 9, 2020. Recent Sales of Unregistered Securities There were no sales of unregistered securities of Luminex during the twelve months ended December 31, 2019. 46 Table of Contents Performance Graph The following graph compares the change in Luminex’s cumulative total stockholder return on its common shares with the Nasdaq Composite Index and the Nasdaq Biotechnology Index. Luminex Corporation Nasdaq Composite Nasdaq Biotechnology 12/14 100.00 100.00 100.00 12/15 114.02 106.96 111.77 12/16 107.84 116.45 87.91 12/17 106.30 150.96 106.92 12/18 125.87 146.67 97.45 12/19 127.85 200.49 121.92 47 Table of Contents Issuer Purchases of Equity Securities The stock repurchase activity for the fourth quarter of 2019 was as follows: ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares Purchased(1) Average Price Paid per Share ($) 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 366 $ — — 20.95 — — — $ — — — — — Period 10/1/2019 - 10/31/2019 11/1/2019 - 11/30/2019 12/1/2019 - 12/31/2019 Total Fourth Quarter 20.95 (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. — $ 366 — $ 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, 2019, 2018 and 2017 and the consolidated balance sheet data at December 31, 2019 and 2018 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, 2016 and 2015 and the consolidated balance sheet data at December 31, 2017, 2016 and 2015 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. Year Ended December 31, 2019 2018 2017 2016 2015 Consolidated Results of Operations Data: (in thousands, except per share data) Total revenue Gross profit (Loss) income from operations Net (loss) income Net (loss) income per common share, basic Shares used in computing net (loss) income per common share (basic) Net (loss) income per common share, diluted Shares used in computing net (loss) income per common share (diluted) $ 334,638 $ 315,818 $ 306,571 $ 270,639 $ 237,708 182,739 (12,079) (3,838) $ (0.09) $ 195,491 199,046 179,655 168,707 27,846 18,508 0.42 $ $ 37,153 29,423 0.67 $ $ 20,986 13,814 0.32 $ $ 37,357 36,861 0.88 44,148 43,727 43,173 42,584 42,091 (0.09) $ 0.41 $ 0.67 $ 0.32 $ 0.86 44,148 44,291 43,300 43,013 42,637 $ $ $ Consolidated Balance Sheet Data: (in thousands) At December 31, 2019 2018 2017 2016 2015 Cash and cash equivalents Short-term investments Long-term investments Working capital Total assets Total long-term debt Total stockholders’ equity Dividends declared per share $ 59,173 $ 76,441 $ 127,112 $ 93,452 $ 128,546 — — 144,401 543,729 — — — 151,369 525,175 — — — 179,393 490,516 — — — 133,537 450,716 — 11,988 7,459 182,294 402,556 — 464,860 467,656 437,907 403,679 368,536 $ 0.30 $ 0.24 $ 0.24 $ — $ — 48 Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 LTG, 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, 2019, Luminex had 82 strategic partners, of which 55 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. 49 Table of Contents • 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 2019. 2019 Highlights • Consolidated revenue was $334.6 million for 2019, representing a 6% increase over revenue for 2018. • Assay revenue of $132.0 million for 2019, representing a decline of 16% over 2018. Excluding sales to LabCorp (see “Material Customer Activity” below), assay revenue increased 6% from 2018. • Sample to answer assay revenue increased for 2019 by $11.3 million, or 20%, from 2018. • Royalty revenue reflecting over $595.7 million of base royalty-bearing end user sales on our technology for 2019, an increase of over 10% from 2018. • Cumulative life-to-date multiplexing analyzer shipments of approximately 17,000 (some of which may be retired or otherwise not in use). • Integration of the acquisition of EMD Millipore Corporation’s flow cytometry business has been successfully completed. • Submitted VERIGENE® II Gastrointestinal Flex Assay to the FDA in the fourth quarter of 2019. 2018 Acquisition of EMD Millipore Corporation’s flow cytometry portfolio On December 31, 2018, Luminex completed its acquisition of EMD Millipore Corporation’s flow cytometry portfolio for $75 million, consisting of $69.9 million paid under a Share and Asset Purchase Agreement (the Purchase Agreement) and $5.1 million in committed inventory purchases, both of which were subject to adjustment. Following a purchase price reconciliation in the quarter ended March 31, 2019, the purchase price was reduced by $1.9 million. The committed inventory purchases were completed in the third quarter of 2019. Luminex financed the acquisition with cash on hand, and acquired 100% of the shares and equity of Amnis Corporation, a Washington corporation (Amnis), a wholly owned subsidiary of EMD Millipore Corporation, a Massachusetts corporation (itself an affiliate of Merck KgaA), and certain other assets owned by other affiliates of Merck KgaA (MilliporeSigma). The acquisition expanded Luminex’s existing offering of flow-based detection systems, which is centered around our innovative xMAP® multiplexing technology, with approximately 17,000 xMAP Systems sold worldwide (some of which may be retired or otherwise not in use). The results of operations for the acquisition have been included in Luminex’s consolidated financial statements beginning January 1, 2019. Material Customer Activity As previously stated in our recent annual and quarterly filings, LabCorp has elected to develop the next iteration of its women’s health products with another party and has indicated its ultimate intention to cease purchasing our CF products. While LabCorp extended its CF purchase commitment through 2021, we have experienced the loss of the women’s health portfolio and the loss or significant reduction of certain other products traditionally sold to LabCorp. These losses could have a material adverse effect on our growth and future results of operations if we are unable to effectively attract new customers, increase our sales with existing customers and/or add new products to our existing portfolio. During 2019, we experienced an aggregate reduction of revenue from LabCorp of approximately $32 million as compared to fiscal 2018. We anticipate the loss of LabCorp revenue will negatively impact our total revenue by between 2-3% in 2020 as compared to 2019. 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 a decrease of $1.6 million, an increase of $0.8 million, and an increase of $0.7 million, in 2019, 2018, and 2017, respectively. While the changes over the past two years have not been significant, fluctuations can manifest through periodic changes in volume from our largest purchasing partners. These partners account for more than 69% 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. 50 Table of Contents Future Operations We expect our areas of focus over the next twelve months to be: • delivering on our revenue growth goals; • accelerating development and commercialization of the assays on our VERIGENE II sample to answer diagnostic system; • increasing the growth of our LTG revenue through enrichment of our existing partner relationships and the addition of new partners; • completing development and commercialization of the next generation sample to answer system, VERIGENE II, our next generation xMAP System, xMAP INTELLIFLEX, and our next generation Guava instrument, Guava Next Gen; • improvement of ARIES® and VERIGENE gross margins; • placements of our VERIGENE and ARIES® Systems, our sample to answer platforms and assays; • maintenance and improvement of our existing products and the timely development, completion and successful commercial launch of our pipeline products; • adoption and use of our platforms and consumables by our customers for their testing services; • expansion and enhancement of our installed base of systems and our market position within our identified target market segments; and • monitoring and mitigating the effect of the ongoing uncertainty in global finance markets and changes in government funding on planned purchases by end users. We anticipate continued revenue concentration 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. in our higher margin 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. 51 Table of Contents 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. We adopted new revenue accounting guidance effective January 1, 2018, which impacted the amount and timing of our future revenue recognition. For further discussion, see Note 18, “Revenue Recognition”, in our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 52 Table of Contents 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 2019 and 2018, 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 2019 or 2018 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. 53 Table of Contents Significant reform of the Internal Revenue Code was signed into legislation on December 22, 2017 pursuant to the Tax Cuts and Jobs Act (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. Revenue Cost of revenue Gross profit Operating expenses: Research and development expense Selling, general and administrative expense Amortization of acquired intangible assets Total operating expenses Income from operations Other income, net Income taxes Net income Year Ended December 31, 2019 2018 2017 100 % 45 % 55 % 17 % 38 % 3 % 58 % (4)% 1 % 2 % (1)% 100 % 38 % 62 % 15 % 35 % 3 % 53 % 9 % — % (3)% 6 % 100 % 35 % 65 % 15 % 35 % 3 % 53 % 12 % — % (3)% 10 % 54 Table of Contents Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 Year Ended December 31, Revenue Gross profit Gross margin percentage Operating expenses Income from operations Net income 2019 $ $ $ $ $ 334,638 182,739 55% 194,818 (12,079) (3,838) $ $ $ $ $ Variance 2018 (dollars in thousands) 315,818 195,491 18,820 (12,752) $ $ 62% (7)% 167,645 27,846 18,508 $ $ $ 27,173 (39,925) (22,346) Variance (%) 6 % (7)% N/A 16 % (143)% (121)% Total revenue increased by 6% to $334.6 million for 2019 from $315.8 million in 2018. The Company experienced increases in system sales, service sales, and royalty revenue in 2019, mainly attributable to the addition of our acquired flow cytometry business, which comprised approximately 14% of total revenue in 2019. Excluding the impact of the flow cytometry acquisition, revenue decreased 8% from the prior year, primarily driven by the decrease in LabCorp sales in non-automated assays of $31.9 million in 2019. Assay revenue declined 16% overall, driven by decreases in our non-automated assay revenue, partially offset by increases in our automated assay revenue. The following table presents our revenues disaggregated by revenue source for the years ended December 31, 2019 and 2018: System sales Consumable sales Royalty revenue Assay revenue Service revenue Other revenue Year Ended December 31, 2019 2018 (dollars in thousands) Variance Variance (%) $ $ 70,276 48,542 53,562 132,028 22,413 7,817 334,638 $ $ 39,986 50,144 49,394 156,714 12,159 7,421 315,818 $ $ 30,290 (1,602) 4,168 (24,686) 10,254 396 18,820 76 % (3)% 8 % (16)% 84 % 5 % 6 % 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 2019, the top five customers, by revenue, accounted for 30% of total revenue, down from 42% of total revenue in 2018 and 48% in 2017. In particular, our two largest customers by revenue accounted for 17% of 2019 total revenue (12% and 5%, respectively), a decrease from 29% of 2018 total revenue ( 14% and 15%, respectively). This decrease is mainly attributable to the reduction of LabCorp sales as discussed under "Material Customer Activity". No other customer accounted for more than 6% of total revenue in 2019 or 2018. In 2019, approximately 25% of our revenue was 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 compares to approximately 17% of our 2018 revenue being derived from sales to non-U.S. customers, with approximately 7% of revenue from sales to customers in both Europe and Asia. This growth in the percentage of sales to non-U.S. customers has been driven primarily by the addition of the flow cytometry business. Revenue from the sale of systems and peripheral components increased 76% to $70.3 million for 2019 from $40.0 million in 2018, primarily as a result of the flow cytometry acquisition, which contributed $32 million of system revenue for 2019. Also included in system revenue is a portion of reagent rental revenue reclassified from assay revenue, which grew 62% or $1.6 million in 2019 from 2018. These increases were partially offset by lower system placements of multiplexing analyzers in 2019, primarily driven by large purchase orders by our partners in the prior year period, which did not repeat at the same level in 2019. We sold 990 multiplexing analyzers in 2019, as compared to 1,131 multiplexing analyzers sold in 2018, bringing total multiplexing analyzer shipments since inception to approximately 17,000 as of year-end 2019, some of which may be retired or otherwise not in use. For 2019, our five highest selling partners accounted for 787 systems, or 79%, of total multiplexing analyzers sold, whereas our five highest selling partners in 2018 accounted for 882, or 78%, of total multiplexing analyzers sold. 55 Table of Contents Consumable sales, comprised of microspheres and sheath fluid, decreased 3% to $48.5 million in 2019 from $50.1 million in 2018, primarily driven by lower aggregate bulk purchases from certain large partners. During 2019, we had 73 bulk purchases of consumables totaling approximately $36.2 million (74% of total consumable revenue), ranging from $0.1 million to $3.0 million, as compared with 74 bulk purchases totaling approximately $38.8 million (77% of total consumable revenue) in 2018. We expect fluctuations in consumable sales on an ongoing basis. Partners who reported royalty-bearing sales accounted for $34.0 million, or 70%, of consumable sales in 2019 compared to $32.8 million, or 65%, of the total consumable sales for 2018. Royalty revenue, which results when our partners sell products or testing services incorporating our technology, increased 8% to $53.6 million for 2019 from $49.4 million for 2018. This increase is primarily the result of higher base royalties of $5.6 million, in addition to a favorable mix of royalty rates, which was partially offset by lower royalty minimums, audit findings and other adjustments of $2.5 million. We believe this is mainly the result of menu expansion and increased utilization of our partners’ assays on our technology. 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 decreased 16% to $132.0 million for 2019 from $156.7 million for 2018. This decline was primarily attributable to reduced sales to LabCorp, whose assay sales declined by $31.9 million to $13.3 million in 2019 from 2018. Excluding LabCorp's impact, assay revenue increased 6% for 2019 compared to 2018, driven in part by the flow cytometry acquisition, which made up 37% of this increase. Our sample to answer assay revenue, which consists of VERIGENE and ARIES® assay sales, grew 20% to $67.7 million for 2019 from $56.4 million in 2018. Revenue for our non-automated testing assays declined by 39% to $61.7 million for 2019, primarily driven by the reduction in LabCorp sales, which made up more than 80% of this reduction. LabCorp, our largest assay customer by revenue, accounted for 10% of total assay revenue for 2019 compared to 29% for 2018. No other customer accounted for more than 4% of total assay revenue during those periods. As discussed above under “Material Customer Activity” and previously disclosed in our prior annual and quarterly reports, our largest assay customer, LabCorp, has developed the next iteration of their women’s health portfolio with another party, which negatively impacted our assay revenue in 2018 and 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 84% to $22.4 million during 2019 from $12.2 million in 2018. This increase was primarily driven by the flow cytometry acquisition, which contributed $9.1 million of service revenue during 2019. Absent the impact of the flow cytometry acquisition, service revenue increased 9% for 2019 from 2018, primarily driven by an increase in the number of systems covered under extended service agreements. At December 31, 2019, we had 2,533 Luminex systems covered under extended service agreements and $6.7 million in deferred revenue related to those contracts. At December 31, 2018, we had 2,311 Luminex systems covered under extended service agreements and $5.3 million in deferred revenue related to those contracts. On a consolidated basis, total deferred revenue was $8.7 million at December 31, 2019, and included 529 flow cytometry systems covered under extended service agreements, which were primarily gained through the flow cytometry acquisition. Other revenue, which includes training revenue, shipping revenue, miscellaneous part sales, amortized license fees, milestone payments and revenue from agreements with U.S. government agencies, increased to $7.8 million for 2019, compared to $7.4 million for 2018. Gross Profit. Gross profit decreased to $182.7 million for 2019, as compared to $195.5 million for 2018. Gross margin (gross profit as a percentage of total revenue) decreased to 55% for 2019, from 62% for 2018. This decrease in gross margin is primarily attributable to: (i) the decline in LabCorp’s assay purchases, which typically carry a higher gross margin, (ii) the absorption of the flow cytometry acquisition and the related acquisition accounting adjustments, which included expenses of $1.1 million for the step-up in inventory to fair value and $0.8 million of acquisition adjustments for the acquired deferred service revenue, (iii) the absorption of higher manufacturing expenses for 2019, and (iv) the increase in sample to answer assay revenue, which historically carries a lower gross margin. We anticipate continued fluctuation in gross margin and related gross profit primarily as a result of variability in consumable and system purchases and seasonality effects inherent in our assay revenue. Our acquired flow cytometry margins were approximately 43% for 2019. However, we anticipate these margins will improve, as the related acquisition accounting adjustments mentioned above and one-time integration costs will not recur. 56 Table of Contents Research and Development Expense. Research and development expense increased to $56.2 million, or 17% of total revenue, for 2019 from $47.2 million, or 15% of total revenue, in 2018. The increase in research and development expense was primarily a result of the addition of the acquired flow cytometry personnel and related expenses, in addition to higher direct material expenses driven by the development of VERIGENE II assays, xMAP INTELLIFLEX and the Guava Next Gen Systems. Research and development headcount as of December 31, 2019 was 216, as compared to 196 as of December 31, 2018. The focus of our research and development activities is the development and commercialization of the VERIGENE II and its associated assays, the development of xMAP INTELLIFLEX, and the development of the Guava Next Gen System. Selling, General and Administrative Expense. Selling, general and administrative expenses, excluding the amortization of acquired intangible assets, increased to $127.2 million for 2019 from $111.8 million for 2018. The increase was predominantly attributable to the addition of the acquired flow cytometry personnel and related expenses, which were not included in 2018. This increase was partially offset by lower acquisition related expenses of $2.7 million incurred in late 2018, which did not repeat in 2019. Selling, general and administrative headcount at December 31, 2019 was 495, as compared to 385 at December 31, 2018. As a percentage of revenue, selling, general and administrative expense, excluding the amortization of acquired intangible assets, was 38% for 2019 and 35% for 2018. Other Income, net. Other income, net, increased $2.6 million in 2019 over 2018. This increase resulted primarily from an additional investment made in Combinati during the quarter ended December 31, 2019, and the subsequent remeasurement based on the fair value prior to the additional investment. As a result, a gain of approximately $3.2 million was recorded in Other income, net in the Consolidated Statements of Comprehensive Income for the year ended December 31, 2019. This increase was partially offset by (i) a nonrecurring dividend payment of $0.4 million from one of our minority interest investments in 2018 that did not recur in 2019, and (ii) an impairment of $0.2 million of one of our investments which was recorded in 2019. See Note 3 - Investments and Other Assets for further details regarding our minority interest and equity investments. Income taxes. Our effective tax rate for 2019 was a benefit of 60%, or $5.7 million, as compared to an effective tax rate of 35%, or $9.8 million, for 2018. The tax benefit for 2019 is primarily driven by 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. The tax expense for 2018 reflects the impact of the Tax Act. The Tax Act includes, among other things, changes to the U.S. federal tax rates and the migration from a worldwide system of taxation to a territorial system. The Company completed its accounting for all of the enactment-date income tax effects of the Tax Act and recorded a net tax benefit of $1.3 million primarily attributable to a reduction of a deferred tax liability for withholding taxes related to our Canadian entity, offset by an increase to the transition tax. In 2018, the Company also recorded tax expense totaling $1.4 million based on the results of a Canadian income tax audit. Other rate impacts are due to our research tax credit benefit and global intangible low-tax income (GILTI). 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, we expect our consolidated effective tax rate to be in the 25% to 30% 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. Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 Year Ended December 31, Revenue Gross profit Gross margin percentage Operating expenses Income from operations Net income 2018 $ $ $ $ $ 315,818 195,491 62% 167,645 27,846 18,508 $ $ $ $ $ 57 Variance 2017 (dollars in thousands) 306,571 199,046 $ $ 9,247 (3,555) 65% (3)% 161,893 37,153 29,423 $ $ $ 5,752 (9,307) (10,915) Variance (%) 3 % (2)% N/A 4 % (25)% (37)% Table of Contents Total revenue increased by 3% to $315.8 million for 2018 from $306.6 million in 2017. This increase was driven primarily by an increase in our automated assays, royalty and system revenue. Automated assay revenue, which is comprised of VERIGENE and ARIES® assays, grew 36% to more than $56 million for 2018 from the prior year. These increases were partially offset by a reduction in our non-automated assay revenue, mainly attributable to the decrease in LabCorp sales. The following table presents our revenue disaggregation by revenue source for the years ended December 31, 2018 and 2017: System sales Consumable sales Royalty revenue Assay revenue Service revenue Other revenue Year Ended December 31, 2018 2017 (dollars in thousands) Variance Variance (%) $ $ 39,986 50,144 49,394 156,714 12,159 7,421 315,818 $ $ 38,651 49,319 44,704 154,907 11,470 7,520 306,571 $ $ 1,335 825 4,690 1,807 689 (99) 9,247 3 % 2 % 10 % 1 % 6 % (1)% 3 % We continued to have revenue concentration in a limited number of customers in 2018. In 2018, the top five customers, by revenue, accounted for 42% of total revenue, down from 48% of total revenue in 2017. In particular, our two largest customers by revenue accounted for 29% of 2018 total revenue (15% and 14%, respectively), a decrease from 35% of 2017 total revenue (20% and 15%, respectively). This decrease was mainly attributable to the reduction of LabCorp sales . No other customer accounted for more than 6% of total revenue in 2018 or 2017. Under the revenue recognition guidance effective January 1, 2018, the system portion of reagent rental revenue is recognized in system revenue. Revenue from the sale of systems and peripheral components increased 3% to $40.0 million for the 2018 from $38.7 million for 2017. This increase was primarily the result of higher sample to answer reagent rental system placements for 2018, which grew 61% over the prior year, and resulted in a $2.5 million reclassification of revenue from assay to system revenue in 2018. This was partially offset by a change in customer sales mix, which lowered the average sales price of system units. We sold 1,131 multiplexing analyzers in 2018, as compared to 1,066 multiplexing analyzers sold in 2017. For 2018, our five highest selling partners accounted for 882 systems, or 78%, of total multiplexing analyzers sold, whereas, our five highest selling partners in 2017 accounted for 779, or 73%, of total multiplexing analyzers sold. Consumable sales, comprised of microspheres and sheath fluid, increased 2% to $50.1 million in 2018 from $49.3 million in 2017. During 2018, we had 74 bulk purchases of consumables totaling approximately $38.8 million (77% of total consumable revenue), ranging from $0.1 million to $3.8 million, as compared with 70 bulk purchases totaling approximately $37.3 million (76% of total consumable revenue) in 2017. The modest increase in bulk purchases in 2018 was the primary driver to the increase in consumable revenue from the prior year. Partners who reported royalty-bearing sales accounted for $32.8 million, or 65%, of consumable sales for 2018 compared to $34.7 million, or 70%, of the total consumable sales for 2017. Royalty revenue, which results when our partners sell products or testing services incorporating our technology, increased 10% to $49.4 million for 2018 from $44.7 million for 2017. This increase was the result of higher royalty minimums, audit findings and other adjustments of $2.5 million (collectively) and higher base royalties of $2.2 million, which we believe was mainly the result of menu expansion and increased utilization of our partners’ assays on our technology. Assay revenue increased 1% to $156.7 million for 2018 from $154.9 million for 2017, primarily attributable to an increase in our sample to answer assay revenue, which consists of VERIGENE and ARIES® assay sales. Our sample to answer assay revenue grew 36% to $56.4 million for 2018 from $41.4 million in 2017. These increases were partially offset by reductions in our non-automated testing assays. Revenue for non-automated infectious disease testing products decreased by 11%. This was driven mainly by (i) the reduction in LabCorp’s non-CF related sales to $36.9 million, from $49.9 million in 2017, and (ii) genetic testing assays decreasing by 12% in 2018 from 2017. The decrease in revenue from our genetic testing products was attributable to pricing and reimbursement challenges within the pharmacogenetic market segment, in addition to declining sales of CF assays from LabCorp of $0.8 million for 2018. Our largest customer, by revenue, accounted for 29% of total assay revenue for 2018 compared to 38% for 2017. No other customer accounted for more than 10% of total assay revenue during those periods. The loss of LabCorp women’s health portfolio negatively impacted our assay revenue in 2018. Excluding LabCorp sales, assay revenue increased 9% in 2018 as compared to 2017. 58 Table of Contents 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 6% to $12.2 million during 2018 from $11.5 million in 2017, primarily driven by the increase in the number of systems covered under extended service agreements. At December 31, 2018, we had 2,311 Luminex systems covered under extended service agreements and $5.3 million in deferred revenue related to those contracts. At December 31, 2017, we had 1,989 Luminex systems covered under extended service agreements and $4.8 million in deferred revenue related to those contracts. Other revenue, which includes training revenue, shipping revenue, miscellaneous part sales, amortized license fees, milestone payments and revenue from agreements with U.S. government agencies, decreased to $7.4 million for 2018 compared to $7.5 million for 2017, primarily driven by an increase in amounts paid towards global purchasing organizations, which are accounted for as a reduction of revenue. Gross Profit. Gross profit decreased to $195.5 million for 2018, as compared to $199.0 million for 2017. Gross margin (gross profit as a percentage of total revenue) decreased to 62% for 2018, from 65% for 2017. This decrease in gross margin was primarily attributable to the decline in LabCorp’s assay purchases, which typically carry a higher gross margin, and the absorption of higher manufacturing expenses for 2018. These impacts were partially offset by a favorable change in sales mix from other higher margin items, most notably, royalty and consumable revenue. Concentration of sales in our higher margin items (assays, consumables and royalties) was 81% of revenue for each of 2018 and 2017. Research and Development Expense. Research and development expense increased to $47.2 million for 2018 from $45.7 million in 2017, but as a percentage of total revenue remained constant at 15%. The increase in research and development expense was primarily a result of the focus of our efforts in the development and commercialization of a pipeline of assays for the ARIES® System and the development and commercialization of the next generation VERIGENE System, VERIGENE II, and assays. Research and development headcount as of December 31, 2018 was 196, as compared to 175 as of December 31, 2017. Selling, General and Administrative Expense. Selling, general and administrative expenses, excluding the amortization of acquired intangible assets, increased to $111.8 million for 2018 from $107.3 million for 2017. The increase was primarily attributable to flow cytometry acquisition related expenses of $2.7 million incurred in late 2018, in addition to higher personnel costs and material expenses stemming from potential customer validations. Selling, general and administrative headcount at December 31, 2018 was 385, as compared to 358 at December 31, 2017. As a percentage of revenue, selling, general and administrative expense, excluding the amortization of acquired intangible assets, remained flat at 35% for 2018 and 2017. Other Income, net. We received a nonrecurring dividend payment of $0.4 million from one of our investments in 2018. See Note 3 - Investments and Other Assets for further details regarding our investments. Income taxes. Our effective tax rate for 2018 was 35%, or $9.8 million, as compared to a an effective tax rate of 21%, or $7.7 million, for 2017. The incurred tax expense for 2018 and 2017 was primarily driven by the impact of this tax legislation. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company recorded provisional amounts in 2018 and 2017 related to the enactment date effects of the Tax Act. At December 31, 2018 the Company completed its accounting for all of the enactment-date income tax effects of the Tax Act and recorded a tax benefit of $741,000 for provisional adjustments comprised of (i) increase of $1.9 million to the transition tax related to the Tax Act; (ii) a revaluation of deferred tax assets of $74,000 based upon the future tax rates; and (iii) a reduction of a deferred tax liability for withholding taxes related to our Canadian entity of $2.5 million. In 2018, the Company also recorded approximately $2.1 million of tax expense under the GILTI provisions of the Tax Act which became effective January 1, 2018, and tax expense totaling $1.4 million based on the results of a Canadian income tax audit. In 2017, the Company recorded provisional tax expense totaling $12.6 million related to the effects of the Tax Act, comprised of: (i) a transition tax of $6.7 million related to the Tax Act; (ii) a revaluation of deferred tax assets of $2.7 million based upon the future tax rates; and (iii) establishment of a deferred tax liability for withholding taxes related to our Canadian entity based upon our change in reinvestment assertions of $3.2 million. These tax legislation effects were offset by the valuation allowance release on our Canadian deferred tax assets of $12.5 million in the third quarter of 2017. Other rate impacts are due to the current rate differential between the U.S. and Canada and our research credit benefit. 59 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents December 31, 2019 December 31, 2018 (in thousands) 59,173 76,441 $ $ At December 31, 2019, we held cash and cash equivalents of $59.2 million and had working capital of $144.4 million. At December 31, 2018, we held cash and cash equivalents of $76.4 million and had working capital of $151.4 million. Cash, and cash equivalents decreased by $17.3 million during 2019. The decrease in cash and cash equivalents from the prior year is primarily attributable to the purchases of property, plant and equipment of $16.2 million, dividends of $12.2 million, and the additional investment of $7.0 million in Combinati Incorporated (Combinati), a private company, made during the quarter ended December 31, 2019. See Note 3 - Investments and Other Assets for further details regarding our equity investment. These outflows were partially offset by operating cash flows of $13.5 million and $3.8 million of proceeds from employee stock plans and exercises of stock options. 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). 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 $13.5 million for the 2019, as compared with cash provided by operations of $50.9 million for 2018. This decrease was primarily attributable to higher operating expenses and lower gross profit in the current year as compared to the year ended December 31, 2018. Cash used in investing activities was $20.6 million for 2019, a decrease from $93.5 million for 2018. The change in cash flows of investing activities from 2018 to 2019 was primarily attributable to the acquisition of EMD Millipore’s flow cytometry business in 2018. 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 used in financing activities increased to $10.5 million for 2019, from cash used in financing activities of $8.4 million for 2018. This change in cash flows used in financing activities was primarily attributable to an increase in dividends from $0.06 per share to $0.09 per share, which was announced in the third quarter and paid in the fourth quarter of 2019. 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 technology, 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 2020. Our short-term projects that are expected to require significant capital to complete are development of the next generation xMAP System, xMAP INTELLIFLEX, our current in-process research and development of the next generation VERIGENE System, VERIGENE II, and our in-process research and development of the Guava Next Gen system. We currently anticipate xMAP INTELLIFLEX, VERIGENE II and Guava Next Gen will all launch commercially in 2020. The estimated aggregate cost to complete these projects, including completion of development of the systems, cartridge, software and the initial assay, validation, verification, clinical trials and regulatory submission, is approximately $1.1 million and is included in our research and development budget for 2020. 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. 60 Table of Contents 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 18, 2020, 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 19, 2020 with a payment date of April 9, 2020. As described elsewhere in this report, LabCorp elected to develop the next iteration of one of its women’s health products with another party. We previously negotiated significant minimum requirements of women’s health purchases from LabCorp, pursuant to which LabCorp committed to acquire no less than $63.1 million of our women’s health products from January 1, 2017 through June 30, 2018. During the quarter ended June 30, 2018, LabCorp met its purchase requirements under that agreement and indicated it would not make further purchases from us of the women’s health products covered by such agreement. However, based on an extension agreement entered into in the third quarter of 2017, the Company continued to sell its CF products to LabCorp through the end of 2019. In the first quarter of 2019, we completed an additional extension agreement and the Company will continue to sell its CF products to LabCorp through at least the end of 2021. The loss of the women’s health LabCorp business, and the anticipated future loss of other products traditionally sold to LabCorp (which we expect to occur with products other than CF, as discussed above), could have a material adverse effect on our growth and future results of operations. During 2019, LabCorp represented total revenue of $15.5 million. That revenue was categorized as follows: women’s health - $2.5 million; CF related - $11.9 million; and all other ancillary products - $1.1 million. During 2018, LabCorp represented total revenue of $47.2 million, categorized as follows: women’s health - $23.2 million; CF related - $12.4 million; and all other ancillary products - $11.6 million. As noted above, LabCorp met its purchase commitment for women’s health products and will no longer be placing material orders for the women’s health portfolio. 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 have and 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. 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. 61 Table of Contents Contractual Obligations As of December 31, 2019, we had approximately $36.7 million in non-cancellable purchase obligations for the next 12 months. These obligations are included in our estimated cash usage during 2020. The following table reflects our total current non-cancellable obligations by period as of December 31, 2019 (in thousands): Contractual Obligations Payment Due By Period Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years $ $ 25,232 Non-cancellable rental obligations Non-cancellable purchase obligations (1) Minimum royalty commitments (2) Insurance premiums Total (3) 63,048 (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 42,274 10,897 36,678 34,819 12,649 1,705 1,002 7,133 6,429 6,974 1,002 992 136 932 94 — — 24 47 — 65 — 60 $ $ $ $ $ $ $ $ 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, 2019, Luminex is unable to make reasonably reliable estimates of the timing of cash settlement with the respective taxing authority. Therefore, $3.4 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 17 to our Consolidated Financial Statements contained in Item 8 of this Annual Report. 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, 2019 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, 2019, 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 $1.3 million on foreign currency denominated asset and liability balances as of December 31, 2019. 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. 62 Table of Contents 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 loss of $432,000 was included in determining our consolidated results for the year ended December 31, 2019. 63 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements 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 PAGE 65 67 68 69 70 71 72 64 Table of Contents 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 27, 2020 expressed an unqualified opinion thereon. Adoption of ASU No. 2016-02 As discussed in Note 17 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842). 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. 65 Table of Contents Description of the matter How we addressed the matter in our audit Description of the matter How we addressed the matter in our audit Revenues with variable considerations 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, 2019, the Company recorded $334.6 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. 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 The Company’s inventories totaled $77.1 million as of December 31, 2019, representing 14% 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. 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 27, 2020 66 Table of Contents 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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and our report dated February 27, 2020 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 27, 2020 67 Table of Contents LUMINEX CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories, net Prepaids and other Total current assets Property and equipment, net Intangible assets, net Deferred income taxes Goodwill Right-of-use assets Other Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities Deferred revenue - current portion Total current liabilities Deferred revenue Lease liabilities Other long-term liabilities Total liabilities Stockholders’ equity: Common stock, $.001 par value, 200,000,000 shares authorized; issued and outstanding: 44,325,369 shares at December 31, 2019; 43,899,210 shares at December 31, 2018 Preferred stock, $.001 par value, 5,000,000 shares authorized; no shares issued and outstanding Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity As of December 31, 2018 2019 $ $ $ 59,173 55,815 77,084 10,398 202,470 65,515 90,336 27,702 118,145 20,439 19,122 543,729 17,983 31,872 8,214 58,069 1,633 17,182 1,985 78,869 76,441 53,396 63,250 9,657 202,744 66,288 105,148 21,470 118,127 — 11,398 525,175 14,504 26,772 10,099 51,375 1,079 — 5,065 57,519 44 44 — 380,304 (1,380) 85,892 464,860 543,729 $ — 365,349 (1,127) 103,390 467,656 525,175 $ $ $ $ See the accompanying notes which are an integral part of these Consolidated Financial Statements. 68 Table of Contents LUMINEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands, except per share amounts) Year Ended December 31, 2019 2018 2017 Revenue Cost of revenue Gross profit Operating expenses: Research and development Selling, general and administrative Amortization of acquired intangible assets Total operating expenses (Loss) income from operations Other income (expense), net Loss from equity method investment (Loss) income before income taxes Income tax benefit (expense) Net (loss) income Net (loss) income attributable to common stock holders Basic Diluted Net (loss) income per share attributable to common stock holders Basic Diluted Weighted-average shares used in computing net (loss) income per share Basic Diluted Dividends declared per share Other comprehensive (loss) income: Foreign currency translation adjustments Other comprehensive (loss) income Comprehensive (loss) income $ $ $ $ $ $ $ $ 334,638 151,899 182,739 56,228 127,183 11,407 194,818 (12,079) 3,100 (523) (9,502) 5,664 (3,838) $ $ 315,818 120,327 195,491 47,164 111,816 8,665 167,645 27,846 465 — 28,311 (9,803) 18,508 $ $ $ $ 306,571 107,525 199,046 45,717 107,322 8,854 161,893 37,153 (4) — 37,149 (7,726) 29,423 28,894 28,894 0.67 0.67 43,173 43,300 (3,773) $ (3,775) 18,196 18,197 (0.09) $ (0.09) $ 44,148 44,148 0.42 0.41 43,727 44,291 0.30 $ 0.24 $ 0.24 (253) (253) (4,091) $ (502) (502) 18,006 $ 1,067 1,067 30,490 See the accompanying notes which are an integral part of these Consolidated Financial Statements. 69 Table of Contents LUMINEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: Net (loss) income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Deferred income tax (benefit) expense Loss on sale or disposal of assets (Earnings) loss on equity method investment (1) Other Changes in operating assets and liabilities: Accounts receivable, net Inventories, net Other assets Accounts payable Accrued liabilities Deferred revenue Net cash provided by operating activities Cash flows from investing activities: Purchase of property and equipment Business acquisition consideration, net of cash acquired Proceeds from net working capital adjustments related to business acquisition Issuance of note receivable Purchase of equity affiliate Proceeds from (payments to) cost method investment Proceeds from sale of assets and investments Acquired technology rights Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of common stock Shares surrendered for tax withholding Dividends paid Net cash used in financing activities Effect of foreign currency exchange rate on cash Change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period $ Year Ended December 31, 2018 2017 2019 $ (3,838) $ 18,508 $ 29,423 28,529 13,198 (7,444) 641 (2,719) (329) (2,440) (13,559) 4,789 3,370 (5,630) (1,031) 13,537 (16,249) — 1,916 — (6,980) 734 — (40) (20,619) 3,750 (2,095) (12,153) (10,498) 312 (17,268) 76,441 59,173 $ 23,674 12,226 8,159 730 — (1,369) (1,569) (6,827) (3,319) 4 103 579 50,899 (21,292) (65,381) — (1,000) — (1,782) 2 (4,000) (93,453) 4,570 (2,312) (10,654) (8,396) 279 (50,671) 127,112 76,441 $ 22,641 12,478 6,383 964 — 1,531 (8,265) (8,668) (83) 4,469 (2,657) (785) 57,431 (14,635) — — (1,400) — (1,000) 62 (140) (17,113) 4,305 (2,350) (7,930) (5,975) (683) 33,660 93,452 127,112 (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 3 - Investments and Other Assets for further details. See the accompanying notes which are an integral part of these Consolidated Financial Statements. 70 Table of Contents LUMINEX CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share data) Common Stock Number of Shares Amount 42,802,480 163,579 $ 345,978 — 92,456 — — — — 43,404,493 157,754 253,152 — 83,811 — — — — 43,899,210 95,097 217,620 — 113,442 — — — — 44,325,369 $ $ $ Additional Paid-In Capital Accumulated Other Comprehensive (Loss) Retained Earnings Total Stockholders’ Equity $ 336,431 2,684 $ (1,692) $ — $ 68,898 — 403,679 2,684 (2,350) 12,409 1,591 — — 69 — 350,834 2,814 (2,312) 12,187 1,740 — — 86 — 365,349 1,698 (2,095) 13,198 2,030 — — 124 — 380,304 $ $ $ $ $ $ — — — — 1,067 — — (625) $ — — — — — (502) — — (1,127) $ — — — — — — — — 29,423 — (10,666) — 87,655 — — — — 18,508 — (10,796) 8,023 103,390 — — — — (3,838) $ $ (2,349) 12,409 1,591 29,423 1,067 (10,597) — 437,907 2,814 (2,311) 12,187 1,740 18,508 (502) (10,710) 8,023 467,656 1,698 (2,095) 13,198 2,030 (3,838) (253) — — (1,380) $ — (13,660) — 85,892 $ (253) (13,536) — 464,860 42 — 1 — — — — — — 43 — 1 — — — — — — 44 — — — — — — — — 44 Balance at December 31, 2016 Exercise of stock options Issuances of restricted stock, net of shares withheld for taxes Stock compensation Issuance of common shares under ESPP Net income Foreign currency translation adjustments Dividends Other Balance at December 31, 2017 Exercise of stock options Issuances of restricted stock, net of shares withheld for taxes Stock compensation Issuance of common shares under ESPP Net income Foreign currency translation adjustments Dividends Other Balance at December 31, 2018 Exercise of stock options Issuances of restricted stock, net of shares withheld for taxes Stock compensation Issuance of common shares under ESPP Net income Foreign currency translation adjustments Dividends Other Balance at December 31, 2019 See the accompanying notes which are an integral part of these Consolidated Financial Statements. 71 Table of Contents 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, 2019, the Company had 82 strategic partners, 55 of which have released commercialized reagent-based products utilizing the Company’s technology. Luminex and these partners have sold approximately 17,000 xMAP-based instruments in laboratories worldwide as of December 31, 2019, 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. 72 Table of Contents 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. Marketable securities that are bought and held principally for the purpose of selling them in the near-term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Held-to-maturity securities are stated at amortized cost, which approximates fair value of these investments. Marketable equity securities not classified as held-to-maturity or as trading are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses included in the determination of comprehensive income and reported in stockholders’ equity. Marketable securities are recorded as either short-term or long-term on the balance sheet based on contractual maturity date. The fair value of all securities is 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. Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against net earnings. In addition, the Company made an equity investment in a private company. 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; therefore, the Company accounts for this investment using the equity method. 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. 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, 2019 and 2018. See Note 6 for further details concerning fair value measurements. Supplemental Cash Flow Statement Information (in thousands) Year Ended December 31, 2018 2019 2017 Cash paid during the period for taxes Cash paid during the period for interest and penalties Effect of acquisitions: Fair value of tangible assets acquired Liabilities assumed Cost in excess of fair value of assets acquired Acquired identifiable intangible assets Deferred tax liabilities, net In-process research and development Total purchase price Less cash and cash equivalents acquired Net cash paid for business acquisition Concentration of Credit Risk $ $ 1,206 29 $ 2,214 17 1,393 57 2,657 (1,915) 18 609 731 (4,016) (1,916) — (1,916) $ 13,262 (5,082) 32,647 26,797 (4,433) 6,703 69,894 4,513 65,381 $ $ — — — — — — — — — 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’s short-term investments consist of investments in high credit quality financial institutions, non-government sponsored debt securities and corporate issuers. 73 Table of Contents 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. Thermo Fisher Scientific Inc. accounted for 12%, 14% and 15% of our total revenues in 2019, 2018 and 2017, respectively. LabCorp accounted for 15% and 20% of our total revenues in 2018 and 2017, respectively. No other customer accounted for more than 10% of our total revenues in 2019, 2018 or 2017. 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.” 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, 2019. In 2019 and 2018, 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 2019, 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 2019, 2018 or 2017. 74 Table of Contents 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 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 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 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. This was a change from how the Company treated royalty payments prior to 2018, by recognizing royalty revenue when our strategic partners reported the end-user sales to the Company, and is primarily the basis for our cumulative adjustment, made 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 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 effective January 1, 2018. This change did not have any impact on top line revenue and the Company has not experienced 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 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”. 75 Table of Contents 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. Allowance for Doubtful Accounts: The Company continuously monitors collections and payments from its customers and maintains allowances for doubtful accounts based upon its historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the Company’s expectations, 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. We adopted new guidance on financial instruments and related credit losses effective January 1, 2020, which will impact the timing of the measurement and recognition of expected credit losses. For further discussion, see Note 17, “Recent Accounting Pronouncements.” 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 $3.5 million, $2.8 million and $2.4 million for 2019, 2018 and 2017, 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. 76 Table of Contents 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. 77 Table of Contents NOTE 2 — BUSINESS COMBINATIONS On December 31, 2018, the Company completed its acquisition of EMD Millipore Corporation’s flow cytometry portfolio for $75 million, consisting of approximately $69.9 million paid under a Share and Asset Purchase Agreement (the Purchase Agreement) and approximately $5.1 million in committed inventory purchases, both of which were subject to adjustment. Following a purchase price reconciliation in the quarter ended March 31, 2019, the purchase price was reduced by $1.9 million. This adjustment resulted in a revised amount of $68.0 million paid under the Purchase Agreement. The committed inventory purchases were completed in the third quarter of 2019. The Company financed the acquisition with cash on hand. Luminex acquired 100% of the shares and equity of Amnis Corporation, a Washington corporation (Amnis), a wholly owned subsidiary of EMD Millipore Corporation, a Massachusetts corporation (itself an affiliate of Merck KgaA), and certain other assets owned by other affiliates of Merck KgaA (MilliporeSigma). The acquisition expands Luminex’s existing offering of flow-based detection systems, which is centered around its innovative xMAP® multiplexing technology, with approximately 17,000 xMAP systems sold worldwide, some of which may be retired or otherwise not in use. MilliporeSigma’s flow cytometry portfolio includes Amnis, a family of imaging flow cytometry products for cell-based analysis, as well as their Guava and Muse portfolio of products, which are economical systems based on microcapillary technologies. The purchase price was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. A portion of the goodwill is deductible for tax purposes. The Company recorded approximately $2.7 million of acquisition-related costs during fiscal 2018. The impact of the acquisition on our liquidity is more fully described under “Liquidity and Capital Resources.” The following table summarizes the estimated fair values of assets acquired and liabilities assumed in connection with the acquisition at December 31, 2018 and adjusted and finalized as of September 30, 2019 (in thousands): Net tangible assets assumed as of December 31, 2018 Intangible assets subject to amortization Deferred tax liabilities Goodwill Total purchase price $ $ 8,922 30,094 (3,702) 32,664 67,978 The Company finalized the purchase price allocation for the acquisition in the quarter ended September 30, 2019. If information later becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be recognized in the Consolidated Statements of Comprehensive Income. Such adjustments have been included in the purchase price allocations retrospectively through revisions to the net tangible assets assumed, fair values of the intangible assets, deferred tax assets and liabilities and resulting goodwill recorded. The excess of the purchase price over the fair value of the tangible net assets, liabilities and intangible assets acquired was recorded to goodwill. NOTE 3 — 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. As of December 31, 2019, the Company had no short or long-term investments, since those funds were used to pay for acquisitions. Available-for-sale securities consisted of the following as of December 31, 2019 (in thousands): Current: Money Market funds Total current securities Noncurrent: Total noncurrent securities Total available-for-sale securities Amortized Cost Gains in Accumulated Other Comprehensive Income Losses in Accumulated Other Comprehensive Income Estimated Fair Value $ $ 707 707 — 707 $ $ 78 — $ — — — $ — $ — — — $ 707 707 — 707 Table of Contents Available-for-sale securities consisted of the following as of December 31, 2018 (in thousands): Current: Money Market funds Total current securities Noncurrent: Total noncurrent securities Total available-for-sale securities Amortized Cost Gains in Accumulated Other Comprehensive Income Losses in Accumulated Other Comprehensive Income Estimated Fair Value $ $ 704 704 — 704 $ $ — $ — — — $ — $ — — — $ 704 704 — 704 There were no proceeds from the sales of available-for-sale securities for the years ended December 31, 2019 and December 31, 2018. 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, 2019 or December 31, 2018. 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. Effective October 1, 2019, the Company accounted for its investment in Combinati under the equity method, given the Company's significant influence over the investee 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. 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 was reclassified to equity method investments to distinguish it from other minority interest investments that take the fair value alternative. As of December 31, 2019, the carrying value of the Company’s total investment in Combinati was $11.5 million, which exceeded the Company’s share of Combinati’s net assets by $8.2 million and is not amortized. For the year ended December 31, 2019, 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 owns 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 have been 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 and communication from this private company. We received the final cash payment for the remainder of this minority interest in the first quarter of 2020. As of December 31, 2019, this remaining portion is included at cost in other short-term assets on the Company’s Consolidated Balance Sheets as of December 31, 2019 as the Company does not have significant influence over the investee, as the Company owns less than 20% of the voting equity and the investee is not publicly traded. 79 Table of Contents 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): Purchased technology rights (net of accumulated amortization of $8,300 and $7,633 in 2019 and 2018, respectively) Minority interest and equity method investments Other 2019 2018 $ $ 6,027 11,501 1,594 19,122 $ $ 6,653 2,782 1,963 11,398 For the years ended December 31, 2019 and 2018, the Company recognized amortization expense related to the amortization of purchased technology rights of approximately $667,000 and $621,000, respectively. Future amortization expense is estimated to be $572,000 in 2020, $540,000 in 2021, $522,000 in 2022, $505,000 in 2023, $500,000 in 2024 and $3,388,000 thereafter. NOTE 4 — ACCOUNTS RECEIVABLE AND RESERVES The Company records an allowance for doubtful accounts based upon a specific review of all outstanding invoices, known collection issues and historical experience. The Company regularly evaluates the collectability of its trade accounts receivables and performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and its assessment of the customer’s current creditworthiness. These estimates are based on specific facts and circumstances of particular orders, analysis of credit memo data and other known factors. Accounts receivable consisted of the following at December 31 (in thousands): Accounts receivable Less: Allowance for doubtful accounts 2019 2018 $ $ 56,956 (1,141) 55,815 $ $ 54,239 (843) 53,396 80 Table of Contents The following table summarizes the changes in the allowance for doubtful accounts (in thousands): Balance at December 31, 2016 Net increases charged to costs and expenses Write-offs of uncollectible accounts Balance at December 31, 2017 Net increases charged to costs and expenses Write-offs of uncollectible accounts Balance at December 31, 2018 Net recoveries charged to costs and expenses Write-offs of uncollectible accounts Balance at December 31, 2019 NOTE 5 — INVENTORIES, NET Inventories consisted of the following at December 31 (in thousands): Parts and supplies Work-in-progress Finished goods $ $ 419 1,312 (386) 1,345 (437) (65) 843 400 (102) 1,141 2019 2018 $ $ 45,459 15,532 16,093 77,084 $ $ 39,873 11,847 11,530 63,250 The Company has non-cancellable purchase commitments with certain of its component suppliers in the amount of approximately $36.7 million at December 31, 2019. 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 6 — 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, 2019. 81 Table of Contents 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, 2019 and 2018 (in thousands): Assets: Money Market funds Minority interest investments - short-term Equity investment Fair Value Measurements as of December 31, 2019 Using Level 1 Level 2 Level 3 Total $ $ $ 707 $ — $ — $ — $ — $ — $ — $ $ 22 $ 11,501 707 22 11,501 Fair Value Measurements as of December 31, 2018 Using Level 1 Level 2 Level 3 Total Assets: Money Market funds Minority interest investments - long-term $ $ $ 704 — $ — $ — $ — $ $ 2,782 704 2,782 NOTE 7 — PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31 (in thousands): Laboratory equipment Leasehold improvements Computer equipment Purchased software Furniture and fixtures Assets on loan/rental Capital lease equipment Less: Accumulated depreciation 2019 2018 $ $ 60,486 43,471 3,916 22,621 5,924 28,946 — 165,364 (99,849) 65,515 $ $ 58,330 39,289 3,322 22,141 5,874 24,259 846 154,061 (87,773) 66,288 Depreciation expense was $16.5 million and $14.4 million for the years ended December 31, 2019 and 2018, respectively. NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill during the period are as follows (in thousands): December 31, 2019 December 31, 2018 85,481 $ 32,646 $ 118,127 $ 118,127 18 118,145 $ $ $ Balance at beginning of period Flow cytometry acquisition Balance at end of period 82 Table of Contents 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 2018 Balance as of December 31, 2017 $ 81,385 $ 19,097 $ 5,664 $ 12,982 $ 119,128 Flow cytometry acquisition Asset acquisition Balance as of December 31, 2018 Less: accumulated amortization: Accumulated amortization balance as of December 31, 2017 Amortization expense Accumulated amortization balance as of December 31, 2018 Net balance as of December 31, 2018 Weighted average life (in years) 2019 17,084 — 98,469 4,722 — 23,819 (34,414) (6,087) (7,037) (1,999) (40,501) 57,968 $ $ (9,036) 14,783 $ 11 10 6,703 4,328 24,013 33,500 4,328 156,956 — — — $ 24,013 $ (43,143) (8,665) (51,808) 105,148 4,991 — 10,655 (1,692) (579) (2,271) 8,384 10 Balance as of December 31, 2018 $ 98,469 $ 23,819 $ 10,655 $ 24,013 $ 156,956 Flow cytometry acquisition purchase price allocation adjustments Balance as of December 31, 2019 Less: accumulated amortization: Accumulated amortization balance as of December 31, 2018 Amortization expense Accumulated amortization balance as of December 31, 2019 Net balance as of December 31, 2019 Weighted average life (in years) (116) 98,353 (428) 23,391 1,154 11,809 (4,016) 19,997 (3,406) 153,550 (40,501) (7,784) (9,036) (2,428) (48,285) 50,068 $ (11,464) 11,927 $ $ 11 10 (2,271) (1,194) (3,465) 8,344 10 — — — $ 19,997 $ (51,808) (11,406) (63,214) 90,336 The Company currently has three IP R&D projects. The first relates to the development of the next generation VERIGENE® System, VERIGENE II. The Company believes the VERIGENE II will launch commercially in 2020. The second is a defensive IP R&D project related to the Company’s next generation xMAP® System, xMAP INTELLIFLEX, which the Company believes will launch commercially in 2020. The third relates to the development of the next generation Guava System, acquired as part of the acquisition (Guava Next Gen System). The Company believes the Guava Next Gen System will launch in 2020. The estimated aggregate amortization expense for the next five fiscal years and thereafter is as follows (in thousands): 2020 2021 2022 2023 2024 Thereafter $ $ 11,406 11,048 9,801 9,452 9,452 19,180 70,339 83 Table of Contents NOTE 9 — OTHER COMPREHENSIVE LOSS 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): Balance as of December 31, 2018 Other comprehensive loss Net current-period other comprehensive loss Balance as of December 31, 2019 Accumulated Other Comprehensive Loss Items - Foreign Currency $ $ (1,127) (253) (253) (1,380) There are no tax benefits or expenses related to the other comprehensive loss for the twelve months ended December 31, 2019. NOTE 10 — ACCRUED LIABILITIES Accrued liabilities consisted of the following as of December 31 (in thousands): Compensation and employee benefits Dividends payable Income and other taxes Warranty costs Royalties payable Current operating lease liabilities Other 2019 2018 $ 17,011 $ 18,086 4,104 1,538 1,641 1,335 5,053 1,190 2,703 1,014 1,901 1,373 — 1,695 $ 31,872 $ 26,772 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, 2016 Warranty services provided Accrual for warranty costs Accrued warranty costs at December 31, 2017 Warranty services provided Accrual for warranty costs Accrued warranty costs at December 31, 2018 Warranty services provided Accrual for warranty costs Accrued warranty costs at December 31, 2019 84 $ $ 675 (2,049) 2,682 1,308 (2,159) 2,752 1,901 (2,868) 2,608 1,641 Table of Contents NOTE 11 — INCOME TAXES The components of income before income taxes for the years ended December 31 are as follows (in thousands): Domestic Foreign Total 2019 (31,314) $ 21,812 (9,502) $ $ $ 2018 2017 7,242 21,069 28,311 $ $ 18,436 18,713 37,149 The components of the (benefit) provision for income taxes attributable to continuing operations for the years ended December 31 are as follows (in thousands): Current: Federal Foreign State Total current expense (benefit) Deferred: Federal Foreign State Total deferred (benefit) expense Total (benefit) provision for income taxes 2019 2018 2017 $ $ $ 821 951 (163) 1,609 $ $ (3,318) $ 515 600 (2,203) $ (10,179) 4,597 (1,691) (7,273) (5,664) $ 6,351 5,271 384 12,006 9,803 $ 3,149 295 883 4,327 14,970 (9,267) (2,304) 3,399 7,726 The (benefit) provision 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, 2018 2017 2019 Statutory tax rate State taxes, net of federal benefit Permanent items Effect of foreign operations Research and incentive tax credit generated Valuation allowance Income tax reserves Remeasurement U.S. deferreds Transition tax Foreign earnings withholding tax Global intangible low-taxed income Other measurement period Tax Act adjustments Canadian income tax audit Other 21.0 % 9.6 % (1.6)% (11.7)% 18.9 % 0.8 % 67.3 % 0.0 % (5.3)% 6.6 % (44.4)% 0.0 % 0.0 % (1.0)% 60.2 % 21.0 % 3.0 % 2.6 % 3.4 % (8.7)% 0.4 % 24.7 % (0.3)% (16.6)% (7.9)% 5.7 % 2.6 % 4.8 % (0.1)% 34.6 % 35.0 % (1.4)% 0.5 % (5.7)% (4.6)% (37.6)% 0.5 % 7.3 % 18.1 % 8.6 % 0.0 % 0.0 % 0.0 % 0.1 % 20.8 % 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. 85 Table of Contents Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows (in thousands): Deferred tax assets: Accrued liabilities and other Net operating loss and credit carryforwards Deferred revenue Leases Stock compensation and other Gross deferred tax assets Valuation allowance Total deferred tax assets Deferred tax liabilities: Accrued liabilities and other Deferred revenue Depreciation and amortization Leases Equity method investment Total deferred tax liabilities $ $ $ 2019 2018 4,577 52,141 1,023 5,023 7,791 70,555 (17,906) 52,649 $ $ 5,646 54,167 — — 6,525 66,338 (21,354) 44,984 (1,287) $ — (18,443) (4,550) (667) (24,947) (2,204) (358) (20,952) — — (23,514) Net deferred tax assets $ 27,702 $ 21,470 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 $3.4 million in 2019 from 2018. This decrease in the valuation allowance had minimal impact on the effective tax rate as this change in the valuation allowance was primarily due to certain deferred tax assets related to state net operating losses that expired and were fully offset by a valuation allowance. As such, the Company removed the expired deferred tax asset and released the corresponding valuation allowance. At December 31, 2019, the Company had gross federal, state and foreign net operating loss carryforwards of approximately $60.7 million, $311.1 million, and $6.3 million, respectively. These losses expire beginning in 2020. Federal and state net operating losses of approximately $59.0 million and $300.5 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 $8.2 million, $3.6 million, and $11.4 million, respectively. These credits begin to expire in 2022, except for approximately $1.5 million which have an indefinite carryforward period. Certain of these credits are subject to annual limitations under the change in ownership provisions. Alternative minimum tax credits of $250,000 which are potentially subject to refund under the Tax Act have been reflected as deferred tax assets. In addition, the Company has state research credits of approximately $1.2 million which have an indefinite carryforward period. 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 $22.5 million at December 31, 2019, $3.8 million at December 31, 2018 and $7.4 million at December 31, 2017. Since the Company does not intend to permanently reinvest portions of its previously taxed Canadian earnings, it has recorded a deferred tax liability of $33,000 related to federal and 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 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. 86 Table of Contents As of December 31, 2019 and 2018, the Company had recorded gross unrecognized tax benefits of approximately $3.4 million and $9.7 million, respectively. All of the unrecognized tax benefits as of December 31, 2019, 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, 2019 and 2018, the Company recognized approximately $1,000 and $104,000 in tax related interest and penalties, respectively. Reserves for interest and penalties as of December 31, 2019 and 2018 are not significant as the Company has net operating loss carryovers. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands): Balance at beginning of year Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Balance at end of year 2019 2018 $ $ 9,721 342 398 (7,038) 3,423 $ $ 2,777 749 6,605 (410) 9,721 The Company recorded a reduction in unrecognized tax benefits related to the U.S. transition tax and a related income tax benefit of $6.6 million as a result of a ruling for certain aspects of the E&P calculation of its Canadian subsidiary. As of December 31, 2019, 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 2013 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 2013 tax year and make adjustments to these net operating loss carryforwards. We are currently under audit in the United States for our 2016 tax year. Although we do not expect a material adjustment, the outcome of the audit is not known at this time. We are not under audit in any other major taxing jurisdiction 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): Basic: Net (loss) income Less: allocation to participating securities Net (loss) income attributable to common stockholders Weighted average common stock outstanding Net (loss) income per share attributable to common stockholders Diluted: Net (loss) income Less: allocation to participating securities Net (loss) income attributable to common stockholders Weighted average common stock outstanding Effect of dilutive securities: stock options and awards Weighted-average shares used in computing net (loss) income per share Year Ended December 31, 2019 2018 2017 $ $ $ $ $ $ $ $ $ $ 65 (3,838) $ 18,508 (312) (3,773) $ 18,196 43,727 44,148 (0.09) $ 0.42 63 (3,838) $ 18,508 (311) (3,775) $ 18,197 43,727 44,148 — 564 44,148 44,291 29,423 (529) 28,894 43,173 0.67 29,423 (529) 28,894 43,173 127 43,300 0.67 Net (loss) income per share attributable to common stockholders $ (0.09) $ 0.41 $ 87 Table of Contents Basic net (loss) income per share is computed by dividing the net (loss) income for the period by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing the net (loss) income 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 1,271,248 shares, 619,113 shares, and 2,182,404 shares for the years ended December 31, 2019, 2018 and 2017, 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, 2019 and 2018, 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: Twelve Months Ending Date Declared Date Payable Date Paid or To Be Paid Dividends Declared per Share December 31, 2017 December 31, 2018 December 31, 2019 February 21, 2017 May 24, 2017 March 24, 2017 June 23, 2017 April 14, 2017 July 14, 2017 September 12, 2017 September 22, 2017 October 13, 2017 December 7, 2017 December 22, 2017 January 12, 2018 January 24, 2018 May 18, 2018 March 23, 2018 June 22, 2018 April 13, 2018 July 13, 2018 September 11, 2018 September 21, 2018 October 12, 2018 December 11, 2018 December 22, 2018 January 10, 2019 $ $ $ $ $ $ $ $ February 8, 2019 May 21, 2019 March 21, 2019 June 20, 2019 April 11, 2019 $ July 11, 2019 $ July 31, 2019 September 26, 2019 October 17, 2019 December 6, 2019 December 19, 2019 January 15, 2020 $ $ 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.09 0.09 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. 88 Table of Contents Stock-Based Compensation At December 31, 2019, 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, 2019, 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, 2019, there were approximately 3.8 million shares authorized for future issuance under the Company’s Equity Incentive Plan and approximately 210,000 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 each of February 21, 2019 and 2018, 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 2019 and 2018, 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, 2019 and 2018, 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, 2019 and 2018, 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 83% and 115% of the number of target Performance Options granted for 2019 and 2018, 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. 89 Table of Contents 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: Dividend yield Expected volatility Risk-free rate of return Expected life of a 10 year contractual term option Expected life of a 7 year contractual term option Weighted average fair value at grant date 2019 2018 2017 0.9% 0.4 2.6% 7 years 4.88 years 1.2% 0.4 2.7% 7 years 4.88 years 1.3% 0.5 2.0% 7 years 4.87 years $ 7.69 $ 8.23 $ 6.66 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, 2019 is as follows: Stock Options Outstanding at December 31, 2018 Granted Exercised Canceled or expired Outstanding at December 31, 2019 Vested at December 31, 2019 and expected to vest Exercisable at December 31, 2019 Shares (in thousands) 3,323 976 (95) (411) 3,793 3,746 1,927 Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) $ $ $ $ 19.05 24.43 17.85 21.74 20.17 20.13 18.31 4.13 $ 4.11 $ $ 3.00 12,636 12,593 9,380 During the years ended December 31, 2019, 2018 and 2017, the total exercise intrinsic value of stock options exercised was $0.4 million, $1.3 million and $0.7 million, respectively, and the total fair value of stock options that vested was $11.9 million, $12.7 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 $6.5 million of total unrecognized compensation costs related to stock options at December 31, 2019 that are expected to be recognized over a weighted-average period of 2.29 years. The Company’s restricted share activity for the year ended December 31, 2019 is as follows: Restricted Stock Awards Non-vested at December 31, 2018 Granted Vested Cancelled or expired Non-vested at December 31, 2019 Shares (in thousands) 724 414 (261) (67) 810 Weighted Average Grant Price $ $ 20.27 24.07 19.67 21.74 22.28 90 Table of Contents Restricted Stock Units Non-vested at December 31, 2018 Granted Vested Cancelled or expired Non-vested at December 31, 2019 Vested at December 31, 2019 and expected to vest Exercisable at December 31, 2019 Shares (in thousands) Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) 468 120 (45) (21) 522 515 356 1.07 1.01 0.00 $ $ $ 12,088 11,927 8,240 As of December 31, 2019, there was $17.4 million of unrecognized compensation cost related to RSAs and RSUs. That cost is expected to be recognized over a weighted average-period of 2.18 years. The total fair value of restricted shares vested during the year ended December 31, 2019, 2018 and 2017 was $6.0 million, $6.7 million and $8.8 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, 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, 2017, the Company awarded 369,715 shares of RSAs, which had a fair value at the date of grant ranging from $18.04–$20.80. 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 and dividend equivalents, which had a fair value at the date of grant ranging from $21.98–$26.39. During the year ended December 31, 2017, the Company awarded 104,237 shares of RSUs, which had a fair value at the date of grant ranging from $18.04–$20.80. Compensation under these RSAs and RSUs was charged to expense over the restriction period and amounted to $8.2 million, $6.2 million, and $7.2 million in 2019, 2018 and 2017, respectively. There were no significant stock compensation costs capitalized into assets as of December 31, 2019, 2018 or 2017. The Company received $1.7 million, $2.8 million and $2.8 million for the exercise of stock options during the years ended December 31, 2019, 2018 and 2017, 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): Cost of revenue Research and development Selling, general and administrative Stock-based compensation costs reflected in net (loss) income Employee Stock Purchase Plan Year Ended December 31, 2018 2017 2019 $ $ 2,028 1,635 9,535 13,198 $ $ 1,715 1,409 9,102 12,226 $ $ 1,561 2,039 8,878 12,478 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, 2019, 2018 and 2017, 631,553 shares, 518,111 shares and 434,400 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 2019, 2018 and 2017, respectively. 91 Table of Contents 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: Assumptions: Risk-free interest rates Expected life Expected volatility Dividend yield Reserved Shares of Common Stock 2019 2018 2017 2.55% 0.5 years 0.35 0.942% 2.1% 0.5 years 0.44 1.2% 1.07% 0.5 years 0.45 1.3% At December 31, 2019 and 2018, the Company had reserved 8,349,808 and 8,925,957 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, 2019: Equity Incentive Plan ESPP Employee Savings Plans and Other Benefit Plans Options and RSUs Outstanding Shares Available for Future Issuance 4,326,593 — 4,326,593 3,813,024 210,191 4,023,215 Total Shares Reserved 8,139,617 210,191 8,349,808 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 2019, 2018 and 2017, each employee could contribute a percentage of compensation up to a maximum of $19,000, $18,500, 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 2019, 2018 and 2017 were $5.1 million, $4.0 million and $3.8 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 — 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. At inception, we determine 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. As described below under “Note 17 - Recent Accounting Pronouncements - Recently adopted accounting guidance,” the Company adopted the new lease guidance as of January 1, 2019. 92 Table of Contents Pursuant to the new lease guidance, all of the Company’s leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of the new lease guidance, 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. 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 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. The components of the lease expense were as follows (in thousands): Twelve Months Ended December 31, 2018 2019 2017 Operating lease cost(a) (a) Includes short-term lease expense costs, which were immaterial in the years ended December 31, 2019, 2018 and 2017 9,434 $ $ 7,032 Supplemental cash flow information related to leases was as follows (in thousands): Lease liabilities arising from obtaining right to use assets Operating leases recorded upon lease standard adoption Cash paid for amounts included in the measurement of lease liabilities Supplemental balance sheet information related to leases was as follows (in thousands): Operating leases: Operating lease right-of-use assets Operating lease liabilities Weighted Average Remaining Lease Term Weighted Average Discount Rate $ 6,583 Twelve Months Ended December 31, 2019 $ $ 24,922 6,547 December 31, 2019 $ $ 20,439 22,235 4.36 years 5.75% Minimum annual lease commitments as of December 31, 2019 under non-cancellable leases for each of the next five years and in the aggregate were as follows (in thousands): 2020 2021 2022 2023 2024 Thereafter Total lease payments Less: imputed interest Lease liabilities at December 31, 2019 93 Operating Leases $ $ 6,429 6,225 4,672 4,007 2,967 932 25,232 (2,997) 22,235 Table of Contents 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, 2019 the Company had approximately $36.7 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 2019, and purchases under these arrangements were $0.8 million, $2.2 million and $1.8 million for the years ended December 31, 2019, 2018 and 2017, 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 15 — 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 16 — 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): Domestic Foreign: Europe Asia Canada Other Sales to Customers 2018 $ 261,726 2017 $ 256,834 2019 $ 252,381 36,625 32,220 5,293 8,119 $ 334,638 21,672 21,603 4,775 6,042 $ 315,818 20,378 20,134 4,386 4,839 $ 306,571 94 Property and Equipment, net 2017 2018 2019 54,623 63,382 63,180 $ $ 178 442 1,715 — 65,515 $ 394 519 1,993 — 66,288 $ 809 741 2,077 8 58,258 $ $ Table of Contents The Company’s aggregate foreign currency transaction losses of $432,000, $487,000 and $134,000 were included in determining the consolidated results for the years ended December 31, 2019, 2018 and 2017, respectively. NOTE 17 — RECENT ACCOUNTING PRONOUNCEMENTS Recently adopted accounting guidance In February 2016, the FASB issued guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. On January 1, 2019, the Company elected to adopt this new lease guidance using a simplified transition option that allows companies to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company also elected to adopt the package of practical expedients permitted in the new lease guidance. Accordingly, the Company is continuing to account for its existing operating leases as operating leases under the new lease guidance, without reassessing whether the contracts contain a lease under the new lease guidance or whether classification of the operating leases would be different under the new lease guidance. All of our leases at the adoption date were operating leases, primarily for facilities, and did not include any non-lease components. With the implementation of the new lease standard, the Company recognized right-of-use assets of $24.9 million, lease liabilities for operating leases of approximately $26.8 million, and eliminated deferred rent of $1.9 million. The Company did not have a cumulative adjustment impacting retained earnings. There are no changes to our previously reported results prior to January 1, 2019. Lease expense is not expected to change materially as a result of the adoption of the new lease standard. In May 2014, the FASB issued a new standard on revenue recognition (the Standard) which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the Standard effective January 1, 2018, using the modified retrospective approach. Under this method, we recorded a cumulative adjustment increasing retained earnings of $10.6 million before related tax impacts or $8.1 million net of related tax impacts. See Note 18, “Revenue Recognition” for additional discussion related to the Company’s adoption of the Standard. Under the Standard, estimated royalty revenue will be recorded each quarter on an accrual basis to more closely coincide with the timing of the end user sale by the strategic partner; with reconciliation made upon submission of the royalty report by the partner indicating actual royalties owed in the following quarter. In addition, we began recording the portion of reagent rental revenue associated with the recovery of the cost of providing the system and other hardware in reagent rental agreements as system revenue rather than assay revenue effective January 1, 2018. This change has not and is not expected to have any impact on top line revenue and we do not anticipate any material effects to our revenue categorization. On January 10, 2018, the FASB issued guidance on the accounting for tax on the GILTI provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Effective January 1, 2018, we recognize the tax on GILTI as a period expense in the period the tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. Recent accounting guidance not yet adopted 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 will adopt the new standard effective January 1, 2020. The primary impact for the Company is the timing of recording expected credit losses on it trade receivables. The Company does not have a history of significant credit losses and this guidance will not have a material impact on its consolidated financial statements. 95 Table of Contents In December 2019, the FABS issued final guidance that simplifies the accounting for income taxes by eliminating some exceptions to the general approach in Accounting Standards Codification (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. NOTE 18 — REVENUE RECOGNITION On January 1, 2018, the Company adopted ASC 606 on revenue recognition (the Standard), using the modified retrospective transition method consistent with the guidance issued by the FASB in May 2014. Under this method, the Company applied the guidance retrospectively, only to those contracts which were not completed as of the date of initial application, and recognized the cumulative effect of initially applying the Standard as an adjustment to the opening balance of retained earnings as of January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under the Standard, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of the Standard, 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, once the contract is determined to be within the scope of the Standard, 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. 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, 2019 (in thousands): Contract assets: Unbilled receivables - Royalties Contract liabilities - short-term: Deferred revenue - Service (1) Deferred revenue - Licenses Deferred revenue - Instruments Deferred revenue - Other Total Contract liabilities - short-term Contract liabilities - long-term: Deferred revenue - Service Deferred revenue - Licenses Total Contract liabilities - long-term Balance at December 31, 2019 Balance at December 31, 2018 $ $ $ $ $ 12,257 7,771 207 2 234 8,214 968 665 1,633 $ $ $ $ $ 10,805 9,476 227 — 396 10,099 207 872 1,079 (1) Note - 2018 contract liabilities includes $4.4 million of deferred service revenue which was acquired through the acquisition of EMD Millipore Corporation’s flow cytometry portfolio on December 31, 2018. 96 Table of Contents During the twelve months ended December 31, 2019, the Company recognized the following revenues as a result of changes in the contract asset and contract liability balances in the period (in thousands): Revenue recognized in the period: Amounts included as contract liabilities at the beginning of the period Performance obligations satisfied in previous periods NOTE 19 — SELECTED QUARTERLY RESULTS (UNAUDITED) Year Ended December 31, 2019 $ 5,110 - The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share data): Revenue Gross profit Income (loss) from operations Net income (loss) Basic income (loss) per common share Diluted income (loss) per common share Cash dividends per common share Revenue Gross profit Income from operations Net income (loss) Basic income (loss) per common share Diluted income (loss) per common share Cash dividends per common share Quarter Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 $ 82,408 $ 83,056 $ 78,673 $ 45,807 (3,584) 2,960 0.07 0.07 0.06 45,227 (5,756) (4,931) (0.11) (0.11) 0.06 41,840 (5,722) (5,250) (0.12) (0.12) 0.09 Quarter Ended 90,501 49,865 2,983 3,383 0.08 0.07 0.09 March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018 $ 82,662 $ 79,578 $ 72,445 $ 53,588 15,266 13,397 0.30 0.30 0.06 49,306 7,858 5,669 0.13 0.13 0.06 44,256 3,754 1,737 0.04 0.04 0.06 81,133 48,341 968 (2,295) (0.05) (0.05) 0.06 See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 97 Table of Contents 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, 2019 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, 2019. 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 64. 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 2019 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 98 Table of Contents ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III The information required by this Item concerning our directors, 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 2020 Annual Meeting of Stockholders to be held on or about May 21, 2020 (Proxy Statement). It is anticipated that our Proxy Statement will be filed with the Securities and Exchange Commission on or about April 1, 2020. 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. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Executive and Director Compensation.” 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, 2019, certain information with respect to shares of our common stock authorized for issuance under our equity compensation plans. Plan Category Equity compensation plans approved by security holders(1) Equity compensation plans not approved by security holders Number of Securities to be Issued Upon Exercise of Outstanding Options and Restricted Stock Units (A) Weighted- Average Exercise Price of Outstanding Options (B)(2) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) (C) 4,326,593 $ 20.17 4,023,215 — $ — — Total (1) Includes approximately 522,000 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. 4,023,215 4,326,593 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.” 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.” 99 Table of Contents PART IV 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 2.1* 2.2 3.1 3.2 4.1 10.1# 10.2 10.3 10.4 10.5 10.6# 10.7# 10.8# DESCRIPTION OF DOCUMENT Share and Asset Purchase Agreement made as of October 18, 2018 by and between EMD Millipore Corporation, and IRIS Biotech Corp. (Previously filed as an Exhibit to the Company’s Current Report on Form 8-K (File No. 000-30109), filed on October 18, 2018). 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). 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). 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). Description of the Registrant’s Securities. 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). 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). 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). 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). 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). 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). 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). 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). 100 Table of Contents EXHIBIT NUMBER 10.9# 10.10# 10.11# 10.12# 10.13# 10.14# 10.15# 10.16# 10.17# 10.18# 10.19# 10.20# 10.21# 10.22# 10.23# 10.24# 10.25# 10.26# 10.27# DESCRIPTION OF DOCUMENT 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 101 Table of Contents EXHIBIT NUMBER 10.28# 10.29# 10.30# 10.31# 10.32# 10.33# 10.34# 10.35# 10.36# 10.37# 10.38# 10.39# 10.40# 10.41# 10.42# 10.43# 10.44# 10.45# DESCRIPTION OF DOCUMENT 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 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). 102 Table of Contents EXHIBIT NUMBER 10.46# 10.47# 10.48 10.49 10.50# 21.1 23.1 24.1 31.1 31.2 32.1 32.2 101 104 DESCRIPTION OF DOCUMENT 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). 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). 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). 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). 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). Subsidiaries of the Company. Consent of Independent Registered Public Accounting Firm. Power of Attorney (incorporated in the signature page of this report). 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. 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. Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. The following materials from Luminex Corporation's Annual Report on Form 10-K for the year ended December 31, 2019, 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. The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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. ITEM 16. FORM 10-K SUMMARY None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LUMINEX CORPORATION By: /s/ Nachum Shamir Nachum Shamir President and Chief Executive Officer Date: February 27, 2020 103 Table of Contents POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Nachum Shamir and Harriss T. Currie, each his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. President and Chief Executive Officer, Director (Principal Executive Officer) Chief Financial Officer, Senior Vice President of Finance (Principal Financial Officer and Principal Accounting Officer) February 27, 2020 SIGNATURES TITLE /s/ Nachum Shamir Nachum Shamir /s/ Harriss T. Currie Harriss T. Currie /s/ Stephen L. Eck Stephen L. Eck /s/ Thomas W. Erickson Thomas W. Erickson /s/ Jim D. Kever Jim D. Kever /s/ Dijuana K. Lewis Dijuana K. Lewis Director Director Director Director /s/ G. Walter Loewenbaum II G. Walter Loewenbaum II Chairman of the Board of Directors, Director /s/ Kevin M. McNamara Kevin M. McNamara /s/ Edward A. Ogunro Edward A. Ogunro /s/ Kenneth A. Samet Kenneth A. Samet Director Director Director 104 DATE February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 Exhibit 4.1 Luminex Corporation (“Luminex,” “we,” “our,” “us” or the “Company”) is incorporated in the state of Delaware. Our common stock, par value $.001 per share (“Common Stock”) is registered under Section 12 of the Securities Exchange Act of 1934, as amended. The following description of our Common Stock is a summary and does not purport to be complete. The description of our Common Stock is subject to and qualified in its entirety by reference to our Restated Certificate of Incorporation (the “Certificate of Incorporation”), and our Amended and Restated Bylaws (the “Bylaws”), which are incorporated by reference as Exhibit 3.1 and Exhibit 3.2, respectively, to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part. We encourage you to read the Certificate of Incorporation, the Bylaws and the applicable provisions of the Delaware General Corporation Law (the “DGCL”) for additional information. General Our Certificate of Incorporation provides that we may issue up to 200,000,000 shares of Common Stock, and 5,000,000 shares of preferred stock, par value $.001 per share. Common Stock Each share of Common Stock has identical rights and privileges in every respect. The holders of our Common Stock are entitled to vote upon all matters submitted to a vote of our stockholders and are entitled to one vote for each share of Common Stock held. The Common Stock has no cumulative voting rights. Subject to the prior rights and preferences, if any, applicable to shares of preferred stock or any series of preferred stock, the holders of Common Stock are entitled to receive such dividends, payable in cash, stock or otherwise, as may be declared by our Board of Directors (the “Board”) out of any funds legally available for the payment of dividends. If we voluntarily or involuntarily liquidate, dissolve or wind-up, the holders of our Common Stock will be entitled to receive after distribution in full of the preferential amounts, if any, to be distributed to the holders of preferred stock or any series of preferred stock, all of the remaining assets available for distribution ratably in proportion to the number of shares of Common Stock held by them. Holders of Common Stock have no preferences or any preemptive, conversion or exchange rights. All outstanding shares of Common Stock are fully paid and nonassessable. The Common Stock has no redemption or sinking fund provisions. The rights, preferences, and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future. Preferred Stock Our Board of Directors has the authority, within the limitations and restrictions stated in our Certificate of Incorporation, to authorize the issuance of shares of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, preemptive rights and the number of shares constituting any series or the designation of such series. The issuance of preferred stock could have the effect of decreasing the market price of our Common Stock and could adversely affect the voting and other rights of the holders of our Common Stock. Our Board has the authority to issue shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of our Common Stock or that a stockholder might consider in its best interest. There are no restrictions on the repurchase or redemption of shares by the registrant while there is any arrearage in the payment of dividends or sinking fund installments. Board of Directors The Certificate of Incorporation provides for a board of directors of eight members, the exact number to be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board, provided that the number so fixed shall not be less than five nor more than 15 (the number of seats constituting the Board is currently fixed at nine); provided, however, that no decrease in the number of directors constituting the Board shall shorten the term of any incumbent director, and no action shall be taken by the directors (whether through amendment to the Bylaws or otherwise) to increase the number of directors unless at least 75% of the directors then in office shall concur in said action. The Certificate of Incorporation provides that the Board shall be classified with respect to the time for which they severally hold office into three classes, Class One, Class Two and Class Three. Directors of each class are elected for a term expiring at the annual meeting of stockholders held in the third year following their election and until their respective successor is duly elected and qualifies, and each year one class of directors will be elected by the stockholders. Holders of shares of our capital stock have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the Common Stock entitled to vote are able to elect all of the successors of the class of directors whose terms expire at that meeting; provided, however, that if the number of nominees proposed to be elected for the class of directors whose term expires at that annual meeting of stockholders exceeds the number of directors determined by the Board to constitute that class of directors, then the persons receiving the greatest number of votes, up to the number of Board seats open for election, shall be elected. Any director elected to fill a vacancy shall serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is elected and qualifies. When one or more directors resign and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the sole power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. Subject to the rights of holders of capital stock of the Company pursuant to any valid and binding agreement, any vacancy occurring on the Board created by reason of newly created directorships resulting from the issuance of any class or series of capital stock of the Company or newly created directorships resulting from any increase in the number of directors and any vacancy occurring on the Board resulting from death, resignation, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board, or by a sole remaining director. Unless otherwise provided in the Certificate of Incorporation or the Bylaws, whenever any holders of a class or series of capital stock of the Company have the right to elect one or more directors pursuant to the Certificate of Incorporation or the provisions of any valid and binding agreement, vacancies in directorships to which such right relates may be filled by a majority of the directors elected by the holders of such class or classes or series then in office, or by a sole remaining director so elected. Subject to provisions of the DGCL and the rights of the holders of any shares of capital stock of the Company, any director may be removed from office only for cause and only by the affirmative vote of the holders of a majority of the combined voting power of the then outstanding shares of voting capital stock of the Company, voting together as a single class. We believe that classification of our Board helps to assure the continuity and stability of our business strategies and policies as determined by our directors. Our classified board could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our Board. Thus, our classified board could increase the likelihood that incumbent directors will retain their positions. The classified terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us or another transaction that might involve a premium price for our Common Stock or that a stockholder might consider in its best interest. Supermajority Vote Our Certificate of Incorporation provides that the affirmative vote of at least 75% of the voting power of the outstanding shares of our capital stock outstanding and entitled to vote is required to amend or repeal, or to adopt any provision inconsistent with, certain provisions of our Certificate of Incorporation, including certain provisions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company. Anti-Takeover Effects of Provisions of our Certificate of Incorporation and Bylaws Our Certificate of Incorporation and Bylaws contain provisions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company. Examples of such anti-takeover effects include the following: • our Board is divided into three classes of directors with each class serving a staggered three-year term; • • • our Board is authorized to expand the size of the Board with the consent of 75% of the directors in office and then fill the vacancies created by such expansion; notice of stockholder nominations for directors and proposals for other business must be made within a certain period prior to an annual meeting; and stockholder action by written consent is prohibited and therefore the power of stockholders to call special meetings is significantly limited. These provisions may discourage a third party from making a tender offer or otherwise attempting to obtain control of us, as it generally makes it more difficult for stockholders to replace a majority of the directors. There is no cumulative voting in the election of directors. Anti-Takeover Effects of Delaware Law Certain Delaware law provisions may make it more difficult for someone to acquire us through a tender offer, proxy contest or otherwise. We are subject to the provisions of Section 203 of the DGCL. Section 203 of the DGCL provides that, subject to certain stated exceptions, an “interested stockholder” is any person (other than the corporation and any direct or indirect majority-owned subsidiary) who owns 15% or more of the outstanding voting stock of the corporation or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date of determination, and the affiliates and associates of such person. Under Section 203, we would generally be prohibited from engaging in any business combination with any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder unless: • • • prior to this time, the board of directors of the corporation approved either the business combination or the transaction that resulted in such stockholder becoming an interested stockholder? upon consummation of the transaction that resulted in such stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers, and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer? or at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Under Section 203 of the DGCL, a “business combination” includes: • • • • • any merger or consolidation involving the corporation and the interested stockholder; any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder? any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder, subject to limited exceptions? any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder? or the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Transfer Agent and Registrar The Transfer Agent and Registrar for our Common Stock is Computershare. National Securities Exchange Our Common Stock is listed on the Nasdaq Global Select Market under the trading symbol “LMNX.” Exhibit 21.1 LIST OF SUBSIDIARIES Luminex International, Inc., a Delaware corporation Luminex B.V., a Netherlands Private Company with limited liability Luminex 2 B.V., a Netherlands Private Company with limited liability Luminex 3 B.V., a Netherlands Private Company with limited liability Luminex Debt Holding, LLC, a Delaware limited liability company Nanosphere, LLC, a Delaware limited liability company Luminex Molecular Diagnostics, Inc., an Ontario, Canadian corporation Luminex Trading (Shanghai) Company Limited, a limited liability company under the laws of the PRC Luminex Japan Corporation Ltd., a Japanese KK Labpac Pty Ltd, an Australian Proprietary company, limited by shares Luminex Hong Kong Limited, a Hong Kong company limited by shares ChandlerTec, LLC, a Delaware limited liability company Iris Biotech, LLC, a Delaware limited liability company Amnis, LLC, a Delaware limited liability company Luminex London Ltd., a private limited company under the laws of England and Wales Luminex Munich GmbH, a German limited liability company Luminex Paris Sas, a French simplified joint stock company Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-8 No. 333-225117) pertaining to the Luminex Corporation 2018 Equity Incentive Plan; (2) Registration Statement (Form S-8 No. 333-218176) pertaining to the Luminex Corporation Amended and Restated Employee Stock Purchase Plan; (3) Registration Statement (Form S-8 No. 333-204170) pertaining to the Luminex Corporation Third Amended and Restated 2006 Equity Incentive Plan; (4) Registration Statement (Form S-8 No. 333-181485) pertaining to the Luminex Corporation Employee Stock Purchase Plan; (5) Registration Statement (Form S-8 No. 333-181484) pertaining to the Luminex Corporation Second Amended and Restated 2006 Equity Incentive Plan; (6) Registration Statement (Form S-8 No. 333-159382) pertaining to the Amended and Restated 2006 Equity Incentive Plan; (7) Registration Statement (Form S-8 No. 333-141042) pertaining to the Tm Bioscience Corporation Share Option Plan; (8) Registration Statement (Form S-8 No. 333-134450) pertaining to the Luminex Corporation 2006 Equity Incentive Plan and the Luminex Corporation 2006 Management Stock Purchase Plan; (9) Registration Statement (Form S-8 No. 333-118772) pertaining to the Balthrop Non-Qualified Stock Option Agreement of Luminex Corporation; (10) Registration Statement (Form S-8 No. 333-87918) pertaining to the 2001 Broad-Based Stock Option Plan of Luminex Corporation; (11) Registration Statement (Form S-8 No. 333-46686) pertaining to the 2000 Long-Term Incentive Plan of Luminex Corporation; (12) Registration Statement (Form S-3 No. 333-151691) pertaining to the Automatic Shelf Registration of Securities of Luminex Corporation of our reports dated February 27, 2020, with respect to the consolidated financial statements of Luminex Corporation, and the effectiveness of internal control over financial reporting of Luminex Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2019. /s/ Ernst & Young LLP Austin, Texas February 27, 2020 Exhibit 31.1 CERTIFICATION I, Nachum Shamir, certify that: 1. I have reviewed this report on Form 10-K of Luminex Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 27, 2020 By: /s/ Nachum Shamir Nachum Shamir President and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Harriss T. Currie, certify that: 1. I have reviewed this report on Form 10-K of Luminex Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 27, 2020 By: /s/ Harriss T. Currie Harriss T. Currie Chief Financial Officer, Senior Vice President of Finance CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 In connection with the Annual Report of Luminex Corporation (the “Company”) on Form 10-K for the period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nachum Shamir, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Nachum Shamir Nachum Shamir President and Chief Executive Officer February 27, 2020 A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 OF THE SARBANES- OXLEY ACT OF 2002 HAS BEEN PROVIDED TO LUMINEX CORPORATION AND WILL BE RETAINED BY LUMINEX CORPORATION AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 In connection with the Annual Report of Luminex Corporation (the “Company”) on Form 10-K for the period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harriss T. Currie, Senior Vice President – Finance, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Harriss T. Currie Harriss T. Currie Chief Financial Officer, Senior Vice President of Finance February 27, 2020 A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 OF THE SARBANES- OXLEY ACT OF 2002 HAS BEEN PROVIDED TO LUMINEX CORPORATION AND WILL BE RETAINED BY LUMINEX CORPORATION AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. 

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